1996Public Service

Corporate takeover

Joby Warrick and Pat Stith
N&O Staff Writers
February 21, 1995

Hundreds of contract farmers make up a franchise system runby a few big companies. Meanwhile, traditional hog farming is fading.

A Murphy Family Farms feed mill towers over Duplin County. A symbol of the shift to corporate farming, themill produces 15,000 tons of feed a week and has its own railyard. (N&O photo by Robert Willett)

CLINTON -- Greg Stephens is the 1995 version of the North Carolina hog farmer: He owns no hogs.

Stephens carries a mortgage on four new confinement barns that cost him $300,000 to build. The 3,000 hogs inside belong to a company called Prestage Farms Inc. Prestage simply pays Stephens a fee to raise them.

For the next 10 years, most of Stephens' earnings will go toward paying off his debt. Then, if all goes well, he can start making money -- enough, he hopes, to put his kids through college.

The arrangement is called contract farming, and it's hardly risk-free. But for anyone wanting to break into the swine business these days, it's the only game in town.

"Without a contract, there's no way I'd be raising hogs," said Stephens, of Clinton. "And even if I had somehow gotten in, my pockets aren't nearly deep enough to let me stay in."

Welcome to corporate livestock production, the force behind the swine industry's explosive growth in North Carolina. The key players are big companies like Prestage, Carroll's Foods and Murphy Family Farms.

The backbone of the new system is a network of hundreds of contractors like Stephens, the franchise owners in a system that more closely resembles a fast-food chain than traditional agriculture.

Nowhere in the nation has this change been as dramatic, or as officially embraced, as in North Carolina. As a result, the hog population has more than doubled in four years, and nearly all of that growth has occurred on farms controlled by the big companies.

Meanwhile, independent farmers have left the business by the thousands.

With this story:

While Midwestern states debate the merits of increased hog production against the loss of independent family farms, North Carolina's government and land-grant university have promoted and encouraged large-scale production for years.

No less an authority than state Agriculture Commissioner Jim Graham believes the corporatization of agriculture is inevitable.

Opponents, however, say the corporations have created a perfect system -- for themselves. They say the hog companies are saddling hundreds of small farmers with huge debts, with no guarantees that they will ever reap the kinds of profits they were promised.

"Why invest your capital when you can get a farmer to take the risk?" asked former state Rep. Joe Mavretic, an advocate for stronger legal protections for contract farmers.

"Why own the farm when you can own the farmer?"

Risky business?

If you want to know how popular hog contracts have become in North Carolina, just call any of the big hog companies and try to get one. Murphy and Prestage say they have yearlong waiting lists. Carroll's says the wait can be as much as two years.

With tobacco facing an uncertain future, many farmers are jumping at the chance to diversify their income and bring in steady earnings. Others see the contracts as an investment or a way to break into the livestock business.

Wendell H. Murphy, founder of Murphy Family Farms and the man generally credited with adapting the contracting concept to hog farming, describes the achievement as his greatest contribution to the industry.

"These contracts are very good for the growers, and they work good for the integrators," Murphy said in an interview. "It's just been a strong economic boost to the region."

To Stephens, the biggest selling point is freedom from risk. When pork prices go south, as they did two months ago, contract farmers are barely affected.

"The company that owns the pig takes on more risk than you do," Stephens said.

But others say the opposite is true: The growers are putting their homes and property on the line, and they're also legally reponsible for environmental problems and lawsuits from neighbors.

"The contract looks a whole hell of a lot better when they're presenting it than the actual value is," said Jack Sauls, a former contract farmer from Faison. "It's a good deal for a man who doesn't have any money and can't borrow the money. You give him a string to hold onto, and he thinks it's great. And it turns out to be a wonderful deal -- for the company."

The risks are real, according to Kelly Zering, an N.C. State University agricultural economist and a widely recognized expert on the state's swine industry.

A typical hog contract farmer borrows anywhere from $200,000 to $1 million to construct his barns -- a loan that's typically secured by his house and land. But while the grower carries the debt for the seven to 10-year life of the loan, the hog company can pull out with 30 days notice. Zering says contracts for raising pigs usually run for only a year, and contain an exit clause that allows either side to cancel much earlier.

"I encourage anyone who considers a contract to consider what they will do with these facilities in the event they lose the contract," Zering said. Once that happens, the grower's only real options are to try to find another company or lease his property to someone else.

Zering says the contract grower can make a "very high level of income" once his mortgage is paid. But his research shows that most barns have a maximum lifetime of only 15 years. The equipment, Zering says, will probably last about half that long.

Meanwhile, while the debt is being repaid, a grower will gross about $9.50 per hog sold, Zering said. After paying his debt service and expenses, the farmer is left a small amount of money for labor -- roughly $7 an hour -- and an additional income of about 50 cents a hog.

"There's not a huge profit margin there," Zering said.

Some contract farmers complain that they didn't make any money at all. John Cooper, a Newton Grove farmer who has worked under contract for three different companies, said he was lured into the business with promises of up to $100,000 a year. But after making $56,000 in annual payments on a $750,000 loan, he ended up taking a loss of $8,000 in his first year.

"I would tell people that each and every contract should be looked at carefully, and nothing should be taken for granted," said Cooper, who says he is happy with his new company, Southern States.

The author of a new book on contract farming agrees.

"People generally don't ask you to go borrow $150,000 to get an $8-an-hour job," says Neil D. Hamilton, director of the Agricultural Law Center at the Drake University Law School in Des Moines, Iowa, and author of "A Farmer's Legal Guide to Production Contracts."

"These relationships shift an awful lot of risk to the producer -- the risk of owning the building, the risk of environmental damage, the risk that the contract won't be renewed," he said.

At the request of The News & Observer, Hamilton reviewed five North Carolina hog contracts that were obtained by the newspaper. His impressions:

The North Carolina contracts were "fairly standard" for the industry and illustrated the general premise of the book:

"Whoever wrote them," he said, "wrote them to take care of themselves."

No legal protections

The changes that are sweeping the swine industry today were pioneered by chicken and turkey growers in the 1960s and '70s. Total confinement housing, vertical integration and contract farming are all standard practices in the feather world.

As a result, you need only look at chickens to see where pork is headed:

The poultry industry today is fully integrated -- meaning a handful of companies control all phases of production -- and the labor is performed by an army of contract growers, some of them decidedly unhappy.

"It's sharecropping -- that's what it is," said Larry Holder, a chicken farmer and president of the N.C. Contract Poultry Growers Association.

Holder's group is pushing for legislation that would give farmers some protection from being squeezed or suddenly cut off before their debts are paid. These rights have long been granted to auto dealerships and similar franchise operators. But swine and poultry growers won't be getting them any time soon -- not if the major livestock companies get their way.

"I don't know that we need legislation to protect people, or to mandate business decisions," said Walter Cherry, director of the N.C. Pork Producers Association.

Cherry's group was one of the leading opponents two years ago when state Rep. Mavretic and Sen. Roy Cooper introduced legislation that would have provided legal safeguards for poultry growers. After an intense lobbying campaign, the bill was killed in the Senate Agriculture Committee.

Swine company officials say the protections aren't needed, and they stand by their relationships with their growers. Murphy says with pride that none of his contract growers has failed financially -- although several have left his company to work for others.

"When we make a commitment, I'm going to stand there and fight to honor that commitment," Murphy said.

Many of the contract hog growers interviewed had nothing but praise for their company. George Garner, a Kenansville farmer, has raised pigs for Carroll's Farms Inc. for 10 years.

"They've been nothing but good to me," Garner said.

But with so much at stake, contract farmers shouldn't have to simply rely on their company's word, proponents of increased regulation say. In the poultry industry, there has been an explosion of lawsuits by contract farmers, some of which resulted in multimillion-dollar damage awards after poultry companies were found to be defrauding growers.

Late last year, Goldsboro Milling, a major producer of turkeys and hogs, offered turkey farmers a cash settlement after being accused in a lawsuit of systematically cheating them on weight for five years.

At least a dozen other lawsuits are pending in Southern states from growers complaining of a wide range of abuses, including unfair termination of contracts, new equipment requirements at the growers' expense, and underweighing of animals and feed.

Mavretic said he believes the problems will continue until contractors are given legal protections by their governments.

"Here is the legislative problem that we refuse to acknowledge: Why is North Carolina such a great state for the poultry integrators, and why has it become such a great state for a few major hog producers?" Mavretic asked. "The answer is, because our laws are so lax that they allow the major integrators to exploit the contract grower."

A dying breed

There's a twist to the pork statistics coming out of the state Agricultural Department, one that is sometimes overlooked: Despite the phenomenal growth in hog production here, the number of hog farmers is dropping -- rapidly.

Since 1983, about the time corporate hog production was just starting to ignite, more than 16,000 North Carolina hog farmers have left the industry -- roughly two-thirds of the 23,400 growers who were in business at the time.

Some, like Sampson County farmer W.E. Warren, are closing down for good.

Others -- producers like Norman Denning, chairman of the Johnston County commissioners and a 54-year veteran of the pig business -- are cutting back.

"It's just a matter of who hangs it up first. There're too many hogs," said Denning, whose herd size is dropping from 125 sows to 45.

The independents are the biggest losers as the swine industry goes corporate. And as they disappear, a way of life is vanishing with them.

Zering, the economist, believes some of the independents will survive, but most will have to either get big or get out, partly because the existing marketing system caters to very large producers.

There are only two major slaughtering plants in the state, Carolina Food Processing Plant in Bladen County and Lundy's in Clinton. Murphy's, Carrolls, Prestage and Brown's of Carolina have supply contracts to provide animals to the packing companies on a regular basis. Independent farmers say they sometimes face long delays in trying to get their animals to market.

"The entire marketing system is changing to try to get rid of the inefficiencies that existed in the past," Zering said. "Being an independent in the sense that you could take five hogs down the road in a trailer or sell them at an auction -- that system is gone."

But even independents that have tried to match the bigger operations in size and technology find it difficult. The major swine producers operate much more cheaply because they import their own grain in bulk and mill it in vast company-owned grain mills.

More importantly, Big Pork has the financial resources to weather extended downturns in the market -- for example, a plunge in wholesale prices over the fall and winter that resulted in the lowest rates, adjusted for inflation, since the Great Depression.

Hogs everywhere sold for a loss, but some of the integrated companies are continuing to post profits.

Smithfield Foods Inc., the Virginia-based hog processor and producer, announced earnings of $7.8 million for the second quarter of its 1995 fiscal year -- up from $923,000 in the second quarter of fiscal 1994. The company credited an ample supply of hogs and lower wholesale prices.

Pork prices at the grocery store haven't dropped.

Despite the lower prices and lack of market access, a few independent producers are managing to hang on -- for now.

Otis Byrd, a 45-year-old Johnston County farmer, has deliberately avoided contract production and says his main ambition is to simply "make a living for my family." But the lack of a contract is making it increasingly difficult to obtain loans or find a market for his pigs.

"I don't know what I'm going to do to fight it, except keep trying to raise hogs," he said recently. "I don't know whether I'll be able to sell them. But I just ain't ready to roll over and play dead yet."

"I do know there's something screwed up in the hog industry," he said, "and it's bad."