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Last month the U.S Justice Department allowed Cargill and Continental Grain to go forward with a high-profile joint takeover of chicken processor Sanderson Farms. At the same time, antitrust enforcers secured a legal settlement with the merging parties that has major implications for the poultry business.

Shortly after permitting the deal, the DOJ proposed a consent decree to remedy other antitrust violations by Cargill, Sanderson, and Wayne Farms around wage-fixing and deceptive practices. The proposed settlement would give nearly $85 million to poultry workers to make up for suppressed wages, impose a court-appointed antitrust monitor, and bar Sanderson and Wayne Farms from deducting farmers’ base pay based on performance.

Farmers’ advocates are disappointed that the merger was not challenged, but encouraged to see the first concrete change to the industry’s use of predatory tournament payment systems in determining wages for chicken farmers after more than a decade of failed regulatory attempts by USDA. The settlement also suggests that more wage-fixing charges could be coming for other poultry companies.

When Cargill and Continental announced their plan last August to buy America’s third-largest chicken processing company, the chicken industry was already facing antitrust scrutiny.

Numerous private and federal antitrust suits had accused major poultry companies of conspiring to cut production, rig bids, and raise prices. In the fall of 2020, Pilgrim’s Pride pled guilty to price-fixing in a federal probe, though after two mistrials the DOJ failed to criminally charge ten poultry executives. Poultry companies also face lawsuits for allegedly sharing sensitive business information and striking no-poach agreements to avoid competing for workers or contract growers, which effectively suppressed wages and farmer pay across the industry. In March, the Justice Department opened its own investigation into poultry processor wage-fixing.

Given these allegations of illegal collusion and ongoing concerns about chicken companies’ power over contract growers, advocates and policymakers urged antitrust enforcers to block Cargill and Continental’s Sanderson takeover to prevent further industry consolidation; they were thus disappointed when DOJ declined.

The DOJ did not issue any explanation, but former DOJ antitrust attorney and law professor emeritus, Peter Carstensen, thinks that challenging the deal wouldn’t have stood a strong chance in court, at least not by today’s legal standards. “Back in the day, it would have been much more plausible to go after this [deal] given the history of collusion in the industry,” he said. Noting that the legal thinking around mergers has become more permissive since the 1970s, Carstensen doesn’t think this merger increases market concentration enough to meet today’s lax standards. The top four firms currently control roughly 54% of the market, and the deal would increase that figure to around 60%.

Carstensen also thought that Sanderson and Wayne Farms’ territories did not overlap enough for the DOJ to argue that the merger would reduce regional competition for farmers or plant workers. Sanderson preemptively sold off a plant in Laurel, Mississippi, that raised the most anticompetitive concerns. Sanderson producers are worried nonetheless, as Sanderson announced farmer pay cuts shortly after announcing the merger last year. Sanderson denies that pay cuts were related to the merger and quickly walked them back.

This deal will also add chicken to Cargill’s agribusiness empire, which already includes beef processing, turkey processing, global grain trading, and animal feed production. Feed is the single largest production cost in raising chickens, and Cargill’s grain trading expertise could give it an advantage.   

Soon after DOJ let the deal go through, the agency required Sanderson, Cargill, and Wayne Farms to settle two other antitrust violations regarding a conspiracy to suppress plant workers’ wages and deceptive tournament systems used to pay contract farmers. 

Drawing on evidence from its investigation, including communications between competing poultry company staff, the DOJ sued Cargill, Sanderson, and Wayne Farms for fixing wages. Companies that together employ more than 90% of U.S. chicken workers, including the merging parties, allegedly worked with a data consultant to systematically collect and share detailed information on both their salaried and hourly packing plant workers’ wages, bonuses, and benefits for at least 20 years.  

DOJ says those involved in the alleged conspiracy saw anonymized data of current and planned future wages at competing processors across the country, down to the wages for each type of worker at individual plants. Participants had to join a secretive yearly meeting, at which the conspiracy was allegedly discussed and maintained. Communications obtained by the DOJ suggest that poultry processing staff also reached out to each other between meetings to consult on wage-setting.

By sharing this information, chicken processors could maintain an effective wage cap across regions and avoid competing for workers by raising wages. Participants appeared to know this exchange violated antitrust laws and discussed precautions to avoid liability, the complaint says. For instance, when one poultry processor received “general antitrust fishing questions” from a private investigator, it proceeded to warn other companies that “the bad guys are still out there, and [this is] why we hold strict confidences about discussing wages.”

To clear these charges, Sanderson, Cargill, and Wayne Farms agreed to pay $84.8 million to poultry plant workers harmed by the conspiracy. They will also have to open their businesses to a court-appointed monitor for the next decade. This monitor will ensure that all aspects of their businesses, from feed production to chicken contracting, to processing and marketing, comply with antitrust law. It remains to be seen if other alleged conspirators will also face charges.

In a novel move, the DOJ also alleged that Wayne and Sanderson’s tournament payment systems violate the Packers and Stockyards Act’s ban on deceptive practices. Tournament systems rank contract farmers’ performance against other growers in their region, giving top performers a bonus and taking a pay cut from bottom performers. Because chicken companies so thoroughly control the quality of the feed, veterinary care, and birds that influence farmers’ tournament ranking, advocates argue the system is fundamentally unfair. Now the DOJ also argues that the system is deceptive, because chicken companies withhold information about the risks of income variation in tournament systems as well as differences in input quality provided to competing growers.

Since 2010 the U.S. Department of Agriculture has attempted in fits and starts to set more fair terms of conduct in the poultry industry under the Packers and Stockyards Act. Most recently in late May, the USDA proposed rules that would require chicken companies to disclose more information about probable income variation and the quality of inputs provided to competing farmers in tournament pools.

As relief for violating the Packers and Stockyards Act, the DOJ will require Sanderson and Wayne Farms to abide by USDA’s disclosure proposal and, critically, cease deducting farmers’ base pay in tournaments while continuing to offer incentive bonuses for good performance. Getting rid of base pay deductions will establish a clearer price floor for contract poultry farmers for the first time in decades.

“The greatest achievement in this agreement is that the DOJ’s action requires Cargill-Continental to pay its contract poultry growers a guaranteed base price for each chicken, and to implement a bonus system,” advocacy group Farm Action said in a statement.

Such changes at Sanderson could indirectly support USDA’s rulemaking efforts to establish industry-wide regulation of tournament systems. “We have the third-largest poultry integrator agreeing they can do business successfully without using the totally unfair tournament system,” Carstensen said. “I think that greatly weakens [poultry companies’] arguments that [regulation] is going to destroy the industry.”