Poultry Hearing in ‘Bama; Rural Stocks Still Lead

The Department of Justice held its second hearing on antitrust violations in agriculture. Meanwhile, rural stocks dropped, but not as much as those on the Dow or S&P 500.

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The federal Department of Justice and the U.S. Department of Agriculture are talking tougher.

Friday morning, Attorney General Eric Holder told an overflow crowd at Alabama A&M University that finding violations of antitrust law in the agriculture industry was “a top priority for today’s Justice Department.”

Later in the day, Holder and USDA Secretary Tom Vilsack presided over a hearing on the poultry industry. Federal officials heard chicken raisers talk about onerous contracts, slim profits and retaliation by large poultry companies if they complained.

“I fully expect you will not experience retaliation,” U.S. Assistant Attorney General Christine Varney told Staples in a voice almost challenging that response. Then, according to Huntsville Times reporter Paul Gattis, she handed Staples a piece of paper. “But if you do, call me at that number.”

Two pieces of the rural economy were moving last week…and fast.

In Normal, Alabama, the Department of Justice was continuing its probe into possible violations of antitrust laws in the business of agriculture.

And on Wall Street, stocks plummeted, erasing all the gains achieved by the major stock indexes this year. Rural stocks dropped, too, but the Daily Yonder’s list of 40 firms that do much of their business in rural America is still up more than 10% in 2010, even as the Dow Industrials and the S&P 500 are registering losses.

The most intriguing business story of the year is the Obama administration’s continuing inquiry into the agriculture business. Last August, the DOJ announced that it would conduct a series of hearings on business concentration in various sectors of agribusiness. 

The antitrust division of the Justice Department held its first hearing in Ankeny, Iowa, in May.  The second hearing was in Normal on Friday. The DOJ has three more hearings set, to cover dairy (June in Wisconsin), livestock (August in Colorado) and the margins between what consumers pay for food and what farmers receive at the farm gate (December in Washington, D.C.). 

The Normal hearing concentrated on the poultry industry and the relationship of growers to big poultry processors. Poultry is a $2 billion industry in Alabama. It’s built on a system of contracts between chicken raisers and the companies that buy their birds. There is essentially no open market for chicken. Almost every bird is sold under contract.

Farmers contend that those contracts are one-sided and subject to cancellation without notice. “Farmers said their livelihoods exist at the mercy of poultry companies, which can end a relationship without cause while also demanding constant upgrades in expensive equipment to maintain those contracts,” Gattis reported from the meeting.

Kay Doby, former president of the North Carolina Poultry Growers Association testified

When I retired from teaching in 1993 and was considering the construction of two, 500-foot chicken houses, I was promised a long-term relationship as long as I raised a good bird or followed the company’s instructions. Initially, I was provided a contract for the ten-year length of my loan. However, a few years later, the company brought out another version of the contract and said I needed to sign it to continue to get chickens. Before the end of the initial ten-year term, the company again changed the contract to a one-year term. I came to realize that the company could change contracts easily by threatening to stop placing birds if I refused to sign.

These complaints are common among producers. Alton Terry, a Tennessee farmer who sued Tyson Foods (and lost) described the position of growers to DTN this way: “When you have a chicken farm, you have no other market than your integrator – none. We have to know the rules of the game and we have to know when these integrators don’t follow the law.”

The federal officials are looking for ways antitrust rules are being violated. “As we work to answer this – and to understand why a growing number of American producers and farmers find it increasingly difficult to survive by doing what they’ve done for decades – I want to assure each of you that the Obama administration is committed to protecting competition vigorously,” Attorney General Holder said in Alabama.

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If Alabama chicken growers are finding things tough, big business in rural America is doing better than big business in the rest of the country. The companies that make up the Yonder 40, the Daily Yonder’s stock index of rural companies, continue to best the other major stock indexes.

Individual members of the Yonder 40, particularly rural retailers, have announced good earnings.

Wal-Mart Stores reported a 10% rise in earnings in the first quarter, as the company cut prices and realized gains in its foreign sales. Many rural retailers, in fact, reported good business in the first quarter of the year. Cato Corporation, which sells women’s clothes, reported a 44% rise in earnings. Family Dollar saw sales soften a bit in the first quarter over last year, but the company still plans to open 200 new stores this year. And Stage Stores reported earnings in excess of expectations.

John Deere recently sold its 500,000th combine and it reported a 16% rise in earnings during its latest quarter. Deere has raised prices on its farm equipment, and even though the company isn’t selling that many more tractors and combines, it has increased its earnings.

Not everyone in rural America was reporting higher profits and sales, of course. Dean Foods, the milk processor, reported a 43% drop in first quarter profits, and the company said it expected low returns into the second quarter. Coal companies were weak, as investors worried about a slumping global economy. And 13 inches of rain in Nashville flooded Gaylord’s Opryland. The resort isn’t expected to reopen until the end of this year.

The Yonder 40 (see full list of stocks below) is down 12% from its peak in late April, but is still up 10.7% for 2010.

The Dow and the S&P 500 are both down more than 2% for the year.

The chart below shows how the Yonder 40 stocks have fared since they reached a peak on April 23rd.

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