Unit V.

Cooperative Law

Legislative Impacts on Co-ops

1. How must co-ops be organized?

2. How must co-ops be operated?

3. How will co-ops be treated?

Legislation Pertaining to Co-ops

Antitrust State Marketing Credit Electrification Taxation Consumer

Significant Iowa Cooperative Laws

Chapter 499: Pertains to traditional Iowa co-ops (i.e. marketing,

supply) Chapter 501:

Pertains to value-added or New Generation Iowa co-ops

Chapter 501A: Pertains to co-ops wishing to organize more like a

partnership with limited liability

Co-op Operational Requirements (IA)

Ch 499 (1935)

Mbr business volume > non member Voting stock owned by ag producers only Mbr preferred stock > non member Co-op can’t own production land Stockholders < 25 if in livestock

production

Co-op Operational Requirements (IA)Ch 501A (2005) May have both user members & investor members User members must authorize investor membership

interest in legal documents User members must have at least 15% of the voting rights 50% (min) of the board must be elected by user members User members must maintain at least 15% of the financial

rights No 8% cap on returns to investors Earnings can be taxed as either partnership or cooperative

corporation (same as 501) Antitrust protection less for 501A (vs 501) Activities not restricted to value-added Ag

States with 501A Laws1. WY, 2001

2. MN, 2003

3. TN, 2004

4. IA, 2005

5. WI, 2006

IA 501 & 501A Updates#501 ≈ 25-30

including Iowa Turkey Growers Co-op501A ≈ 2

including Iowa Wine Co-opActivities

Majority of 501 co-ops are involved in ethanol. If ethanol plant is large (e.g. > 40 mil gal per yr), the plant is likely jointly owned by a 501 co-op and outside investors and is a(n) LLC business.

Co-op Operational Requirements (IA)Ch 501 (1996) Equity & voting: ≥ 60% farmer members May limit # of stock shares Mbrs may own more than 1 share Shares of stock may involve delivery rights Shares may be marketable Co-op can own production land (≤ 640 A) Stockholders not limited to 25 if in livestock

production

Co-op “Control” Laws (Ch. 499)Voting 1 member, 1 vote required Proxy voting NOT allowed

Directors Boards must have at least 5 directors District voting allowed

Co-op ‘Finance’ Laws (Ch. 499) Preferred Stock: mbrs > nonmbrs Stock dividends: < 8% Order of asset distribution if liquidated:

1. Liquidation expenses2. Creditors3. Preferred stock (& dividends payable)4. Deferred patronage refunds5. Common stock6. Members

Co-op ‘Finance’ Laws (Ch. 499)

Revolving funds: oldest must be redeemed first Preferred stock: can be redeemed in any order Cash patronage refunds: cannot be > 20% cash

IF the co-op has any equity claimable by estates (i.e. NOT ‘current’)

Stock redemption must be done within:→ 2 yrs to estates and to inactives→ 60 days to expelled mbrs

Brief Antitrust History, Early to Mid 1800’s

Some of the 1st co-ops formed in U.S. No enabling co-op legislation in existence

(MI = 1st state law, 1865) Consumers, farmers, small business

owners concerned about monopolies 1st major antitrust law passed in 1890

Sherman Antitrust Act, 1890

Every contract, combination, or conspiracy in restraint of trade as well as attempts to monopolize trade are illegal.

A proposed amendment to exempt ‘co-ops’ from the Sherman Antitrust Act failed. Why?

1. Supporters of the Act were concerned that it would be declared unconstitutional if Congress started adding exemptions.

2. Co-ops were generally small at the time and there was little concern about their market power (i.e. no need to exempt them).

Passage of the Sherman Antitrust Act created antitrust problems for co-ops (i.e. next 20-25 yrs)

e.g. indictment of co-op directors in at least 6 statese.g. an IL dairy co-op denied payment for milke.g. an Iowa hog marketing co-op, farmers cooperative society, (Decorah), had an injunction filed against it by the Iowa Supreme Court

An Iowa Example of a Sherman Antitrust Act Violation 1913 in Decorah, a group of local farmers, mostly

hog producers, org’d the Farmer’s Cooperative Society to primarily mkt hogs. Had about 350 mbrs. Had in their by-laws a provision which required mbrs to pay 5¢/cwt. For every 100 lbs. of hogs sold to someone other than co-op. A buyer from the Chi. Stockyards claimed that the combined action of the farmers made it necessary for him to pay more for hogs in the Decorah area than what he previously had paid. He claimed the co-op was restraining trade & stifling competition. Filed a law suit. In 1913, IA Supreme Court issued an injunction against this Decorah co-op on the grounds that it was a violation of Sherman Antitrust Act.

CLAYTON Act, 1914

Anticompetitive mergers illegal

Nonstock ag co-ops legal

FEDERAL TRADE COMMISSION Act, 1914

Established a regulatory agency (FTC)

Q. Can you guess the ‘Year’? World Series: NY Giants beat the NY

Yankees U.S. Golf Open: Gene Sarazen wins Pro Football: American Professional

Football Assn changes name to NFL; Chicago ‘Staleys’ change name to ‘Bears’

Mussolini becomes Italy’s dictator VEISHEA begins at ISU Capper Volstead Act passed

A. 1922

CAPPER VOLSTEAD Act, 1922

Sect. 1 Identifies:

1. Who can organize a co-op?2. How a co-op is to be organized/operated?3. What activities a co-op can undertake?

CAPPER VOLSTEAD Act, 1922

Sect. 2:

Authorizes the Sec. of Ag to order a co-op to cease from unduly enhancing prices as a result of monopolizing or restraining trade.

Capper & Volstead

Capper: senator from NY

Volstead: representative from KSNote: had introduced the

‘Prohibition’ law, in effect 1920-1933

Rep. Volstead:Trying to make it so farmers can put their money together into a business, much like businessmen do in corporations, without being charged with violating antitrust laws. The formation of corporations does not violate the Sherman Antitrust Act; the creation of subsidiaries does not violate the Sherman Act; neither should the formation of a co-op.

Senator Capper:Trying simply to make definite and unquestioned the legal right, which already is generally admitted, of farmers to organize co-op associations – a legal right, which in view of the Sherman Act, may be questioned or doubted by those whose interests are not identical with the farmer . . .

Who Can Organize a Co-op?

Persons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers may act together in associations, corporate or otherwise, with or without capital stock.

Capper Volstead Organizational/Operational

Requirements

1. One person, one vote or dividends on stock cannot exceed 8%.

2. Member business volume must exceed nonmember business volume.

Activities Authorized by Capper Volstead:

1. Organization2. Processing3. Handling4. Marketing5. Marketing agencies in common6. Member contracts

What Capper Volstead Does NOT Do:

1. Enable co-ops to incorporate under it.2. Determine taxation treatment of co-ops.3. Regulate or limit production or size of co-

ops.4. Specify how co-ops are to be financed.5. Grant co-ops operational immunity from

antitrust laws.

Rep. Volstead:

In the event that associations authorized by this bill shall do anything forbidden by the Sherman Antitrust Act, they will be subject to the penalties imposed by that law. This bill is not intended to place co-ops above the law but rather to grant them the same immunity from prosecution that corporations now enjoy.

Illegal Cooperative Activities: (not authorized by Capper Volstead or any other Act)

1. Price controlling or price fixing with non-cooperative firms.

2. Merger with or acquisition of a non-cooperative firm where the intent is to suppress competition.

3. Predatory practices (not limited to dealings with non-cooperative businesses).

4. Unduly enhancing prices.

National Broiler Mktg Assoc. Formed 1970 75 mbrs = IOF Agribusinesses (e.g. Cargill,

Pillsbury, Ralston Purina, Central Soya, Allied Mills)

Businesses = feed mills, processing plants, and all but 6 had breeding flocks and hatcheries

Chicks raised by contract growers NOT a legal co-op, Sup. Ct., 1978

1. Not ALL members were producers.2. Members were NOT farmers in traditional sense.

MD & VA Milk Producers Assn.

Had 80% mkt share, Washington, D.C. milk market.

Pd excessive P for a competing dairy (Embassy) Interfered with milk shipments of non co-op

members. In 1960, in violation of Sherman Act Showed:

Predatory co-op behavior, in restraint of trade, not immune from prosecution; reaffirmed during 1970s with charges against AMPI

BORDEN Co. = IOF, fluid milk processor Conspired with dairy co-op to raise retail

prices by limiting milk supply In 1939, in violation of Sherman Act Showed:

1. Antitrust action against co-op did NOT have to be initiated by Sec. of Ag.

2. Co-ops could NOT conspire with non co-ops to raise prices

MD Co-op Milk ProducersMD & VA Milk Producers Assn.

Formed a common mktg agency Jointly set prices and made sales In 1956, found NOT guilty of antitrust

violation Showed:

Co-ops could have common marketing agencies.

Possible Explanations as to Why the Sec. of Ag has Never Ordered a Co-op to Stop Unduly Enhancing Prices:

1. Difficulty in defining undue price enhancement.2. Lack of evidence suggesting farm prices have increased

faster than other prices.3. Co-ops tend to be relatively small in size compared to a)

market size or b) the size of non-cooperative firms in the same industry or in the economy.

4. Co-ops inability to control supply or production.5. Would be contradictory with USDA self help policy.6. No such specific policy exists for non-cooperative firms.

$ Sales, Largest Non Co-ops vs. Largest Ag Co-ops*Rank Non Co-ops Ag Co-ops

1 288.28, Walmart 11.1, CHS

2 270.8, Exxon Mobil 8.5, Dairy Farmers of America

3 193.5, General Motors 7.7, Land O’Lakes

4 172.2, Ford Motor 2.7, AGP

5 152.4, General Electric 2.5, California Dairies

6 148.0, Chevron Texaco 2.1, GROWMARK

7 121.7, Conoco Phillips 1.7, CF Industries

8 108.3, Citigroup 1.4, Foremost Farms

9 98.6, American International 1.4, Staplcton

10 96.3, IBM 1.3, AMPI

*2004 sales in billion dollars

Rank Non Co-op Firms 2006 Sales (bil $)

1 Exxon Mobil 339.9 2 Wal-Mart Stores 315.73 General Motors 192.64 Chevron 189.55 Ford Motor 177.26 ConocoPhillips 166.7 7 General Electric 157.28 Citigroup 131.09 American Intl. Group 108.910 Intl. Business Machines 91.1

Rank Co-op Firms 2006 Sales (bil $)

1 CHS 14.3842 Dairy Farmers of America 7.8993 Land O’Lakes 7.2754 GROWMARK 3.6005 AGP 2.3616 California Dairies 2.3337 Southern States 1.5928 Darigold 1.4549 Staplcotn 1.37110 Prairie Farms Dairy 1.34