By Leisa Boley Hellwarth, a dairy farmer and attorney near Celina
It’s been said that a lawsuit is a machine which you go into as a pig and come out of as a sausage.
That’s an appropriate analogy for the complaint, filed in mid-August 2020, by Maxwell Foods (a subsidiary of Goldsboro Milling of North Carolina) against Smithfield Foods (purchased by the Chinese company, WH Group in 2013), alleging breach of the production sales agreement (PSA) by failing to pay a fair price for hogs as well as purchase output required by the agreement. (This little piggy went to market below price; this little piggy stayed home in violation of the PSA.)
A few days prior to the initiation of legal proceedings in North Carolina’s Wayne County Superior Court, Maxwell Foods announced it would begin shutting down hog operations and permanently closing by mid-2021 due to “projected financial losses.” Maxwell has been in operation for 31 years and has agreements with approximately 150 contract farmers in its system.
Smithfield issued the following statement regarding the litigation: “It is regrettable that one of our longstanding hog farming partners, Goldsboro Milling, the parent company of Maxwell Foods, who has been a valuable part of our supply chain for many years, is taking legal action against us for what is fundamentally a commodity market issue of low livestock prices, from which we have also suffered. The allegations by Maxwell Foods are not true, and we will respond to the lawsuit accordingly.
“The hog industry has been challenged for some time and conditions have worsened amid the COVID-19 pandemic. A number of well documented issues have negatively impacted the hog industry over the last several years. These include hog farm nuisance litigation, which we have repeatedly described as an existential threat to farmers and agriculture; lengthy U.S. trade disputes with several large export partners; and the ongoing and unprecedented pandemic, to name a few. Maxwell has openly acknowledged these factors and, consequently, divested half its sows in the past year.
“These macroeconomic factors have caused financial duress, for many hog farmers, including Smithfield. As the largest US hog producer, our exposure to the commodity markets outstrips all other domestic producers and we have not been immune to deflationary pressures.”
Maxwell was an early player in consolidating several aspects of production under one company, commonly referred to as vertical integration. The company started as a feed mill, branched into turkeys, and then diversified into hogs. And they further integrated their milling business to grain purchases and storage.
In 1994, Maxwell Foods entered into a PSA with Smithfield Foods. That contract is the basis for the legal dispute. At the time Maxwell signed the agreement, Smithfield was purchasing hogs from Carroll’s, Murphy Family Farms, Prestage and Maxwell. By late 1999, Smithfield had bought Carroll’s and Murphy Family Farms — more vertical integration in the industry.
Never wrestle with a pig. You’ll both get dirty, and the pig likes it. Even if Smithfield loses the lawsuit, it could turn it to an advantage. Smithfield could buy out Maxwell’s contracts with individual farmers, further consolidating the industry. The farmers will be anxious to find a new contract. The buyouts would also help Smithfield amass more hogs at these existing operations, allowing the company to grow despite a long-standing moratorium on new or expanded hog farms in North Carolina.
Likely, the most Maxwell can expect from the litigation is financial compensation for lost income. While money is always a good thing, Maxwell would still likely go out of the hog business as announced in early August.
Lee Miller, a lecturer of Agricultural Law at Duke University who is not involved with the litigation, observed that in a “rational view” of anti-trust law that Smithfield would not be allowed to operate at its present scope and scale. Yet because consumer prices for pork are steady — the barometer federal regulators use to determine if anti-trust laws apply — Smithfield has avoided that level of scrutiny.
Maxwell is demanding a trial by jury. It is to be determined is whether the old adage will apply to the final outcome:Pigs get fat, but hogs get slaughtered.
Leisa Boley Hellwarth is a dairy farmer and an attorney. She represents farmers throughout Ohio from her office near Celina. Her office number is 419-586-1072.