Questions over the independence of poultry farmers could have wide-ranging implications for other small businesses.

The Small Business Administration’s independent Office of the Inspector General issued a report in early March that questioned whether chicken farmers could be consider small businesses for the purpose of receiving SBA-backed loans. The report determined that most chicken growers are tied so closely to larger poultry firms that they operate more like subsidiaries than independent businesses.

During a short, but sharp, hearing Wednesday by the House Small Business Committee, a disagreement surfaced between SBA representatives over how other businesses should be treated.

Mike Ware, the SBA's acting inspector general, suggested in his testimony that the concerns about vertical integration and affiliation raised in the report could be applied to other industries such as hog farming and automobile dealerships.

That conclusion was disputed by William Manger, associate administrator for the SBA's Office of Capital Access, which oversees the 7(a) program. Manger said agency staff reviewed poultry loans cited by Ware’s office and concluded that they were made in accordance with longstanding policy.

“It’s been our policy that … contracts alone do not cause affiliation,” Manger said. “Only firms that are commonly owned or managed are considered affiliated.”

The rift shows that the notion of independence, and its implications for shaping policy, goes far beyond poultry farming, which accounted for about 1% of the 7(a) program's $88 billion in loans at March 31.

“This [issue] does bring up the whole question of how you look at franchising,” Ed Elfmann, senior vice president of agriculture and rural banking policy at the American Bankers Association, said in an interview after the hearing.

The chickens that farmers raise are typically owned by larger poultry companies that dictate their care, Elfmann said, though he added that other management decisions involving work hours and hiring remain at the farmer’s discretion. Many farmers expanded into chicken production because the manure the birds produce is beneficial for growing soybean and other crops, he said

Rep. Blaine Luetkemeyer, R-Mo., also hit on agricultural diversity issue during the hearing, noting that chicken growers frequently raise other animals and grow other crops, so much so that poultry companies “don’t control their entire operation.”

“I’m not sure you understand the business model of what a poultry farm is all about," Leutkemeyer told Ware, adding that he questioned the office's definition of affiliation “when you’ve got so many other examples that are just as controlling.”

Ware stuck to his guns, claiming contracts with large poultry firms are typically a chicken grower’s most valuable possession. According to him, their operations aren’t financially viable without one.

“In the defaulted loans we reviewed, when the contract went away, so did the poultry farm,” Ware said.

For her part, Rep. Nydia Velazquez, D-N.Y., insisted that the SBA continue to investigate the relationship between chicken growers and large poultry companies. Velazquez said she would consider legislation to regulate lending to affiliated companies if the agency’s policies go unchanged.

“The rapid shift to a vertical-integration model in the poultry industry has resulted in just 25,000 contract farmers growing the majority of U.S. chicken production,” Velazquez said. The “nature of the power relationship” between poultry companies and chicken growers means the SBA “may not be assisting what we consider small businesses,” when it lends to a grower.

The original report by the SBA’s Office of the Inspector General concluded that, given the control exerted by poultry companies, growers should be classified as affiliates of the larger entities rather than independent small businesses.

The conclusion has created a fear among lenders that the SBA would be unable to honor guarantees attached to poultry loans.

Manger said during the hearing that all guarantees would be honored and that the SBA’s existing guidance involving poultry loans remains in place.

The SBA does not lend directly under 7(a); it guarantees small business loans made by banks and other private lenders. Loans are only supposed to be made to borrowers that fall under the agency's size standards.

Manger noted that the poultry loans have performed well. The current delinquency rate for the 7(a) program's poultry loans is 0.34%, about half that the rate of the overall portfolio.

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