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Chick-News.com Poultry Industry News, Comments and more by Simon M. Shane

NCC Responds to Small Business Administration Proposed Rule for 7[a] Loan Program

01/07/2019

The Federal Register of September 28th described proposed changes to the express loan program with specific emphasis on SBA 7[a]. Between 2012 and 2016, the SBA backed $1.8 billion in loans to poultry growers to enable these independent farmers to erect facilities to grow broilers under contract.

The Office of the Inspector General (OIG) released a report in March 2018 entitled Evaluation of SBA 7[a] Loans Made to Poultry Farmers. The conclusion of a study based on only eleven, albeit typical loans, questioned the eligibility of applicants to participate in the 7[a] program. The OIG report concluded that integrators exercised a high degree of "comprehensive control over the growers that they could not operate their business independent of integrator mandates, causing the business concerns to be considered affiliated."

The SBA is proposing to amend regulations to regard two businesses as affiliated if they have "an identity of interest" or if one is economically dependent on the other. Economic dependence is defined as deriving more than 85 percent of receipts from another concern over the past three years." The OIG report concluded that loans to broiler contractors failed to meet SBA requirements for eligibility because integrators exercise control over the growers through contracts, operating procedures and other mandates.

In a lengthy and reasoned response as required under law, the National Chicken Council responded on December 18th refuting the OIG report and placing on record the following justification for continuing eligibility of contractors under the SBA 7[a] program:

  • The existing 7[a] program is functioning as Congress intended and is supporting small agricultural businesses

  • Loans to contract growers represent one percent of the entire 7[a] portfolio, and the delinquency rate is less than 0.5 percent of the entire SBA 7[a] portfolio

  • Despite the contractual arrangements between independent farmers and integrators, growers may be regarded as independent. Their success depends on their efforts and diligence in caring for flocks and managing their farms.

  • Poultry growing frequently represents only one of a number of parallel farming activities carried out by an individual farmer or farm family. The NCC maintains that the SBA 7[a] program allows independent farmers to access capital to grow their operations and pass down multi-generational family farming legacies.

  • Despite the control exercised by integrators over contractors, individual farmers operating in according with a contract benefit from their efforts and also bear the risk of losses associated with ownership of a facility.

It is evident that if prospective contractors become ineligible for SBA 7[a] loans, future expansion of broiler production would be limited creating an undesirable chain of unintended consequences. Disruption in the supply chain leading to production of broilers will impact demand for ingredients and allied suppliers but more importantly result in a rise in price paid by consumers following reduced competition.

In conclusion, the NCC expressed concern "that the Proposed Rule is based on a flawed OIG report would in fact place even more obstacles in the path of rural American businesses.


 
Copyright 2018 Simon M. Shane