How This $7.1 Billion Multinational Uses Small-Town Farms as a Shield From Millions in Fines

Thirty-five years ago hog farming was a pretty simple business. Most operations held less than 100 hogs; the biggest held upwards of 3,000 hogs at any given time. The business was profitable, it created jobs, and it was sustainable.

Then the business model began to change. Beginning in the 1980s, executives from global corporations like Smithfield Foods would approach these farmers with a proposition...

Spending (borrowed) money to make money

Source: The Pug Father

These executives offered the small-town farmer a contract to raise hogs owned by Smithfield. The contracts were generous, oftentimes worth six or seven digits in annual revenue.

There was a catch.

To achieve scale, Smithfield needed the farmer to raise 10,000, 15,000, or more hogs at a time. With contract in hand, small-town farmers across the U.S. approached banks to mortgage the farm and build new infrastructure to attempt to support the massive influx. This was their opportunity to enter the big time.

Upfits were complete, the new hogs were delivered, and seemingly overnight the operation was transformed into a massive factory-style facility, the type that dominates the industry today.

According to the North Carolina Department of Agriculture and Consumer Services, in 1986 over 87% of North Carolina's 15,000 hog farms held fewer than 100 hogs and pigs. Only 800 operations held more than 500 hogs.

By 2000 the total number of North Carolina hog farms had decreased to just under 4,000 operations. Of those, 1,500 operations held over 1,000 hogs each and controlled over 99% of the statewide hog inventory. The factory-style farm had become the industry standard.

Unintended consequences for the small farmer

A critical aspect of the hog business is management of all the waste. A typical hog will produce about four gallons of waste per day; this kind of volume on a 15,000-hog farm is incredible.

To deal with this volume of waste, hog operations typically use a "lagoon and spray" method. They construct giant, open-air lagoons that can hold tens of millions of gallons of hog waste. These lagoons are typically lined with a thin clay barrier. Unfortunately, clay is porous. It doesn't prevent the waste from leaching into the ground, but it does slow down the dissipation into the environment.

Hog barns and lagoon in Trenton, N.C. Source: Waterkeeper Alliance

As the lagoon fills, the facilities use spray systems to distribute the waste over neighboring fields, either grass or crops -- corn, soybeans, wheat, or another. In theory, the hog waste is absorbed as fertilizer and safely disseminated into the environment.

But that theory doesn't always work out in practice -- 10,000+ hogs producing four gallons of waste per day can fill a lagoon faster than the spraying system can responsibly distribute the existing waste. The farm operations are forced to spray onto fields already saturated, leading to pools of waste that can run off onto neighboring properties -- forests, wetlands, neighborhoods, rivers, and so on.

Worse yet is when these lagoons burst. Whether the result of a hurricane's rains, a flood, or even faulty construction, a burst lagoon means millions of gallons of waste spill into the environment, polluting the communities, water supply, and wildlife for miles downstream.

Examples abound

Flooding in the aftermath of Hurrican Floyd, 1999. Source: Wikimedia.org

In 1995, a North Carolina farm working under a contract with a Smithfield Foods subsidiary, spilled over 25 million gallons of hog waste into the Neuse River, a major waterway in central and eastern North Carolina.

In 1999, Hurricane Floyd burst at least five hog lagoons and flooded at least 47 others in North Carolina.

In 2011, a factory hog farm in Illinois spilled 200,000 gallons of hog waste into the water system. The pollution from that spill caused a massive 100,000+ fish kill.

To see a slide show of the hog waste disposal process, click here.

The small business heads to court, the multinational yawns

Any discharge of hog waste into "waters of the United States" is a violation of the Clean Water Act. Under the law, violations are the responsibility of the owners and operators of the hog facility, that is, the local farmer. The mega-corporation -- in this case, Smithfield Foods -- is protected by an indemnity clause in its contract with the local farmer.

The local farmer agrees to house the hogs, which are owned by Smithfield, feed them food provided by Smithfield, give veterinary care and an antibiotic regimen as prescribed by Smithfield, and otherwise raise the hogs to exacting standardized specifications set by Smithfield.

Smithfield though is contractually held harmless for any on-site violations.

The local farmer is stuck between a rock and a hard place

Source: WikiMedia.org

Earlier this month, nonprofit watchdog groups The Waterkeeper Alliance and the Neuse Riverkeeper Foundation jointly filed a Notice of Intent to sue a hog facility based in Trenton, N.C. The facility is under contract with Murphy Brown, LLC, a subsidiary of Smithfield.

Facing a lawsuit and likely a hefty fine with expensive cleanup costs, why wouldn't the local farmer sue the global corporation to revoke the indemnity clause as unconscionable? It was the corporation's idea to house such an incredible volume of hogs on the property, and the hogs were raised to the corporation's precise standards and procedures.

It seems plausible that the indemnity clause is lopsided at best and extremely unfair at worst. And yet the farmers do not sue.

The reason, unfortunately, is dollars and cents. If the local farmer breaks off its relationship with Smithfield or another global player, the revenue from that contract stops. Without that income, the farmer can no longer afford the mortgage on the property. From there it's a short time before the bank is foreclosing.

Economically, these farmers are stuck between a rock and a hard place. If they turn down the contract initially, they don't have the scale to compete on price against the factory farm competition. If they accept the contract, they can achieve scale but they are left high and dry in the event of a regulatory or statutory violation.

By contracting locally, companies like Smithfield distribute their regulatory and environmental risks across a huge network of distinct small-town farms. There are over 4,000 hog operations in North Carolina today, with approximately 90% of them contracted or owned by Smithfield. A Clean Water Act lawsuit against one of these farms is hardly a blip on Smithfield's radar screen; they have thousands of other farms under contract operating business as ususal.

Its a complex problem and it requires a complex solution

Hog farming is big business in North Carolina and other states, and there is no simple fix. According to the National Pork Producers Council, the North Carolina pork industry supports nearly 25,000 jobs and contributes nearly $1.5 billion to the state's gross domestic product. North Carolina is second only to Iowa in pork production nationally.

With such a large economic impact and so many jobs at stake, local politicians are hard pressed to act decisively.

Simultaneously, the current system is structured to benefit the global companies, giving them little incentive to support change. In its 2013 annual report, Smithfield reported sales exceeding $13 billion and operating profits exceeding $500 million. The company has been profitable for nine of the past 10 years, generating aggregate operating profits in excess of $4 billion.

Shuanghui International acquired Smithfield Foods in Sept. 2013. Source: Smithfield Foods Investor Relations

Smithfield, as a result of its scale and financial success, was acquired in 2013 by Hong Kong-based Shuanghui International Holdings Ltd., in a multi-billion dollar deal that made Shuanghui the largest pork producer in the world.

The industry today stands at a crossroads: continue down the same path defined by an oligarchy of faraway global corporations' drive for profits, or reform the system to protect the long-term sustainability of the small farm, the environment, and the local communities that rely on the industry.

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