When it comes to income inequality, chicken processing companies usually receive mention in relation to low-wage employees and tough, dangerous, and abusive working conditions.
Now there's a new twist via a report from the Small Business Association's Office of the Inspector General (SBA OIG). According to the watchdog, close ties between large processors of broiler chickens and much smaller chicken farmers meant that small business loans to the farmers effectively benefited the processors.
The OIG started an investigation at the behest of "congressional staff that large businesses were, in effect, subsidized by SBA’s lending program," as the report stated. (Given that I received word of this from the office of Nydia M. Velázquez, ranking Democrat on the House Small Business Committee, I suspect this is not a bipartisan issue.) The processors own chick hatcheries, feed mills, and processing plants. The farmers own growing facilities that receive chicks from the hatcheries and raise them, using feed from the mills, finally delivering them to the plants. Farmers depend completely on exclusive contracts that typically run for less than a year.
The farmers usually finance their facilities through the SBA 7(a) guaranteed loan program, which can provide up to $5 million in funds. Applicants must be small according to SBA standards. According to the SBA sizing tools companies in this particular industry sector need to make less than $750,000 a year. That is tiny compared to the scale of large processors.
The OIG looked at 11 loan contracts that it found were representative to see if "7(a) loans made to poultry farmers (growers) met statutory, regulatory, and SBA requirements for eligibility."
In the process, they found that the farmers didn't have independent businesses but, instead, were essentially "affiliates" of the larger producers. They are effectively an outsourced block controlled by the producers.
This control was enforced through close integrator oversight, management agreements, and grower–integrator communication. A grower's failure to comply with these requirements could result in a significant decrease in integrator payments, a reduction in flock placements, or a cancellation of the contract. A grower's economic viability was based upon a performing production contract with an integrator and is the true basis for grower income and facility value. As a result, from FY 2012 to FY 2016, SBA guaranteed approximately $1.8 billion in loans that may be ineligible.
Many in comfortable circumstances frequently complain about those who supposedly sponge off the system. But there is a type of indirect benefit and sponging off the system that companies attain through others. It might be paying employees so little, whether through low wages, inadequate hours of employment, or both, that those workers are eligible for and need public assistance, so essentially a subsidy from taxpayers.
It could be a large franchisor that exacts tight control over franchise owners, who now must jump through an unusual number of hoops, even for that industry. The franchise owners complain about labor costs, but the <a href="http://www.theguardian.com/business/2015/apr/14/mcdonalds-franchise-owners-minimum-wage-restaurants" money paid in rent, royalties, and other fees to some big-name franchises like McDonald's can hit 25% or more of gross receipts according to reports. (That doesn't count potential premiums paid for equipment, food, and supplies when they must be purchased from the franchisor, which can potentially mean pricing that is protected from competitive pressure.) The less money the franchise owner keeps, the more pressure there is on other costs, including labor.
The National Labor Relations Board under the Obama administration looked at McDonald's as joint employer of its franchisees' workers. That has fallen to the wayside, but is another example of how extensive control can make one companies more of an arm of another rather than a business partner. Their demands were only possible because of lower employee pay.
These examples are similar, in the sense that large companies can gain subsidies from individuals and governments indirectly through smaller "partners." Chicken processing is just another example.
Between 2017 and 2018, agricultural businesses donated $32 million to political candidates and parties. A good investment.
