Costco is cheap really cheap.
This chicken costs five dollars. These birds are an iconic
Costco product. Costco sells about 60 million of them every
year. Sounds like a great moneymaker right. Wrong. Costco
sells these chickens at a loss sometimes up to 30 to 40
million dollars per year. The chickens are a lure to get
customers in the door. They're placed strategically at the
back of every Costco so customers might pick up other items
along the way.
That's why Costco wants to keep the price so low.
The trouble is that chicken prices have crept up over the
last 10 years and the industry is practically an oligopoly
run by the likes of Tyson and Perdue. Costco like most
American Grocers buys from these behemoth companies because
there's no other option. But not anymore. In 2016 Costco
announced its plans to open a chicken farming operation in
eastern Nebraska. It will own the whole supply chain from
baby chicks to feed to the final product. This operation
will provide Costco with 40 percent of its yearly chicken
needs about 100 million chickens.
That's one hundred million chickens. It won't have to buy
from Tyson or Perdue.
But here's the problem. Large scale chicken farming doesn't
really exist in Nebraska.
So Costco is paying the not so cheap price of 440 million
dollars to make it happen.
Costco's chicken operation will process about 2 million
chickens every week. Here's how it will work. Costco will
own the chickens feed and the processing plant. Local
farmers will own the barns and equipment and raise Costco's
chickens to maturity. Then the chickens will go to the
plant in Fremont Nebraska where workers will prep the birds
for sale. Some will be sold in parts but most will become
those famous rotisserie chickens. This model is called
vertically integrated agriculture. It's a relatively new
method of farming.
But today it's responsible for 95 percent of the nearly 9
billion chickens produced in America each year. So how did
we get here.
In the early 20th century chicken meat was merely a
byproduct of egg production. The only chickens sold for
meat were older hens who could no longer lay eggs. So it
was a rare and expensive product even though the meat would
be tough and unpalatable. By today's standards. But that
changed rapidly after World War 2.
A couple of large companies Tyson and Perdue found ways to
increase the number of chickens they would raise through
the industrial model where large numbers of similar breeds
are raised in confinement in houses. And the discovery that
antibiotics are administered in small doses daily not only
keep the chickens healthy but would bring them to market
weight faster.
Farmers can now raise fatter chickens with less feed in less
time and Americans quickly gained a taste for them. In 2012
the average American consumed four times as much chicken as
they did in 1950. More people eating more chicken sounds
great for farmers right.
Not really independent farmers struggled to keep up with
costly new equipment so small to mid-sized farms began
disappearing vertically integrated mega farms took their
place producing twenty nine percent of chickens in 1967 but
ninety five percent today.
By 2017 the industry produced over 30 billion dollars worth
of chickens so chicken went from a luxury product to the
most commonly consumed meat in just a few decades.
But this system has its own problems. The modern chicken
industry has faced a slew of criticisms inhumane treatment
of the chickens devaluation of property near processing
plants abusive treatment of plant workers environmental
degradation and exploitative farming contracts. The
contracts especially have come under fire in recent years
as farmers speak out in documentaries and file lawsuits
against their former employers. Just ask Craig Watts who
farms chickens for produce from 1992 to 2016.
You just turned over control of your farm to that company.
You did it the way they told you to do it. Whether it made
sense to you or not. But at the end of the day you could
follow those to a tee and they could still find something
that you didn't like. It was like hitting a moving target.
A typical mega farm has three to five chicken barns each of
which costs the farmers about two hundred thousand dollars.
Journalist Christopher Leonard argued in his 2014 book The
Meat Racket that this system makes farmers into modern day
sharecroppers trapped in indebted servitude on the edge of
bankruptcy but taking their business elsewhere isn't an
option for chicken farmers. Chicken companies essentially
have spheres of influence across the US. And most farmers
only live close to one of them. To top it off wholesale
chicken prices have shot up over the last 10 years. Recent
lawsuits alleged that this is because the biggest chicken
companies illegally aspired to fix prices. To put it simply
chicken companies are making huge profits but consumers are
paying more and many chicken farmers live in poverty.
This is the industry that Costco is about to enter but it
wants to do it differently.
While the specifics of Costco's contracts are confidential a
representative explains the basics to CNBC. Let's take a
look. First Costco offers 15 year guaranteed contracts.
Most contracts are much shorter sometimes only lasting one
year or even just one flock of chickens. This should give
Costco's farmers time to pay off their two million dollar
loans. However Costco can also cancel a contract with 90
days notice.
I didn't I don't know why we would accept a contract unless
there is some gross negligence on the part of on behalf of
the broker. I think that's the reason those types of
arrangements are there.
Christopher Leonard argues that similar terms in other
contracts make it too easy for companies to cancel giving
them a disproportionate amount of power over the farmers.
Second Costco will pay a baseline amount for each flock
regardless of quality as well as bonuses for good flocks.
If a farmer consistently underperforms they'll be placed in
a grower improvement program which basically says grower
growers here's a challenge we see and this is a new
benchmark we want to help you get to so that you're
performing better and working with them.
What's the former Perdue farmer sees the program as nothing
more than a first step to a canceled contract.
That's pretty common in poultry contracts. One bad luck can
make a three long average really bad in a hurry.
Third Costco is working with the Nebraska Department of
Environmental Quality to meet standards that are not
required by state or federal laws. But researchers from
Johns Hopkins argue that regulations can only do so much to
prevent the worst outcomes of large scale vertically
integrated agriculture.
That part of Nebraska has somewhat of a fragile ecosystem
and and the the waste that is generated every shadow which
is put on fields is great fertilizer. While the right
quantities it is but if you're producing 2 million chickens
in a really small area it becomes a runoff problem.
Finally Costco will pay its 1000 meatpacking plant workers
fifteen dollars an hour well above Nebraska's nine dollar
state minimum wage. However that's still significantly less
than the starting salary at Hormel plant in the 1990s
Costco's chicken operation will add an estimated one point
two billion dollars 10 Nebraska's annual GDP so it could be
a boon for Nebraska farmers who have signed up hope that
adding chickens will bolster their farms for years to come.
One of the most exciting parts of adding chickens to our
operation is that I have a daughter who is graduating from
University of Nebraska Lincoln because of the chicken
operation we're able to bring her home.
But others disagree. Randy Rupert a longtime resident of
eastern Nebraska formed a group specifically to oppose the
move.
We don't want vertical integration in Nebraska. It's
wrongheaded it's bad for the environment it's bad for
farmers it's bad for towns are our mantra is This is not
farming this is this is industrial production of widgets
Costco's chicken operation won't open for another year.
And besides the industry as a whole is moving towards
organic chicken. But with the State of the industry as it
is now it's worth asking is five dollars for a whole
chicken just too good to be true.