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Ryan Zmek, of L&R Grading and Excavating, a contractor for Costco and Lincoln Premium Poultry, surveys the site of one of Costco and Lincoln Premium Poultry's chicken barns.

Garret Hetzel says it’ll be years before he starts seeing dividends from his chicken barns, which will be supplying poultry to Fremont’s Costco and Lincoln Premium Poultry chicken plant.

But that’s fine, he says. The incoming eight-barn site, which will be located just north of North Bend, isn’t really meant for him, anyway.

Hetzel plans to invest everything he makes back into the business, hoping to pay off the business’ roughly $4 million loan in about 10 to 12 years—hopefully a few years ahead of schedule.

By that time, he hopes that the farm will be ready for the ones who really matter: his kids, 4-year-old Ayden and 13-week-old Will.

“It’s designed to be set up for my family, my kids down the line, so when they graduate college or get out of high school, they can come back to something if they choose to,” he said. “If they want to come back and work at the farm and own the chicken barns, they’ll be able to. I mean, they’re going to grow up doing that stuff because that’s what I grew up doing and it kind of gives you a sense of ownership.”

This story is the final part of a four-part series looking at the implementation of Costco and Lincoln Premium Poultry’s incoming chicken operation in Nebraska and exploring the project’s initial local economic impact. For this story, we look at Costco’s grower network—the contracted chicken producers building barns across northeast Nebraska that will exclusively provide poultry to the Fremont-based processing plant.

This type of business model, where one company or entity controls much of the supply chain, is often referred to as vertical integration. Costco officials, contractors and supporters of the projects have framed the operation as an exciting business opportunity—one with the potential to help curb the depopulation of rural areas by creating new opportunity for future generations.

But those critical of the project are skeptical that those promises will come to fruition. They point to how the vertical integration of agriculture and livestock operations elsewhere in the country has failed to live up to promises—and they’ve raised concerns about what the proliferation of poultry barns could mean for Nebraska.

Barn progress

Costco and Lincoln Premium Poultry’s operation will yield 520 barns across the northeast Nebraska region, with several in Iowa as well.

Those barns are broken down by type—24 pullet houses are going up on eight unique farm sites; 64 breeder houses on 16 unique farm sites; and 432 broiler houses on a still-to-be-determined number of sites. Some of those will come in sets of four while others might come in sets of eight.

Thus far, 18 sites have gone through the public approval process mandated by local governing bodies. Two more are expected next week, which would bring that number to 20, according to Lincoln Premium Poultry’s Jessica Kolterman. In total, there are 30 sites currently under construction—several are located in areas where public approval processes are not necessary.

There are 16 counties in Nebraska where there has been either interest in building barns or barns already approved: Butler, Colfax, Cuming, Dodge, Madison, Platte, Polk, Saunders, Seward, Stanton, Thurston, Washington, Wayne, Dixon, York and Lancaster. Four counties in Iowa have also seen interest or approval.

The numbers are expected to change through October as projects continue to break ground or seek approval.

Here in Dodge County, approval has been granted to four different barn operations, including Hetzel’s, which he is pursuing with business partner and farmer Chris Armstrong.

Hetzel’s Dodge County project will feature 8 broiler house barns. He expects it will see roughly 2.1 million chickens over the period of a year, all housed in enclosed barns. It will employ roughly five to seven people. Construction has not yet started.

Hetzel is not a farmer himself—he has several other jobs, including one working for the automotive company Continental Tires. But his family owns a piece of farmland in Nebraska that he subleases out. He grew up in a small town in a family of veterinarians who raised chickens to a much smaller magnitude than his latest venture. His business partner, Armstrong is a farmer living closer to the barns who also expects to have his kids play a significant role.

For Hetzel and Armstrong, the project was appealing because it allowed them to invest in a project that could have long-term benefits without having to line up all the necessary pieces on their own—Costco lines it all up for them.

“We want sort of a low-risk, where we could put some money in and in 10 to 15 years have a really good company that has great assets,” Hetzel said.

Concerns

But for Randy Ruppert and the group Nebraska Communities United, which has opposed the project, it’s that exact prospect that poses a threat to farmers who choose to go into business with Costco. To Ruppert, Costco’s operation puts all of the risk on the farmer—with only a fraction of the profit, which he argues will leave the state as the product lines Costco’s shelves across the country. Farmers’ fates, Ruppert argues, are in Costco’s hands.

“That takes away independence from the farmer,” Ruppert said. “He goes into debt up to $1.2 million or more to build the barns. He will never own the product, he owns all the liability, Costco owns all the profit.”

In Iowa, Ruppert argues, a boom in the concentrated animal feeding operations (CAFOs) like the chicken barns now being erected in Nebraska have led to serious concerns, outlined in newspaper editorials and reports, about water quality and odor. He’s afraid that the nitrogen and phosphorus from runoff from CAFO-applied manures could impair waterways in Nebraska, as some argue it has in Iowa.

Ruppert believes that vertically integrated and corporate controlled agriculture “is not the way modern food production should be going.” He compared it to a monopoly, where the production of it is controlled by fewer and fewer people.

“Nebraskans spend over $2 billion a year on food,” he said. “Ninety percent of that $2 billion leaves this state, and we’re saying we have the ability to produce locally grown foods, that not only are much better and healthier for you, but they keep the money inside the state of Nebraska.”

Kolterman argued that Lincoln Premium Poultry (LPP) views its growers as long-term “partners, rather than someone that holds a contract,” she said, and that growers purchase many supplies and equipment locally—ensuring that money still remains in the local economy.

LPP’s contract is different from others in the poultry industry, Kolterman said. Poultry contracts are often are done flock-by-flock, she said, while Costco’s is a 15-year contract that guarantees each farmer get six flocks per year.

“We wanted to make sure that our farmers have [comfort] in knowing with certainty that they would have that 15 years in an effort to have the time to pay off their barns,” she said.

Additionally, Costco’s contract has a base-pay guarantee—and bonuses are still given to high performers. Other contracts give out similar bonuses, but often take it from low performers as a penalty. That base pay is not affected by low performance, and a peer review system is available for growers to hammer out challenges.

“Our goal is that no grower is ever left behind,” Kolterman said.

From an environmental perspective, Costco and LPP officials have argued that the dry litter produced at the barns are different from the wet manure produced in other CAFOs that house animals like hogs, which reduces the risk of runoff. Ruppert argues that Nebraska Communities United has pushed Costco and LPP to have their growers plant cover crops and put buffer strips around waterways that would further improve waterway safety, though that has not been implemented.

Additionally, Costco has argued that it is requiring all of its growers to get a Nebraska Department of Environmental Quality permit and create a nutrient management plan despite not being required to legally. That would make them accountable to state rules and recommendations to hold them accountable and would monitor their placement of litter with nitrogen and phosphorus.

Ruppert countered by saying that, when farmers have excess litter, they may sell it to neighbors who are not subject to the same permits and regulations. Kolterman said that in the nutrient management plans, growers “have to be accountable to where the manure goes.”

“Our nutrient management plans will demonstrate in documentation that we are not contributing to any increases in polluted waterways,” she said.

Brad Lubben, an extension policy specialist on agriculture at the University of Nebraska, says that the concerns about vertical integration are longstanding.

However, he added, Costco’s operation is different from other operations that have been established elsewhere in the country.

First, Costco’s operation is entering into a market with an undeveloped broiler chicken industry—in other words, Nebraska has fewer independent poultry growers who may be pushed out as a result of the corporate growth.

Second, Costco’s control extends all the way up to the retail level—its chicken will be sold under the brand name of Costco, exclusively in Costco-branded retail stores, where no other chicken brands will be lined on shelves to compete. That’s different from other vertically coordinated operations, where the chicken product might be shipped out to retailers whose shelves are stocked with a multitude of different brands. That could put unique pressure on Costco.

“It’s a product that they use as a primary draw into the store,” Lubben said. “That might suggest that there’s more care and emphasis placed on every segment of the chain because it’s not just trying to competitively produce a food product, it’s also producing something that is fundamentally identified and recognized as their brand on display.”

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