— I want you to look into it, Miller said.
Tabor said he would assign some attorneys to explore the matter. Without knowing it, Miller had launched a battle that would last more than a decade, pitting the attorney general’s office against the nation’s biggest meat companies. The courtroom battle would center on Smithfield Foods, one of Tyson’s biggest competitors. But the fight drew in Tyson and every other meat producer, and it was a battle that ranged from Iowa to North Dakota to Capitol Hill in Washington, D.C. Smithfield might have been the main target of Tom Miller’s litigation, but it was clear that the effort could ultimately affect the entire national meat industry.
* * *
When Tabor looked for someone to investigate contract farming, his staff attorney Steve Moline was an obvious choice. Hogs had put Steve Moline through college. Then, when he decided he didn’t want to follow his father into farming, hogs had put Moline through law school.
Where Tabor was cautious and reserved, Moline was boisterous, blunt, and slightly profane. He also had a good relationship with several offices of attorneys general around the country. During the 1990s, Moline worked the phones, querying attorneys in the major farm states. What he heard created a disturbing picture of modern contract farming.
Moline heard from attorneys general throughout the South that contract farming completely dominated the chicken business. There wasn’t an open market on which chicken farmers could sell their birds, so they were forced to enter contractual arrangements with big companies like Tyson to stay in business. Without an open market, and just a few “integrators” with which to do business, chicken farmers lost all bargaining power when they signed contracts. Complaints were pouring into state attorneys, who heard horror stories about farmers having their contracts canceled for nothing more than refusing to toe the company line.
When he reported back to Tabor, Moline’s verdict on contract farming, at least in southern states, was unambiguous.
— It’s just a titch over serfdom! Moline said. There’s a sword right over your throat.
These contracts were similar to the ones being offered to Iowa’s hog farmers. Perhaps more disturbing, Moline learned that companies were taking over ownership of the farrowing operations and contracting farmers to fatten the adult pigs at feeder farms. Having raised hogs ever since he was a kid, Moline knew that the industry’s profits were locked up in the animal’s genetics. To own the breeding herds was to own the most profitable part of the business, and corporations were rapidly taking them over. That would leave Iowa farmers with the lowest-yielding part of the business: fattening up the adult hogs. Farmers were basically becoming babysitters for outside companies.
It seemed far-fetched to think that hog farmers might one day be as powerless as chicken farmers in the South. But the number of contract operations in Iowa was growing by the day. And Moline had heard about what contract farming had done in the South.
— We don’t want it here, he said.
The only thing that put Moline’s mind at ease was the knowledge that Iowa farmers still had choices. There was competition. If a farmer didn’t like the terms of a contract, he could walk away. In the chicken business, the independent cash market for chickens had effectively disappeared. But Iowa farmers could still sell their animals at the network of roadside sales stations. With a free market with which to compete, Moline didn’t think companies could get too out of hand with the contract terms they imposed.
* * *
Things changed after the hog market crash of 1998, which wiped out so many independent farmers. And it was just around that time that Steve Moline started to entertain a series of unusual houseguests. When Moline came home from work as a staff attorney in the Iowa attorney general’s office, he made sure his wife and kids were occupied, and then he waited for his guests to arrive.
They were hog producers, all of them, grown men with an independent streak who had decided to stick it out in an increasingly tough farming business. In spite of the grit they showed in other aspects of their life, the men approached Moline’s house like furtive children, worried they might be spotted by authorities. They called Moline at his office and told him they wanted to talk but didn’t want to meet at their farms. They were worried Moline might be spotted by one of the hog company field technicians who drove from farm to farm. The farmers were even too worried to arrive at Moline’s office in Des Moines to meet with him, out of fear they might be seen there. Moline’s solution was to invite them into his home. He sat with them at his kitchen table, or when the weather was nice they sat on his screened-in porch. Moline offered his guests hot coffee, and after a few sips they opened up, unburdening themselves.
Things had changed in the Iowa hog business. After the price collapse of 1998, big contractors had gained the upper hand. Farmers told him a variety of horror stories, recounting the ways big companies were driving them to the edge of bankruptcy now that the farmers had invested hundreds of thousands in their hog barns.
Big meat companies were shifting the risk of doing business down to the community level. They gave farmers new agreements called “ledger” contracts that kept a tally of whether the pigs were sold at a profit or at a loss. If the pigs were sold at a loss, the farmer still got paid. But the value of the meatpacker’s loss was recorded on a ledger, and the farmer was obligated to pay it back. Some farmers racked up losses so high that they could never feasibly repay them. Companies were burying farmers in debt to cover their losses in the marketplace.
Other farmers told Moline that companies were paying them under a tournament system, ranking their performance against their neighbors’. They were convinced companies delivered them sick pigs, just to drive down their income because the farmer had been too argumentative.
Moline listened, but there was little more he could do. Being a farm boy himself, Moline knew how hard it was to prove whether one batch of pigs was healthier than another, especially after they had been sitting on a farm for a few weeks.
He tried to explain to his visitors, almost apologetically, that there was little the attorney general’s office could do to help them. Suing big meat companies was never easy, and they would need near-airtight cases to do it.
— The proof problems are a monster, from a legal point of view, he told them.
But there were other means at Moline’s disposal. He toured the state, visiting small towns and talking at meetings hosted by farming groups. Moline told his audiences that hog contracts were becoming more heavy-handed, even “egregious” and “unconscionable.” He advised farmers not to enter into contracts with the kinds of provisions that were hurting those already in the business, and he publicized what he saw as the worst abuses in the industry.
At his office, Moline started getting angry calls from hog producers and field technicians who felt like he was interfering in their business. It didn’t bother him. Moline knew Tabor and the attorney general supported what he was doing.
Moline also knew there was still one critical protection that kept companies like Tyson and Smithfield from gaining too much power. A 1975 law banned meatpackers in Iowa from owning their own animals. The old state statute broke the most critical link in a chain of vertical integration: If companies couldn’t own both slaughterhouses and farms, they couldn’t gain complete control over the marketplace.
Because of Iowa’s corporate farming law, called a “packer ban,” companies like Tyson and Smithfield could not sign up contract farmers in the state as long as they owned the slaughterhouses.
That left the field open to IBP, which bought its hogs under formula contracts; and to Murphy Farms, a smaller company based in North Carolina that copied the Tyson Foods playbook by building a network of contract hog farms in Iowa. By 1999, Murphy Farms was raising about 900,000 pigs under contract in Iowa.
But with the packer ban in place, the full circle of vertical integration was kept from closing. And the worst practices were kept at bay.
* * *
I
n September 1999, Moline was driving home when he heard the news on the radio: Smithfield Foods, the nation’s biggest hog producer, had just purchased Murphy Farms. With the inking of one deal, a huge portion of Iowa’s hog farming sector had been swallowed under Smithfield’s control.
Moline couldn’t believe what he’d heard. Smithfield had just blatantly violated Iowa’s ban on vertical integration. The company knew full well the ban was in place and would prohibit it from buying Murphy Farms, yet it had gone ahead with the deal anyway.
Moline called Bob Malloy, a local lawyer who represented Murphy Farms, whom Moline had known for years.
— Bob, you’re violating the law! Moline said.
Malloy was unmovable.
— I don’t think we are, Malloy replied.
— We’ll have to see about that, Moline said, before hanging up.
Iowa was about to wage the nation’s biggest legal fight against vertically integrated meat production. That fight would eventually spill over and affect other companies, from Tyson to Cargill and Hormel.
* * *
The matter seemed clear-cut to Iowa Attorney General Tom Miller. Smithfield had simply ignored Iowa law when it bought Murphy Farms. The company was essentially saying that the state government had no role in writing the rules of the livestock industry. The ban on vertical integration was meaningless. If Smithfield had the money to close the deal, that’s apparently all that mattered.
Moline and Tabor worked the phones and talked with Smithfield’s attorneys. The company wasn’t going to back down. It owned the biggest network of contract farms in Iowa, and it was going to run them how it wanted.
Tom Miller and his attorneys felt they almost had no choice. They sued Smithfield for violating Iowa’s packer ban. The nation’s biggest farming state sent a warning to all the major hog producers: Iowa’s hog farmers weren’t going to be sucked into a vertically integrated system. Not without a fight.
* * *
Joe Luter, the Smithfield Foods CEO, walked down the narrow path between office cubicles in Tom Miller’s office in the Hoover Building. Luter was flanked by his well-paid attorneys, and he had come at the invitation of the attorney general.
Luter carried himself with the broad-shouldered air of someone who had just won a prizefight. And in many ways, he had. Luter joined Smithfield Foods just out of college and worked his way up through the company from his beginning in the sales department. Luter ushered Smithfield through a revolutionary period when it copied the model laid out by Tyson Foods, building a network of contract hog farms from scratch. By the time the company bought Murphy Farms, Smithfield was big, rich, and seemingly too powerful to fight.
Miller greeted Luter and his lawyers and the men stepped inside Miller’s office. They sat down at a small conference table and were joined by Eric Tabor and Steve Moline. If Luter was at all intimidated by the attorney general’s lawsuit, he didn’t show it. He sat down in his chair as if he owned the building. Miller sat across from him. With his white hair, thin face, and somewhat gaunt complexion, Miller could resemble an aging high-school principal more than a courtroom brawler. He tended to sit back and listen. That was good, because Luter didn’t give him much time to talk.
Shortly after the meeting started, Luter interrupted his lawyers, looked at the attorney general, and began to school him in the realities of modern agriculture.
— You have to understand what’s going on in this industry, Luter said.
Luter explained how vertically integrated chicken production had changed everything. The rise of cheap chicken put pressure on every other kind of meat, driving pork and beef off fast-food menus and the family dinner plate. That was reality, Luter said. If the pork industry didn’t respond, it would shrink to obsolescence. The only way to compete with chicken was to imitate it. The evolution was unstoppable, and Iowa’s ban on vertical integration was irrelevant. The transformation was going to happen regardless. The litigation, in other words, was pointless.
— We don’t want the chickenization of the meat counter. We want to make sure hogs and cattle have a place, Luter said.
Luter was suggesting that Tom Miller should drop his lawsuit. It wasn’t accomplishing anything but hurting Iowa’s farmers. And it wasn’t going to stop Smithfield, Tyson, or anyone else from taking over the hog industry.
— We’ve got to work together, Luter said.
Moline was stunned. He looked at Luter’s attorneys, who seemed to be mortified by their client’s lecture. Moline guessed they had advised Luter to stay quiet during the meeting but had failed to rein him in.
Attorney General Miller wasn’t accustomed to corporate executives telling him how to interpret Iowa law, or which laws he ought to enforce.
After Luter left, Miller and his attorneys went over the meeting. It appeared to them the southern meat executives were accustomed to acting like bullies, whether dealing with farmers, regulators, or state officials.
In spite of Luter’s bluster, they knew he didn’t have leverage over them. His dire predictions about the collapse of the hog industry didn’t hold water with Moline and Tabor. Iowa had the corn, and Smithfield needed it.
No matter how much money companies like Smithfield or Tyson saved by building farms in Oklahoma, Arkansas, or North Carolina, those savings were outweighed by the extra cost of shipping corn and soybeans there. In the race to win control of the hog market, the companies had no choice but to operate in Iowa.
Moline and Tabor returned to their offices, and they pressed ahead full steam on the case against Smithfield.
* * *
The lawsuit against Smithfield turned out to be far more complicated than just trying to enforce the packer ban. By prohibiting vertical integration, the attorney general’s office was essentially suing Smithfield over the company’s business model. So Smithfield just cleverly changed its business model, without really changing it, and let the lawsuit try to catch up to it.
At one point, Smithfield’s new Murphy Farms division simply transferred the ownership of all its hogs to a man named Randall Stoecker.
Murphy sold all 900,000 of its pigs to Stoecker for about $79 million. Stoecker was hardly a millionaire, so Murphy loaned him the entire amount he needed. Stoecker didn’t have to put a penny down. Then Murphy set up a company called Stoecker Farms Inc., and he was then able to argue in court that it did not in fact own any livestock in Iowa. So the state’s ban on vertical integration didn’t apply.
Attorney General Miller sued over the transaction, calling it a sham. So Murphy shifted ownership again to a member of the company’s board.
The whole case continued in this way. Steve Moline would sit in a conference room with Smithfield officials and question them about their company’s operations.
He was convinced that after the questioning, the officials would huddle in the hallway with their attorneys and make calls back to headquarters, relaying orders on how to change the company to evade legal challenges.
All the while, Smithfield’s business was running ahead full tilt in the state, with hundreds of thousands of hogs being raised for the company under contract.
Tom Miller and Eric Tabor felt they needed to do something bigger. A lawsuit wasn’t enough. In September 2000, Miller unveiled a new law called the Producer Protection Act. It was by far the most stringent law ever proposed to constrain the power of companies like Tyson and Smithfield.
The act banned companies from making their contracts with farmers confidential. Miller wanted to post the contracts on his website, creating a transparent market for the rules of production. The act also banned companies from retaliating against farmers who complained or tried to join an organization like a growers’ union. It protected farmers who talked back, in other words. The act also gave farmers the right to cancel any contract within three days of signing it, giving a lawyer plenty of time to look over the terms.
Miller enlisted fifteen other state attorneys general to support the Producer Protection Act. Not
surprisingly, Tyson’s home state of Arkansas did not join, but several important farm states supported the bill, from Nebraska to Missouri, Oklahoma, and Wisconsin.
By pushing vertical integration into Iowa, Smithfield had invited a fight that threatened to change the economic order of the meat industry throughout much of the Midwest.
* * *
Eric Tabor took the stage at a Marriott hotel in suburban Kansas City. He was feeling good. This was his moment. There was broad momentum behind what he was doing, and Tabor decided to let loose and have some fun.
It was May 10, 2000. The hotel was packed with farmers from around the Midwest and regulators from Washington, D.C. Even the secretary of agriculture, Dan Glickman, was on hand. The U.S. Department of Agriculture was hosting the event, which carried the grandiose title “Visions for the Millennium.” Perhaps more important, the conference was attended by senior leaders of a USDA agency called GIPSA2, the nation’s top antitrust enforcer over meat companies.
For Tabor, the event signified that federal regulators had finally joined the campaign, started in Iowa, to curb meatpacker power.
Farm-state politicians and activists were berating the Democratic administration of President Bill Clinton to take action. The urgency of the issue was stoked by the upcoming presidential election. The Democratic candidate, Vice President Al Gore, faced a growing challenge from the longtime consumer advocate Ralph Nader. Nader was unequivocal in his opposition to industrial meat production and the rise of factory farms. Clinton’s administration needed to look like it was doing something about it.
The Meat Racket: The Secret Takeover of America's Food Business Page 26