Friday, November 03, 2006

Cooperatives and Anti-Corporate Farming

My last post addressed anti-corporate farming laws and the slippery concept of initiative-voters' intent (as an interpretive move or as a means of finding protectionist motives). In keeping with the subject of Ms. Broadmoore's recent post, this post addresses cooperatives and links them back to the earlier discussion of corporate farming. Specifically, this post addresses how anti-corporate farming laws should treat and, in one instance, how such laws have treated cooperatives.

Of the many different ways in which the cooperative form can be used, I'd like to concentrate on one geared at production. Specifically, what do we do with a cooperative in which agricultural producers pool their resources to decrease their production costs by out-sourcing some part of the production process to a cooperative? Thus, I am thinking of a cooperative that is "engaged in farming". This brings the cooperative squarely within the rubric of many laws that try to regulate farming operations, including anti-corporate-farming laws.

An example: Five small hog farmers form a cooperative for the purpose of producing feeder pigs. The cooperative will purchase a farrowing and feeding unit that is larger than any one member could create on their own. The cooperative will sell feeder pigs to the members at cost, and the cost per pig should be lower through the cooperative effort because the cooperative operates on a larger scale. The members, in turn, hope to turn a profit by fattening the feeder pigs to slaughter weight and selling them in the market (though the cooperative won't be involved in marketing). Members will also purchase feed and supplies from the cooperative that they will use on their individual farms in the finishing process. Those materials will also be sold at cost. The ex ante problem of selling feeder pigs and supplies at cost is, as is the custom, solved through the patronage refund. But the cooperative can retain funds on the members account as a new infusion of capital to further the goals of the cooperative. Each member, as is also customary in a cooperative, will have an equal say in the cooperative's governance regardless of her capital contribution.

So do anti-corporate farming laws allow this sort of farming operation? Should they?

I suppose the first question one should ask is, are cooperatives any different than corporations? Yes, and Ms. Broadmoore's post tells us how they are different. But do those differences matter for purposes of our ban on corporate ownership? Do cooperatives pose the same threat as corporations, despite the differences? What, exactly, are anti-corporate efforts trying to do?

Let's take the typical small-family-farm justification first. If anti-corporate farming laws are geared at saving the small family farm, do cooperatives preserve such farms or further threaten them? On the one hand, the cooperative effort helps small producers band together to compete. But will this sort of horizontal consolidation (if we think of it as such) push out other smaller producers? Maybe. But don't those smaller producers have an equal opportunity to band together? And if the net effect is to save 5 of 15 small family farms, is that better than watching 15 family farms wither on the vine?

From the agrarian-ideal standpoint, do cooperatives pose a threat? The members will not "own the land they till" individually, but the cooperative will. And each member preserves his or her say in the operation. So, to some extent at least, the master-and-commander portion of the agrarian ideal remains. And I think one could argue that the cooperative form is at least related to more ad-hoc forms of community support that we like to think (and which I believe do) exist in rural settings. In this regard, the cooperative business form may simply formalize the cooperative nature of agrarian existence.

But what if the cooperative grows? What if the pressure to join becomes too great? Will it then "threaten" the small family farm? Maybe.

At least one anti-corporate-farming law has been interpreted to ban this sort of entity. In Pig Pro Nonstock Cooperative v. Moore, 253 Neb. 72 (1997), the Nebraska Supreme Court concluded that the operation described above was violating the anti-corporate-farming provision of the Nebraska Constitution. The farmers tried to argue that it was a "non-profit corporation." And the Nebraska Constitution provides an exception for such operations. But the court disagreed. While the cooperative did not profit as a cooperative, the court found that it did not operate with the sort of eleemosynary motives that the non-profit-corporation exception was intended to protect (notably, the court gleaned the intent from what the voters intended when they passed the initiative). Thus, because the cooperative bestowed pecuniary gain upon the members as producers, it was not a non-profit corporation for purposes of the Nebraska provision. And this was true even though the tax code and the cooperative statutes referred to nonstock cooperatives like the one at issue as non-profit. The court cited similar results in different contexts. See Diekmann v. Evansville Producers Com. Ass'n, 219 Ind. 636 (1942) and Schuster v. Ohio Farmers' Co-op. Milk Ass'n, 61 F.2d 337 (6th Cir. 1932).