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:


Chapter 501:


Pertains to traditional Iowa co-ops (i.e.
marketing, supply)
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 Laws
1.
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-op
501A ≈ 2
including Iowa Wine Co-op
Activities
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.
2.
3.
4.
5.
6.
Liquidation expenses
Creditors
Preferred stock (& dividends payable)
Deferred patronage refunds
Common stock
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 ‘coops’ 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 2025 yrs)
e.g.
e.g.
e.g.
indictment of co-op directors in at least
6 states
an IL dairy co-op denied payment for milk
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
 Nonstock
mergers illegal
ag co-ops legal
FEDERAL TRADE COMMISSION
Act, 1914
 Established
(FTC)
a regulatory agency
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.
2.
3.
Who can organize a co-op?
How a co-op is to be
organized/operated?
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 KS
Note: 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.
2.
3.
4.
5.
6.
Organization
Processing
Handling
Marketing
Marketing agencies in common
Member contracts
What Capper Volstead Does NOT Do:
1.
2.
3.
4.
5.
Enable co-ops to incorporate under it.
Determine taxation treatment of co-ops.
Regulate or limit production or size of
co-ops.
Specify how co-ops are to be financed.
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 coops 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.
2.
3.
4.
Price controlling or price fixing with noncooperative firms.
Merger with or acquisition of a noncooperative firm where the intent is to
suppress competition.
Predatory practices (not limited to
dealings with non-cooperative
businesses).
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.
2.
Not ALL members were producers.
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.
2.
Antitrust action against co-op did NOT have
to be initiated by Sec. of Ag.
Co-ops could NOT conspire with non co-ops
to raise prices
MD Co-op Milk Producers
MD & 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.
2.
3.
4.
5.
6.
Difficulty in defining undue price enhancement.
Lack of evidence suggesting farm prices have increased
faster than other prices.
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.
Co-ops inability to control supply or production.
Would be contradictory with USDA self help policy.
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
2
3
4
5
6
7
8
9
10
Exxon Mobil
Wal-Mart Stores
General Motors
Chevron
Ford Motor
ConocoPhillips
General Electric
Citigroup
American Intl. Group
Intl. Business Machines
339.9
315.7
192.6
189.5
177.2
166.7
157.2
131.0
108.9
91.1
Rank
Co-op Firms
2006 Sales (bil $)
1
2
3
4
5
6
7
8
9
10
CHS
Dairy Farmers of America
Land O’Lakes
GROWMARK
AGP
California Dairies
Southern States
Darigold
Staplcotn
Prairie Farms Dairy
14.384
7.899
7.275
3.600
2.361
2.333
1.592
1.454
1.371
1.34