WEST POINT -- Tim Mueller farms about 500 acres near Columbus.
He always considered the farm too small to support himself and his sons, 31 and 23. Then he heard about Costco Wholesale Inc.’s plans to build a chicken processing plant near Fremont and its need for producers to raise the birds and earn as much as a 7 to 8 percent return on investment.
“This is a chance to get my boys included in the farming operation and make some decent money. What a golden opportunity,” he said during a Monday hearing on annexing 417 acres of farm ground south of Fremont for Costco's proposed hatchery, feed mill and processing plant.
But critics of the poultry industry are urging farmers like Mueller to take the company’s promises with a grain of salt and read their contracts with a magnifying glass.
“The details are important," said Lynn Hayes, an attorney and program director for Minnesota-based Farmers Legal Action Group Inc. "In poultry contracts, there is no way that you can tell whether a poultry operation is going to cash flow your loans and make any income until you see every word.”
Hayes made the comment to about 70 people in West Point Monday and will speak at other informational meetings this week with Mike Weaver, a poultry grower from West Virginia and president of the Poultry Growers Association of the Virginias.
Lincoln Premium Poultry, the Georgia-based company created to run Costco’s chicken plant, has said its contract will be a far cry from the industry norm.
“First of all, it’s a 15-year contract," said Premium Poultry General Manager Walt Shafer, who used to be head of operations support for Pilgrim’s Pride, one of the nation's largest chicken producers. "That is typically the term of the loan that these growers would go out and borrow to finance the equipment and houses. So we’re committing to the life of the loan essentially.”
And the contract will not have a clause that would pit farmers against each other. Often called a tournament system, companies set an average price for chickens, then pay some farmers more and others less based on a formula that measures how well birds put on weight compared to how much feed the company provides.
The practice has drawn criticism, but the industry defends it.
Premium Poultry says it plans to offer a guaranteed base pay for farmers, plus incentives.
“If you do well we reward you more, but we don’t take pay away. Their pay is guaranteed through the contract," Shafer said, adding that the contract, which has yet to be finalized, will be nonnegotiable.
Company representatives have met with about 300 area farmers interested in signing up to host as many as 12 barns, each capable of housing 43,000 chickens, Shafer said. Costco would need a network of about 400 barns in all, according to the Greater Fremont Development Council.
The company would own the chickens and provide the feed. Farmers would own the barns and raise the birds.
Development Council estimates say building four barns would cost $1.5 million and net the producer $116,600 in annual profits.
Weaver, who has been raising chickens on contract in West Virginia since 2001, said the cost estimates appear too low and profit estimates too high. He also scoffed at suggestions by the Development Council that farmers could sell a year's worth of manure for $40,000.
“If you can get that much, I’ll ship you mine,” he said.
Do the math, he told farmers, and have an attorney look over the contract.
“If they (Costco) do it right, this could be a good thing for you folks,” Weaver said.
He also recommended Nebraska farmers create a growers association to advocate for them.
Costco had $113.7 billion in sales for fiscal year 2015. President Jack Frank put the company's reputation on the line during a Monday night presentation to the Fremont planning commission.
“We take care of our members. We take care of our employees. And we respect our vendors,” he said.
Costco sold 76 million rotisserie chickens at $4.99 each in 2014. But as demand for the savory birds continues to increase supply has become tighter and costs inched up, Frank said.
“As supply shrinks and demand increases, it is incumbent upon us to find creative ways to develop a sustainable supply,” he said.
That’s where Fremont comes in. It would process nearly 350,000 birds daily.
Nebraska Farmers Union President John Hansen, one of six organizations that sponsored and paid for a series of informational meetings, hopes Costco's reputation and actions will outweigh industry history.
"Costco has a good national reputation as a retailer who is known for exacting their practices and standards out of their providers and vendors," he said. "The downside is the reputation and industry standard of the poultry industry, which has been a known problem for some considerable amount of time."