Federal Legislation

Students of cooperatives should be aware of three major pieces of federal legislation affect cooperatives:

1890: Sherman Anti-trust Act

1914: Clayton Act

1922: Capper-Volstead Act

What is a Trust?

A trust is a legal agreement in which individuals transfer ownership of certain assets to trustees for benefit. In business, stakeholders transfer stock to a select group of trustees in exchange for a share of the earnings from the jointly managed companies.

Trusts consolidate power that can be used to create monopolies. Monopolies easily gain control of entire industries. They can use their power to undercut competition, fix prices artificially low for a time period to force competitors out of business, or buy competitors outright.

Monopolies can force producers and suppliers into unfair contracts. Lack of alternative market channels leaves producers and stakeholders with no other choice but to comply with the monopoly’s strict rules and set prices.

Once a monopoly dominates the marketplace, it can use its power to raise prices artificially high for consumers. With no competitors, consumers are left with no choice but to pay the set rate.

Anti-trust Laws Affecting Agricultural Cooperatives

A series of anti-trust laws were enacted throughout the Progressive Era (1890-1920) as a response to what was perceived as corporate greed of large powerful companies.

  • The Sherman Anti-Trust Act (1890) made it illegal for groups to use trusts as a vehicle to gain unfair advantages over competition.
  • The Clayton Act (1914) gave rights to bring private lawsuits against corporations engaging in monopolistic behavior. It exempts agricultural producers whom cooperate to produce, handle, and market agricultural products.
  • The Capper-Volstead Act (1922) secured rights for agricultural producers to market, manage, and sell products through cooperatives. The goal of the legislation was to level the playing field, allowing farmers to organize in associations that could compete with large agribusiness.

Together, farmers gained bargaining power to access new markets, negotiate higher prices for their goods, and lower prices for supplies.

Farmer cooperatives were formed to negotiate terms of sales for members. They spread financial risk by negotiating delivery and payment schedules that are advantageous for farmer members.

Cooperation means individual farmers are no longer dependent on rigid contracts, or reliance on brokers and dealers, to handle their goods. Cooperatives empower farmers to retain a larger portion of production dollar by cutting out middlemen.

Ag co-ops foster greater stability for supplier and the market. Often they provide farmer members with a guaranteed market for their goods. An example is Dairy Farmers of America, who market fluid milk to diversified channels, from fluid milk to dry milk mixes with longer shelf life.

The Act contains three stipulations: 1. Each member of the cooperative receives one, equal vote. 2. Patronage dividends are capped at 8%. 3. The cooperative must do more member than non-member business.

Capper-Volstead’s protected status applies to producers. The stipulations affect how cooperatives with packer, processor, or distributor members are viewed in light of the legislation. Capper-Volstead also addresses concerns involving cooperatives with members who enter into contracts for a portion of the production, such as ranchers that purchase cattle to grow-out or use contact facilities to finish product, and whether or not that business counts as member or non-member business. Commodity producers that purchase product from non-members to make up for shortages in delivery rights may find conflict.

Cases to study:

Case-Swayne Co Inc v. Sunkist Growers, Inc

United States v. E. C. Knight Co.

 

References

“Understanding Cooperatives: Cooperative Business Principles”(2011). U.S. Department of Agriculture Rural Development, Cooperative Information Report 45, Section 2. Retrieved from http://www.rd.usda.gov/files/CIR45_2.pdf