Judge Charles Everingham IV found that Pilgrim’s had violated the Packers and Stockyards Act of 1921 (PSA) and thus was liable for damages of various amounts to the plaintiffs, a group of contract growers near Pilgrim’s El Dorado, Arkansas processing plant.

What is interesting is that the PSA violation was Pilgrim’s effort to drive up chicken prices — a result that did not injure the contract growers. They don’t own birds and their payments do not depend on chicken prices.

So, Action A caused Impact B which was a violation of the PSA. And since Action A resulted in a violation of the PSA, others “harmed” by Action A are paid damages even though the harm was not due to Impact B.

We aren’t lawyers so we admit that there may be some “legal” logic in there somewhere but we fail to see it.

Perhaps more important is the longer-term precedent that this decision might have. Let’s consider the facts as set out in the judge’s written decision:

• This was a relatively normal poultry contract growing system where producers provide barns, utilities and labor and companies provide birds, feed, and management. Producers were paid on a tournament system in which growout results are compared across growers and higher premiums are paid to those that do best in terms of death loss, feed efficiency, etc. The judge had not problem with these. Some were not on the tournament system but the judge said that fact was not violative of the PSA.
  
• The contracts were ongoing but that they clearly contained provisions for either the company or the grower to terminate the agreement without cause after one flock had been settled and before another was delivered. The contracts were, in essence, flock-by-flock with no guarantee of future deliveries of birds.
  
• The only portion of the PSA that was violated was Section 192e of the federal code or Section 202e of the PSA (available at www. gipsa.usda.gov) which says it is illegal to act “...for the purpose or with the effect of manipulating or controlling prices... “
  
• Judge Everingham specifically stated that Pilgrim’s had not engaged in unfair, discriminatory or deceptive practices (prohibited by Sec. 192a), given any undue or unreasonable preference or advantage (prohibited by Sec. 192b) and had violated neither the Arkansas nor Louisiana Deceptive Trade Practices Acts. The treatment of the contract growers was not an issue.
  
• Pilgrim’s bought the El Dorado complex from Conagra in 2003. It then bought Gold Kist in 2006 and incurred substantial debt. Pilgrim’s made $265 million in 2005 but the higher debt, “rising grain prices ...and a general downturn in the poultry market” drove profits down to $51.5 million in 2007 and a loss of $998.6 million in 2008. Pilgrim’s filed for bankruptcy on 1 December, 2008.
  
• Beginning in May 2008, a number of conversations among Pilgrim’s management and outside consultants included talk about closing complexes with one result being higher chicken prices. Phase II of Pilgrim’s reorganization plan required idling three plants, including the one in El Dorado.
  
• El Dorado growers objected when the idling motion was submitted to the bankruptcy court. One objection was that the true reason for idling was to raise the price of chicken. The objections were eventually withdrawn and, on 14 April, 2009, the bankruptcy court approved of the idling of the El Dorado facility.
  
• There was some legal wrangling over just what objections the growers had withdrawn. Judge Everingham concluded that the complaint about price manipulation was NOT one of them and so let it stand.
  
• The Pilgrim’s plant in Farmerville, LA was also closed. The State of Louisiana offered $40 million to assist a competitor in buying the plant and keeping it open. A Pilgrim’s officer wrote that selling it to the competitor under those conditions would allow them to get the plant for working capital and “enable them to flood the market with cheap chicken and foil our plans to restrict the chicken in the area and allow prices to rise.”

So what are the economic issues and lessons we see at this point? First, this decision raises serious concerns about what a company can do if it is losing money.

The PSA’s restrictions on actions to manipulate prices are intended to prevent firms from exercising market power to buy livestock at prices lower than a competitive market would price them or sell meat at prices higher than a competitive market would price it. But this situation involved a seismic shift in the cost of production. What was once a competitive market price did not cover costs in the short or, as it turns out, the long run.

Companies (not just Pilgrim’s) were cutting output to reduce losses. The ultimate impact of those reductions would be to raise chicken prices. But would those prices be higher than the new competitive equilibrium? Maybe momentarily if the cutbacks under-shot the equilibrium level of output but notoriously share-driven chicken companies would have quickly responded to those higher prices, driving them lower.

It is unclear what a company could have done (or can now do) but one thing appears certain: Don’t talk about it in terms of higher prices and for darn sure don’t put that in e-mails! Pilgrim’s action was unilateral. The judge says so. But Sec 202e of the PSA does not require collusion for price manipulation to be a violation.

Second and most concerning, though, is that not talking about higher prices may not be enough. Sec 192e/202e says action “with the effect of manipulating or controlling prices” is illegal even if intent is not present in the form of statements, emails, etc.

How could anyone argue that reducing output has no effect on prices? Especially if the firm is of any size at all. Pilgrim’s size was indeed cited as a factor in this decision. But what if a smaller company made an output reduction of the same size? It’s market impact would, logically, be the same. Pilgrim’s is appealing the decision.