* USDA expected to propose marketing rules in June
* Rules deal with "undue preference" in purchases
* Also clarify producer rights in contract disputes
* Packers say they follow the law
WASHINGTON, May 25 (Reuters) - The U.S. government will soon propose rules to bar meatpackers from unfairly favoring big cattle feedlots and to give poultry producers more leverage, two small-farm groups said on Tuesday.
The proposal would modify Agriculture Department guidelines on fair play in livestock and poultry sales. Activists say farmers are out-muscled by big packers who dominate meat processing. The 2008 farm law required action on the issue.
Agriculture Secretary Tom Vilsack told agribusiness lobbyists on Tuesday that changes to marketing rules would be proposed in June but did not specify them. He said the changes would allow USDA to "do a better job of responding to some of the complaints we've heard" from farmers.
Two farmer advocacy groups identified the proposals as dealing with "undue preference" in livestock purchases by meatpackers and clarifying the contractual rights of producers who feed poultry for large processors.
Most U.S. poultry, pork and beef is produced under contract to companies such as Tyson Foods Inc (TSN.N), Cargill, JBS USA (JBSS3.SA), National Beef Packing Co and Smithfield Foods Inc SFD.N.
Producers say they have limited recourse if packers treat them unfairly. Meat processors say existing antitrust and competition laws are effective.
Vilsack cited ongoing Obama administration hearings into competition in the agricultural sector before mentioning the imminent release of proposed revisions.
"It's encouraging the secretary is mentioning them," said Kathy Ozer of the National Family Farm Coalition, referring to the proposed rules.
A spokesman for the National Sustainable Agriculture Coalition said, "we've been waiting and waiting" for the update to USDA's application of the 1921 Packers and Stockyards Act.
Under the 2008 farm law, USDA is required to issue regulations to:
--prevent packers from price discrimination in buying livestock. Farm activists say small and medium-size producers do not get as good a price as big producers.
--give poultry producers the right to refuse arbitration in a contract dispute and take the issue to court.
--require poultry processors to warn producers if they will delay delivery of a new flock of birds.
--mandate poultry processors tell producers in advance of improvements that will be required in feeding houses.
--give swine and poultry producers a reasonable amount of time to correct problems that could lead to termination of a production contract. (Reporting by Charles Abbott; Editing by David Gregorio)