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.
