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.