By KEVIN WALKER

Michigan Correspondent

WASHINGTON, D.C. — An evaluation of U.S. Small Business Administration (SBA) loans made to chicken farmers who act as contractors reveals that many of the loans are illegal.

An evaluation conducted by the Office of Inspector General (OIG) – part of whose function is to provide an independent analysis of SBA loans – revealed that many of its loans made to chicken farmer contractors are illegal, in that the parent company had too much control over the contractor and that, as such, the contractor couldn’t legitimately be considered a small, independent businessperson.

The 17-page report, titled Evaluation of SBA 7(a) Loans Made To Poultry Farmers, is dated March 6. The 7(a) Loan is SBA’s primary program for helping startup and existing small businesses, offering financing guarantees for loan amounts up to $5 million to fund startup costs, expand existing businesses, purchase equipment, repair existing capital and other uses.

The OIG found that these loans made to growers did not meet SBA requirements because the large chicken companies, known as integrators, exercised such comprehensive control over the growers that the OIG “believes the concerns appear affiliative under SBA regulations.” As such, the loans were apparently “ineligible under SBA size standard regulations and requirements.”

The integrators’ control was “exercised through contractual restrictions, management agreements, oversight inspections and market controls,” the report states. “This control overcame practically all of a grower’s ability to operate their business independent of integrator mandates.”

The report goes on to say a grower’s failure to comply with the integrator’s mandates could result in a decrease in integrator payments to the grower, a reduction in flock placements or a cancelation of the contract with the grower.

“A grower’s economic viability was based upon a performing production contract with an integrator and is the true basis for grower income and facility value,” it stated. “As a result, from FY (fiscal year) 2012 to FY 2016, SBA guaranteed approximately $1.8 billion in loans that may be ineligible.”

The report pointed out that most chickens raised are broilers, and that most of those are raised by farmers under contract with large chicken companies – the integrators. The report described local markets for growers as highly concentrated, with just over 50 percent of markets having either one or two integrators available.

Growers in these markets accounted for approximately 57 percent of broiler production in the United States.

Growers borrow money to pay for facilities to raise chickens from a commercial bank or the Farm Credit System. Growers used federal guarantees for loans obtained via the SBA Loan Program and Farm Service Agency.

Between 2012-16, poultry loans as a percentage of all loans increased from 61 to 76 percent. Poultry loans also increased in value by 235 percent, from $159 million in 2012 to $534 million by 2016. During this same time, all other agricultural loans increased in value 62 percent.

The chicken housing is the most expensive aspect of raising broiler chickens, said National Sustainable Agriculture Coalition Senior Policy Analyst Paul Wolfe; it’s helpful to large chicken companies to be able to offload that expense onto the contractor, or taxpayer.

“Maybe they shouldn’t make these loans; it’s basically a free line of credit to these big chicken companies, courtesy of taxpayer dollars,” Wolfe opined.

The OIG evaluation was started after Congressional staff members indicated that large companies were being inappropriately subsidized by the SBA loan program. “We found that 7(a) loans made to growers did not meet regulatory and SBA requirements for eligibility,” the report says. “Integrators were ineligible to participate in the SBA 7(a) Loan Program due to their size.”

Wolfe said the SBA should put better processes and controls into place. Farm World’s attempt to reach the SBA offices for comment was not returned by press time.