High Hopes for Costco Poultry

WAHOO, Neb. (DTN) -- Experts on poultry contracts have spent the last week in eastern Nebraska talking to farmers about issues to consider and the possible pitfalls of a bad contract as farmers consider the income potential of a new broiler operation in the region.

Costco Wholesale Corp. has been working all spring to get approval for a $180 million poultry processing plant near Fremont, Nebraska, that would process roughly 1.6 million birds a week. The facility would cater to Costco stores, which sell rotisserie chickens that are popular with customers.

Costco will own the processing plant, and all of the product will go to Costco stories. Lincoln Premium Poultry LLC will run the actual poultry production side of the operation, said Walt Shafer, project manager for Lincoln Premium. To keep operating, the processing plant would need roughly 404 barns built in the local area that would each raise about 43,000 birds per barn for each flock delivered. That would include 332 broiler barns, 24 pullet barns and 48 breeder barns.

"We'll work with the growers," Shafer said in a phone interview. "Costco sells chickens and we know how to grow and process chickens."

The processing plant and hatchery that would be adjacent to it are going through zoning and city approvals after being rejected in April for zoning and incentive approval at a neighboring town. The zoning situation remains divisive as local media have reported about complaints regarding environmental issues and a likely influx of more immigrant labor into the community. Fremont has already been a battleground in Nebraska over the past several years because of ordinances meant to curb illegal immigrants remaining in the community.

While zoning and community debate are ongoing, the Nebraska Farmers Union organized meetings all week in the region to educate farmers about poultry contracts. Lynn Hayes, an attorney with the Farmers' Legal Action Group, along with West Virginia poultry grower Mike Weaver, president of the Contract Poultry Growers Association of the Virginias, talked to potential growers.

Hayes and Weaver have dealt with problems with poultry contracts for decades. Both seem somewhat pleasantly surprised by the potential for the Nebraska farmers who would contract with the Costco-related broiler processor.

"If they are going to do what they say, it could be a pretty good thing for this area," Weaver said.

Costco and its backers say farmers putting up a four-barn operation would have a rough construction cost of about $1.5 million.

Some initial estimates from backers implied net income could be as high as $116,000 for producers. Shafer said Friday that based on costs, income on a four-barn operation would be closer to $95,000. The profitability will somewhat depend on what happens with interest rates between now and construction on barns. Those barns likely won't go into construction until fall 2017 because the barns won't be developed until the construction processing facility is underway.

The operation would provide a steady stream of local feed demand for corn and soybean farmers. Those 400 or so poultry barns would take 300,000 bushels of corn and 3,000 tons of soybeans per week from local sources, according to the local economic development group.

Broiler production is fairly limited in Nebraska, but the Costco project would dramatically raise the state's profile for growing broilers.

Willow Holoubeck, executive director of the Alliance for the Future of Agriculture in Nebraska, or A-FAN, has been working with Lincoln Premium executives since the beginning of the year. Holoubeck said there is a high demand among area farmers willing to consider poultry production to diversify their operations or help bring a child back to the farm.

"There's nobody holding a gun to anyone's head," Holoubeck said of poultry production. "There are risks to everything. When you plant your corn, there is risk. I think it has to be the right fit for the right people, but we're trying to make people aware of it."

Costco has stressed the company is seeking to treat growers better than the industry standard. Hayes said that would be a change from contract conditions provided by most major poultry integrators. "It would be great if they dramatically change the industry standard, but you need to be cautious," she said.

The contracts dictate both the prices farmers receive and their obligations for raising birds. Hayes said that to her knowledge there are no contracts released yet to producers. Those would come once the processing plant is approved by officials and ready for construction. Hayes repeated frequently that poultry companies have a track record of changing contract conditions on farmers.

"Let me just caution you the devil is in the details," Hayes said. "It really is the words in that contract that are going to control how you get paid ... You essentially need to understand every word in that contract."

A major difference between what Lincoln Premium is pitching and most standard poultry operations is Lincoln Premium is offering producers a 15-year contract, which the company states would be long enough to pay off the cost of the facilities. Most poultry companies score farmers against each other when it comes to premium potential and base pay. Weaver is paid on a tournament system that can cause as much as $30,000 swings in his pay from year to year.

"It is hated, hated by growers," Weaver said. He added, "They have way too much leverage over the growers, and I don't want to see that happen to you all."

Shafer, who also raises broiler chickens in Virginia, told DTN the Lincoln Premium contract will state farmers would get six flocks per year. Each flock, raising 6-pound birds, would take 44 days to raise the chicks to market weight. Then there would be a 14-day cleanup and turnaround time frame for the next flock to arrive, Shafer said. He also stressed that Lincoln Premium will not be using the tournament system in Nebraska.

"Our contract also says there will be a guarantee for base pay," Shafer said. "There will be no takeaway in our contract. The base is what the pro forma is set on, and then there is a bonus built in that is not included in the pro forma that you can get on top of that."

Shafer also said the contract will include a peer-resolution clause for farmers made up of three growers and two Lincoln Premium management people. If a farmer feels they are being wronged, they can take it to the peer-resolution panel, he said.

"We are setting the bar differently with this contract with growers," Shafer said. "The farmers I've met, they are smart people. They aren't going to enter into anything they haven't vetted and looked at very carefully. These guys farmed thousands of acres before we came along."

Hayes and Weaver cautioned that a contract may not guarantee a certain number of flocks per year or number of birds delivered. These become critical issues when trying to pay off buildings, Weaver said. He added that in the Southeast, contracts can often turn into flock-to-flock contracts.

Weaver said growers often put up their farms and homes for loan collateral to build the poultry barns. It then becomes difficult to stand up to a company if it changes conditions because growers are dealing with high volumes of debt that need to be paid.

John Hansen, president of the Nebraska Farmers Union, also told farmers the issues being raised about contracts and poultry production dovetail into the current battle within USDA and industry lobbying groups over livestock marketing rules, known as the GIPSA regulations after the Grain Inspection Packers and Stockyards Administration. USDA is trying to implement the GIPSA rules this fall that have largely been blocked by Congress since the 2008 farm bill.

"We are now in the heat of battle trying to get the law of the land that has gone through the rule-making process in areas such as poultry contracts that aren't being implemented because processors have used their public muscle," Hansen said. He added, "Some of the rules include trying to prevent retaliation against producers."

Given that broiler production is fairly limited in the eastern Nebraska area and the Costco situation is new, Hayes and Weaver said now would be a good time for potential growers to organize into a group to help ensure contracts are fair for everyone. She also encouraged farm groups to work with ag lenders on the contract terms.

"They want to be here," Hayes said. "Don't underestimate the power of the community right now."

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

(AG/SK)

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