Agricultural cooperatives and the law: obsolete statutes in a dynamic economy.

• Author: Carstensen, Peter C.
• Position: Antitrust and Competition in America's Heartland

Agriculture has always had a special place in American politics and public policy. This was even truer in the first third of the last century when farmers were more numerous. Section 6 of the Clayton Act, (1) the Capper-Volstead Act, (2) and the Cooperative Marketing Act (3) are the results of that "solicitude" for farmers. (4) Adopted in 1914, 1922, and 1926, these acts have remained unchanged over the succeeding decades. The Agricultural Marketing Agreement Act (5) ("AMAA"), despite many amendments since its adoption during the Depression, still authorizes the creation of enforceable output restrictions in various commodities. Moreover, the AMAA has the effect of further strengthening the hand of cooperatives in some important types of agriculture, especially dairy. Overall, this combination of statutes has the capacity to facilitate a variety of anticompetitive acts affecting both farmers and consumers. Competitive concerns most frequently arise when the cooperative is large or its members include, or might even exclusively be, vertically integrated producers of agricultural commodities.

This article will examine the problems that result from a statutory scheme adopted in an era dominated by small farms and local cooperatives that has survived into an era of immense farming operations. In this modern era, "farms" can be billon dollar enterprises that directly process and market their commodities, and "cooperatives" can have tens of thousands of members. Congress should revise these acts, particularly the Capper-Volstead Act and the AMAA, to address the dramatically different nature of American agriculture in the 21st Century. Regrettably, the iconic status of the Capper-Volstead Act among farmers and politicians makes revision politically unlikely. Hence, judicial interpretation provides the only means to limit the unintended harmful consequences to both farmers and consumers of these historic relics. Similarly, the Secretaries of Agriculture over the decades have, with rare exceptions, been unwilling to use the limited powers under the Capper-Volstead Act and the more expansive powers conferred by the AMAA to police the competitive and governance issues that exist. While only legislative or administrative action can avoid some of the undesirable consequences, the evolving pattern of judicial construction of the Capper-Volstead Act can limit a number of its potential adverse effects.

A broader concern, and the secondary focus of this article, is the weakness of both internal and external oversight with respect to the governance of large cooperatives. The combination of the statutory immunities of these enterprises with the inherent nature of the limited governance role of cooperative members creates an additional set of issues that should be of concern to farmers and lawmakers.

Part I of this article reviews the statutory scheme itself. Part II describes the varied functions that agricultural marketing cooperatives can perform. Part III describes the consequences of an obsolete and incomplete legal framework. Those consequences include competitive harms that have affected both farmers and consumers. The instances of such harm are relatively limited and usually require either a combination of statutory entitlements that create the potential for harm, or the dominance of a sector by large, vertically integrated firms. A second consequence is the lack of oversight and appropriate legal rules regulating the internal governance of large cooperatives. This systemic failure directly harms members of large cooperatives whose interests are often subordinated to managerial exploitation. It also creates additional incentives for managers to engage in anticompetitive conduct because of their ability to appropriate the resulting gains. Part IV provides a critical review of the current state of the law applicable to the concerns raised in Part III. Part V proposes a set of statutory reforms that would free some classes of productive cooperatives from the dead hand of the past while providing a better framework for authorizing and supervising cartelistic cooperatives. Recognizing the political futility of such reform, Part VI evaluates the evolving pattern of judicial interpretation and suggests how it can best minimize many, but not all, of the downsides of the static statutory scheme.

1. THE FEDERAL STATUTORY SCHEME GOVERNING AGRICULTURAL COOPERATIVES: EXEMPTIONS FROM ANTITRUST, TAX AND SECURITIES LAW

   1. THE ANTITRUST EXEMPTION FOR FARM COOPERATIVES

      Section 6 of the Clayton Act, (6) the Capper-Volstead Act, (7) and the Cooperative Marketing Act of 1926 (8) provide, in combination, an antitrust exemption for some activities of farm cooperatives engaged in the marketing of agricultural commodities. In adopting the Sherman Act, (9) Congress rejected an amendment to exempt cooperatives and labor unions from the statute. (10) Indeed, prior to the adoption of the Clayton Act, there had been no antitrust challenges to cooperatives under the Sherman Act, (11) but a number of state antitrust cases had found against cooperatives. (12) The courts were particularly concerned about exclusive supply contracts between cooperatives and their members. (13)

      Congress intended Section 6 of the Clayton Act to resolve these problems with respect to both unions and cooperatives generally. (14) Unlike the Capper-Volstead Act, Section 6 applies to any "labor, agricultural, or horticultural organization[] instituted for the purposes of mutual help...." (15) Thus, this provision covered some farm cooperatives that provided goods and services to farmers as well as those that marketed farm products. However, Section 6 applied only to "organizations ... not having capital stock or conducted for profit...." (16) Hence, it did not shield a growing number of cooperatives organized in a corporate form based on equity investment and profit sharing among members. Moreover, the exemption applies only to "the existence and operation" of such organizations, and only protects members if they are carrying out the legitimate objects thereof...." (17) The courts read this Clayton Act exception narrowly, giving it limited value for both farmer cooperatives and labor unions facing a Sherman Act complaint. (18)

      Following World War I, farm prices collapsed as greatly increased productive capacity faced a lack of demand. (19) Within the agricultural community, there was both advocacy for the creation of broadly based cartels that would control the price of agricultural commodities and demands for direct government subsidies. Another theme in this period was the need for farmers to have better ways to process and/or market their commodities.

      Direct subsidies lacked political attraction to the conservative leadership of the country. Moreover, the history of the Granger movement in the 1880s argued against the likelihood that farmers could effectively band together to control prices. (20) At the same time, antitrust became a tool for suppressing union bargaining. The Department of Justice challenged the Sun Maid raisin organization in California, which had achieved a near monopoly on the supplies of raisins in a year of shortage and dramatically increased prices. (21) In addition, there were complaints about dairy cooperatives that had raised prices in a few major cities where cooperatives controlled milk supplies. (22) These events provided the background for a demand for more antitrust protection for cooperatives that marketed farm products. The process went forward from 1920 to 1922 and culminated in the Capper-Volstead Act.

      The proponents of this legislation repeatedly emphasized that farmers were at the mercy of large buyers who dictated unfairly low prices while simultaneously raising prices to consumers. (23) Hence these antitrust challenges to cooperatives were presented as the opening stages of broader attacks on farmer owned cooperatives. (24) Cooperattves in turn were pictured as the means of protecting the farmers' rights to fair treatment (25) and the means to demand reasonable prices for their products either through bargaining with buyers or through processing and marketing of their products. (26) Moreover, the legislative history shows a congressional assumption that buyers paid farmers low prices but charged consumers high prices. (27) The resulting margin between farm and consumer ought to be shared with the farmer. Hence, Congress adopted the Capper-Volstead Act (28) with a stated goal of enhancing the bargaining power of farmers in their dealings with buyers. (29)

      From the outset, therefore, the Capper-Volstead Act had dual goals of efficiency enhancement and wealth transfer. In the case of wealth transfer in particular, there were strands of countervailing power ideas (30) (organized farmers would be better able to bargain for reasonable, fair prices) and cartelistic notions (by organizing, farmers could drive up prices). However, the record suggests that Congress lacked any in-depth understanding of how cooperatives would achieve either wealth transfer goal. Indeed, another theme was that with so many producers, there was no risk of excessive prices for consumers. (31)

      The Act expanded the Clayton Act's coverage of farmer cooperatives engaged in the marketing of agricultural commodities to include corporate cooperatives, provided they met either a voting constraint (each member to have only one vote) or a limit on the amount of dividends that could be paid to members (no more than eight percent could be paid on investments). (32) It imposed limits as to membership (only producers, i.e., farmers, could be members) and required that cooperatives deal primarily in the products of their members. (33) The Act does not explicitly reference the antitrust laws, but it expressly legalizes contracts between a cooperative and its members and authorizes cooperatives to act in concert with each other, but not with third parties. This latter...