Don Tyson saw the changes clearly and exploited them quickly. He spent his time cultivating relationships with the big grocery chains that sold more chicken than ever over their butcher counters. He figured out that he could cut the birds up in his slaughterhouses into prepared breasts and drumsticks, and sell the packaged parts, reducing the grocery store’s cost of paying a butcher to do it on site. Don Tyson’s young company benefited from being a new kind of animal altogether. It was both a farm and a manufacturer. It was a biological system and an industrial machine. This hybrid quality allowed it to dodge taxes and evade regulations that constrained the power of other meat companies, like beef meatpackers.
As the Tyson Feed and Hatchery business grew, Don and John Tyson earned a kind of prestige and respect in Springdale. After arriving in town destitute and desperate, John Tyson had become one of the town’s biggest employers. A portrait from the time shows him sitting behind his desk in a dark suit and tie, a little more corpulent than in the early days when he slung crates of fruit into the back of his truck. His arm is draped casually across the back of his chair, and he is gazing off into the distance with a look of contentment on his face, like a man who is savoring his power.
While John Tyson carried a veneer of aristocracy about him, the memory of dire poverty never seemed to have left Don Tyson. He might as well have still been penniless in the family living room in the earliest days of the company. Don realized, perhaps more than anyone, that the success of his family’s company was transitory. He learned that even as the chicken business grew by an order of magnitude, it remained as volatile as in the earliest days. He watched the big competitors get torn down overnight, and he learned that even a mountain of profit wasn’t enough to keep a company alive. No matter how rich he got, or how much cash came in the door of Tyson Feed and Hatchery, Don Tyson knew that collapse could be around the corner. It was knowledge that shaped him, and his company, for decades to come. Don was more willing than his father was to take risks and borrow money, but the knowledge that his business was always vulnerable never left him. The chicken business would forever be defined by waves of boom and bust that pitted the biggest companies against each other. When the decade began, there was a frontier quality to the chicken industry, with countless start-up companies entering the fray to cash in on the growing market. The ensuing years would be pitiless to these companies, winnowing them down into a smaller group of competitors who fought each other for survival.
The companies that outlasted the rest, Don learned, were those that could exert the most control over their operations and their farmers. The survivors were the companies that relentlessly controlled their costs, pushing every possible penny of waste out of their system, even when they were turning a profit. Tyson’s evolution during the 1960s unfolded quietly, beyond the notice of most Americans, who were concerned with the Vietnam War and rise of its youthful counterculture. But the agricultural revolution that took place in far-flung southern towns set the stage for a modern industry dominated by a few titanic companies.
The lessons Don Tyson learned during those years were etched into Tyson’s corporate DNA and therefore began to shape the future of America’s rural economy.
* * *
Don Tyson spent a lot of time with bankers. After secretly borrowing $80,000, he had finally convinced his father that taking credit from bankers wouldn’t bring doom to the company. As John grew more comfortable with borrowing, Don traveled throughout Missouri and Arkansas, building relationships with bankers who were increasingly interested in investing in the new business of poultry production.
Don discovered a new source of credit that had been overlooked by many of his competitors, in the form of a sleepy federal agency called the Farm Credit Administration. The Farm Credit Administration was established to loan money to farmers who got turned away by banks. There was more to the program than just ensuring a steady food supply. The 1961 Agriculture Act, which extended cheap credit to farmers, carried language that would have made Thomas Jefferson smile. The idea was to further subsidize the family farm, which Congress called the most efficient way to produce food, and a bedrock economic base for towns and cities in rural America. To support family farmers, the Farm Credit Administration gave them cheap loans to build barns or buy wheat threshers. If the farmer defaulted, the taxpayers would cover the cost.
The agency wasn’t heavily involved in the poultry business, but Don Tyson helped change that. Tyson met with Farm Credit agents and explained to them the new business of industrial chicken farming. The system evened out the wild risks that had characterized the early days of the poultry industry. A farmer growing birds for Tyson could show the Farm Credit Administration a reliable long-range prediction of cash flow and sales, regardless of the season. Perhaps most important, Tyson provided a letter of intent to the lenders, assuring them it would deliver a steady flow of chickens to make the farm profitable. Production wasn’t tied to weather events or the grain markets. It was tied only to Tyson marketing arrangements and contracts. The predictability made it a safe haven for the taxpayer’s money.
The Farm Credit Administration was convinced. The agency extended more government-backed loans to farmers entering the business to grow birds under contract with Tyson. Those government loans, in turn, helped assure private banks that chicken farming was a safe proposition for lending.
Loan after loan was extended to a new generation of contract farmers as Don Tyson made the circuit of banks and extolled his new business. A new breed of indentured farmer was born.
* * *
As Haskell Jackson was organizing Tyson’s financial ledgers, a steady parade of train cars hauled loads of lumber into northwestern Arkansas. Wooden beams were cut to specific dimensions and stacked neatly in the train cars. Upon arrival they were moved to trucks and shipped out to the hillsides and green meadows around Springdale, where the skeletal frames of new chicken houses were being erected.
A young Tyson employee named Donald Wray visited these farms as construction got under way. Wray was a congenial man, freshly dropped out of the master’s program in agriculture at the University of Arkansas. He was a country boy from Magnolia, Arkansas, and everyone called him by his nickname, Buddy. It was Don Tyson who had talked him into leaving school in 1961. Don instantly put him to work as a field technician for the company’s farmers. It was a job Don himself had done as a young man, and it was fast becoming a job that was critical to the company’s success.
Wray helped build a network of giant chicken farms at a time when the very definition of the American farm was transforming. Just a decade before, the American farm was still an enterprise owned and run by middle-class families. Farming was still seen as the quintessential small business, the basic economic unit for a society that prized individual ownership and wealth. But that started to change in the 1950s. Rather than being an economic foundation for families, farms were becoming rural factories that provided as much food as possible for an increasingly large and complicated food system.
Scientists made a number of breakthroughs that forever changed the economics of farming. Chemists figured out how to turn petrochemicals into nitrogen fertilizers that made soil more fertile. New pesticides wiped out insects that for centuries had made it impossible to grow thousands of acres of the same crop at one time. Farmers weren’t so much dependent on the rain or sun as they were on their relationship with their local chemical dealers.
Buddy Wray was the face of this new mode of farming. He helped farmers do the two things necessary for modernization: get big and get specialized. They raised huge volumes of one crop—in this case chicken—and they did it with increasingly high costs and sophisticated equipment.
Getting big and getting specialized made farmers more dependent on outside corporations like Tyson. In 1940 farmers bought only about 34 percent of the inputs like fuel and feed that they needed to run their farm. They produced the rest themselves. By the time Buddy Wray was knocking on doors and visiting farme
rs in the early 1960s, farmers bought about 63 percent of their inputs. As farms became more dependent on the outside economy, they also became more productive. Aggregate farm output rose by 54 percent between 1940 and 1962, even as farm inputs rose by just 4 percent.
As farmers grew more food, prices went down and their profit margins got thinner. So they raised more crops or livestock to stay afloat, thereby increasing supply and driving down prices even more. It began a race toward bigness that still hasn’t stopped, and which has driven the vast majority of farmers out of business.
Buddy Wray was offering farmers a deal that was perfectly suited to the era. Tyson arranged for farmers to build new chicken houses, helped them get the loans to do it, and provided them specially bred birds to raise. Tyson emphasized that contract farming was a way to reduce risk. The farmer was insulated from the most dangerous part of the business, which was selling birds in a wholesale market where prices could fall by half in a day.
Buddy Wray was good at his job. He is a naturally affable man, with his tall stature, close-cropped black hair, and square jaw. He has the look of someone who could naturally be trusted. His country boy mannerisms from Magnolia made him seem entirely too simple, and entirely too good, to be pitching a business deal anything less than completely honest.
* * *
In the early 1960s, Don Tyson, still hadn’t figured out the best way to get his farmers to grow huge numbers of chickens as quickly and cheaply as possible. When he needed to chew over such a problem, he often turned to one of his old friends, Joe Fred Starr. The two of them had met in college, and both had a penchant for carousing. As a teenager Starr had lost most of his right hand in a shooting accident, and he had only his index finger left. While the deformity might have made other men self-conscious, it only seemed to stoke Starr’s brash self-regard. Like Don Tyson, Starr was a salesman with a deep hunger for making money. The men remained fast friends for decades.
Don and Joe Fred hashed out the problem of Tyson’s farms. The company had largely settled on the model of contract farming, but this had its drawbacks. The houses were getting bigger, the feed mixes more complicated, and the knowledge necessary to medicate the birds for disease was becoming more technical. In short, it took a college degree to be a chicken farmer. But the company couldn’t find college-educated people willing to do the grimy, seven-day-a-week job of raising chickens.
Tyson experimented with the model of owning farms outright and staffing them with well-trained workers. This seemed like a natural fit for Tyson, because it left the farm within the company’s control. But the limitations showed up quickly. It was hard to motivate hired hands to do the work, which involved hauling loads of dead chickens out of a barn where the ammonia fumes were so strong they burned the eyes. Hired hands just didn’t raise the best birds, no matter how much you paid them or what kind of incentives you provided. They didn’t have skin in the game.
Owning farms also had another downside: Chicken houses were a terrible investment of the company’s money. The buildings served only one purpose, and they lost their value quickly as they wore out. A quick set of calculations revealed that Tyson Feed and Hatchery would never have the kind of capital it would need to buy all the land and build all the houses required to supply itself with chickens.
To counter these problems, Tyson settled on the model of using independent contract farmers. A farmer who owned his chicken houses was deeply motivated to care for the birds. He had a mortgage and debt from the chicken houses hanging over his head. It made a man get up early in the morning, and it kept him going until late at night.
Tyson provided the necessary college-educated labor on the farm by hiring a team of technicians like Buddy Wray, who visited each farm several times a week. A formula was settled upon that lasted for decades: The farmer provided the labor, and the company provided the brains.
* * *
Haskell Jackson had just barely gotten Tyson Feed and Hatchery’s books under control when he was told he had a second big task: convince the Internal Revenue Service that Tyson should pay taxes as if it were a family farm.
Harry Erwin, Tyson’s auditor in Little Rock, broke the news. It wasn’t going to be enough for Jackson to get Tyson’s books in order. He was also going to have to keep two sets of them. One set of numbers would be the figures that Tyson gave to its bankers and investors, showing how profitable the company had become. The second set of books was for the IRS, and these would show the federal tax agents how much money Tyson was losing.
The task was possible because Erwin had discovered a profitable loophole in the U.S. tax code. Unlike most U.S. businesses, family farms were allowed to use an outdated form of bookkeeping called “cash-basis” accounting. Virtually every other company had to use a different kind, called “accrual” accounting, which better reflected the true profitability of complex corporations.
Cash-basis accounting is simple. A company records its expenses only when it pays out the actual cash for them. And it only books income when the actual cash comes in the door. By contrast, companies using accrual accounting methods record their expenses when they sign a contract to pay someone, even if the cash hasn’t actually left their account yet.
Farmers were allowed to use cash-basis accounting because it was simpler, and Congress didn’t think small farms had the money to hire accountants for complicated recordkeeping. So a farmer would only record his expenses for seed when he paid for it, and he only booked his income for grain when he cashed the check. Erwin realized the cash-basis tax provision might apply to Tyson Feed and Hatchery. The company employed nearly four hundred people, many of them working in factory conditions in the slaughterhouse, and it invested millions of dollars in industrial plants for the feed mill, hatchery, and fleet of trucks. But Tyson’s sole purpose was producing meat. Don and John Tyson maintained a majority ownership, and they were certainly family. So under U.S. tax code, their multimillion-dollar corporation was a family farm.
Jackson set up a dummy corporation called Poultry Growers Inc., a wholly-owned subsidiary of Tyson’s that operated the company’s network of chicken farms. Using cash-basis accounting, Jackson could easily make it look like the corporation suffered massive losses each year. Poultry Growers Inc. paid up front for its feed, fuel, and other farm expenses. Because Tyson sold its birds with long-term contracts to grocery stores and restaurant chains, it could delay reporting its income into the next tax period, when cash from the contracts rolled in. Hypothetically, the company could kick the can of taxable income down the road for years.1
While Tyson couldn’t escape paying taxes altogether, it could reduce its payments substantially. In Jackson’s view, the income tax ploy basically let Tyson take an interest-free loan from taxpayers. By putting off its tax payments, Tyson could put its money to work by investing it in new equipment or more workers.
The plan worked, but it was hell on Jackson. After carefully orchestrating Tyson’s cost codes and accounting for all the company’s transactions, Jackson had to translate all the numbers into a different accounting basis. When it came time to pay taxes, he submitted these books to the IRS. When Tyson went to banks to borrow more money, Jackson had the other books on hand, the ones that used accrual-basis accounting. Presumably, all of this was legal.
By 1985, Tyson’s Foods had avoided paying $26.5 million in annual taxes through the cash-basis loophole, according to a report written by two economists with the U.S. General Accounting Office.
The morality of the ploy didn’t seem to be a matter of much debate inside Tyson. When the company saw a loophole and a chance to make a profit, Tyson took it, a strategy that became part of the company’s culture for decades to come. If the feds had a problem with it, it would be up to them to broach the issue. Eventually, that happened with cash-basis accounting. In 1986 Tyson was forced to quit using the scheme when the Tax Reform Act closed the loophole for farms with more than $25 million a year in gross receipts. Poultry Growers Inc. was merged into Tys
on Foods, Inc. in 1989.
It was a good time to be a family farm.
* * *
On Monday mornings at six o’clock, Haskell Jackson, Buddy Wray and Joe Fred Starr arrived at Tyson’s offices downtown for the weekly managers’ meeting. In the winter months it was still dark when they parked their cars in the lots and walked into work. They had all been raised as farm boys, so the early hours didn’t bother them. But Jackson had to admit he was still groggy during the morning sessions, and he never really got used to talking business strategy before he was fully awake.
The men filed into a tiny room that had been cleared out in the back of the office, the closest thing Tyson had to a meeting room. They sat in cheap metal chairs around three small, square tables that had been set end to end to make a kind of formal meeting table. Three glass ashtrays sat along the center of the tables, and the men were quick to light up their first smoke of the day as they sat down and tried to get their brains going. The small room was hazy with smoke as the meeting got into full swing.
There wasn’t much friendly banter, but Jackson felt at home with the men around the table. They were mostly college-educated farm boys like him. Leland Tollett, for example, had a PhD in agriculture from the University of Arkansas. Leland had been pals with Buddy Wray at the university, and Leland vouched for Wray when Don Tyson hired him.
The Meat Racket: The Secret Takeover of America's Food Business Page 8
