The Fairy's Secret Factory

The Fairy's Secret Factory is the first story of Humanity Has Declined and covers episodes 1 and 2 of the anime series.

Summary
The Mediator has returned to the village after she ruined The Human Monument Project and is ashamed of her short hair. Upon her return, she learns that a food shortage has demanded that the men go out to hunt and the girls are ordered to slaughter the chickens. Sensing the murderous intent, the chicken successfully escape from the village girls and the men return with empty hands as well. The fairies soon learn from Ms. Sweets that the lack of food makes it difficult for her to gather the ingredients for candy, sending them into a panic. In the following days, a bulk of products from "Fairy Co." begin appearing in the village, arousing suspicion in the populace. While the products look like food and have the right texture, the flavors feel artificial. However, the protagonist ends up finding a bottle of shampoo promising stimulated hair growth and chooses to use it. The following day, her hair has grown back to its normal size.

While investigating the Fairy Co. products, the village girls end up running into a plucked, headless chicken roaming around the forest. They attempt to capture it, but fail. When The Mediator returns, this time with her Grandpa, The Assistant, and Nakata, they find the Fairy Co. factory and are greeted by an employee. As they are guided through the facility, they learn that the machines use all manner of resources to create artificial goods like bread that look and feel like the real versions. However, a sentient piece of bread reveals this means that the food can also be made out of trash.

As the party continues exploring the factory, Grandpa and the employee wind up missing. Later on, The Mediator is also separated from The Assistant and almost crushed in a waste disposal machine, only to be saved by an unseen rescuer. This leads to her meeting The Director, a former UN employee who remembers her for sabotaging the Human Monument Project. He has now taken on a job for the factory and prides himself on climbing the ladder of its non-existing hierarchy. Upon learning The Mediator is here on inspection of its goods, he begins to grow worried and reluctantly shows her around. However, he soon realizes that exposing the factory's wrongdoing could mean the entity in charge is fired, freeing up that position for himself. After this realization he falls into a trap and disappears. The Mediator carries on and finds a boardroom, where she is greeted by the chickens who escaped the village earlier, all plucked and headless, yet perfectly alive. They aggressively squeak at her and a fairy offers to translate, only to later offer her a pair of glasses that do the work for him. The chickens reveal their grand plan to get back at the humans, but The Mediator misses it because she was adjusting the glasses. She is then imprisoned, but The Assistant returns and uses the shutter noise of the film camera to scare the chickens into believing he is a gunman. As they run off, The Mediator finds that her cage has been ripped open behind her back.

The Assistant chases the chickens around the facility, who take shelter in the machines used to create the artificial food and wind up being processed. Their leaders are eventually chased to a cliff where The Mediator catches up with them, only for The Assistant to use the shutter noises to scare the chickens one last time, sending them plummeting down the cliffside. Back at the factory, they find the room where all the missing people were imprisoned, as well as the fairies that were meant to be in charge. The Director is promoted to CEO and the factory resumes production.

Back home, The Mediator learns that her hair has come alive and saved her from the waste disposal machine and freed her from the cage. Since this is the latest point in the series' timeline, this revelation has no bearing on further episodes.

Trivia

 * This story arc features the show's best-known scene: the animatronic bread ripping itself apart as blood (carrot juice) sprays out.
 * Nakata's appearance here is one of the few occasions where a fairy from one story arc reappears in a chronologically later one.
 * This story shows The Mediator's malicious side numerous times. She intimidates the village girls into keeping her mistakes secret, she scares The Director into cooperation, and intended to attack the chickens with her knife before being imprisoned.