The historic agricultural cooperative statute Capper-Volstead, now a century old, has recently enjoyed some rare time in legal news headlines. In January, a court found a Pennsylvania mushroom cooperative to be in violation of the Capper Volstead act because the cooperative did not consist solely of producer members and therefore could not legally set prices as a group. This case is currently set to go to trial unless the parties reach a settlement.
The Capper Volstead Act allows farmers to band together to set prices, negotiate with buyers, and avoid competition among one another under specific circumstances. The purpose of the 1922 statute was to give farmers a leg up in a world where buyers were hugely consolidated and held all the bargaining power. Capper-Volstead provided a means for disadvantaged individual farmers to act in concert to demand better prices for their products.
But, not just any group of farmers can take advantage of this ability to coordinate marketing activities and avoid competition. The law sets four requirements related to cooperative business structure. If these are followed, an agricultural cooperative may take advantage of the Capper Volstead privileges:
- all members of the cooperative must be agricultural producers;
- each member of the cooperative (no matter how much they sell to the cooperative) gets a single vote so that the structure is democratic in its purest sense—one member, one vote;
- dividends to members of the cooperative cannot exceed 8% a year so that the farmers are benefitting from selling their commodities, not the cooperative’s business profits, and
- of what the cooperative sells, at least 50% must be from cooperative members.
The mushroom cooperative violated the first of these requirements. Several of its members were what we could call vertically integrated—the mushroom producer also owned a distribution company. The problem is that an agricultural distribution company is not an agricultural producer. Including non-producers in an agricultural cooperative means that middlemen benefit from engaging in price-fixing alongside producers. This was not the intent of the Capper-Volstead Act.
To make the issue even stickier is that the businesses the court based its decision on in this most recent case were two ventures owned by a single family. A husband, wife, and their two sons owned a mushroom farm, clearly an agricultural producer company. The husband and wife, alone, also owned a distribution company that was part of the cooperative, too. The sons weren’t a part of this second business.
Despite these tight family ties between the two businesses, the court found insufficient cross-over for the businesses to be considered a single entity. The distributor was selling at cooperative prices, which it didn’t have the right to do. The Court recognizes a universal truth– that families don’t always agree; the parents could have made a unilateral decision that would benefit the distributor but not the farm.
While this distinction can seem like a narrow technical violation, courts are keen on making this distinction clear. Vertical integration is now much more common than in 1922 when this statute was written, but courts remain firm that policies must protect against middlemen buying up farms solely to enjoy the antitrust protections of the Capper-Volstead Act, even when the policies impact family businesses.
Farm businesses will need to choose between integrating vertically to get a better price (because they are the farmer and the middleman) or banding together in a cooperative to get a better price (and leaving the distribution to others).
The other lesson in this recent case is that business entity and formation decisions can have broad reverberations down the road. It behooves farm businesses to fully understand the business structure they are choosing and to strictly adhere to all formation rules relevant to that structure. For guidance on business formation, see Farm Common’s guide here. There is an entire chapter on cooperative formation if that type of structure interests you or farms with whom you work.
Sources and Further Reading
For more reading on the Capper-Volstead act, this article looks forward to its future and suggests some ways it can be applied to address issues of inequity and land access.
The opinion in the recent mushroom cooperative case can be found here.