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A fight for the right to unite

Ben Yale Published on 08 June 2010

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In 1910, E. Tucker, a Kentucky farmer, and three others sued a tobacco buyer for breach of contract. They were not suing for themselves, but an association of tobacco farmers. These men made up the negotiating committee of the Farmers’ Union of Breckenridge County in Kentucky.

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Tired of too low prices, these tobacco farmers had come together and agreed to pool their receipts by selling all their tobacco at the best prices that could be negotiated. The income would be returned to the members in a blended price. The committee negotiated a contract for all of the tobacco.

The buyer refused to honor his agreement made with the committee. The committee on behalf of all of the farmers sued the buyer for breach.

On appeal, the courts said that they had a contract with the buyer. The matter went back to trial to determine what was owed the farmers. At trial, the buyer introduced the by-laws of the association as part of the evidence. In it was this phrase: “…[We] shall strive to control the production, price and distribution of every class of farm products.”

After losing in the trial court, the buyer appealed. He argued that the by-laws showed that the committee and the members of the chapter illegally combined and conspired to restrain trade and that such a contract was unenforceable. The court of appeals disagreed, not because it saw this as an argument that should be dismissed, but on a technicality that it was not raised in the first appeal. While the court of appeals avoided addressing the issue directly, the farmers still had to defend their right to be a cooperative. They could not take it for granted. There was a time, not all that long ago, when state laws prohibited, even to the point of criminal sanctions, farmers from coming together to price and market their products.

Now, move forward in time to the mid-1970s. Growers of another leafy product, lettuce in this case, in the Central Valley of California, formed a cooperative to seek price stability, eliminate waste and inefficiencies in marketing lettuce, establish pricing and perform other activities for their mutual benefit to make production of lettuce profitable. The association, the Central Valley Lettuce Producers Cooperative, Inc., entered into membership and marketing agreements, which provided the framework for a unified approach to selling their product. It worked. Previously, buyers took advantage of the very short period of lettuce’s freshness, four to five days, to force growers to sell at the lowest prices for fear of no price at all. The cooperative stopped those practices. No longer being able to play one grower against another, the buyers had to pay more. A chain of supermarkets, Northern California Supermarkets, sued, claiming that this association had illegally combined with the growers to set prices. In dismissing the argument, the court said that Congress protected these farmers under the Clayton Antitrust Act exemption for agriculture and the Capper-Volstead Act. Still, at their expense, these farmers had to defend the very right to associate for their mutual economic benefit.

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The most beneficial economic movement in American agriculture in the 20th century was the development and protection of the cooperative business model. Cooperatives are organizations owned and controlled by farmers for the benefit of its farmer members. They are democracy in action. They provide a legally recognized organization tool that lets individual farmers retain independent production operations while benefitting from the efficiencies and economic power of larger business operations. This unity of producer capital and product value allowed producers to eliminate the waste and inefficiency of marketing products that undermined their market stability and price levels.

This development of cooperatives did not come easily. Prior to cooperatives, each individual producer operated at the whim of the buyer. The buyer was the larger economic power. Producers were forced to be price-takers. Cooperatives changed this balance of negotiating power with the buyers. Buyers did not readily accept farmers having the power to change the characteristics of the sale of commodities. They fought back, mostly in court. In the late 19th century and early 20th century, they had some success. But in the first decades of the 20th century, the states passed statutes expressly authorizing formation of these cooperative associations and exempting them from antitrust laws. At the federal level, Congress passed the Clayton Act, the first federal antitrust statute, with an exemption for agriculture. But the challenges to farmers collectively marketing agricultural products continued.

Trying to stop the effort of farmers to get paid for their product, not pay for waste and inefficiency, those who wanted cheaper prices raised other challenges. There were questions as to whether the Clayton Act exemption was too narrow and left out other forms of farmer organizations and associations. Must they remain unincorporated, leaving individual members liable for the debts of the cooperative? Could they sell stock? In 1922, Congress corrected this problem by passing the Capper-Volstead Act. Its provisions, so important to dairy farmers today, include the following:

“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, in collectively processing, preparing for market, handling and marketing in interstate and foreign commerce, such products of persons so engaged. Such associations may have marketing agencies in common; and such associations and their members may make the necessary contracts and agreements to effect such purposes: Provided, however, that such associations are operated for the mutual benefit of the members thereof, as such producers, and [are organized as one member one vote or pay less than 8 percent dividends].”

There were some limits. Such associations, formal or informal, incorporated or not, cannot include non-farmers, nor can they be predatory. The passage of this act cleared the way for American farmers to form cooperatives.

The Capper-Volstead gave dairy producers the ability to join together to handle their milk more efficiently or process excess milk to remove it from the market. It recognized that the power of farmers to help themselves was more than negotiating price, but being in control of those parts of the marketplace that worked against them. Producers were not just price-takers; they were forced to cover the cost of waste and inefficiency in the marketing of the product. To have enough milk all of the time, there has to be too much milk some of the time. Managing this extra milk by removing it from the supply is the foundation for stable milk prices. The Capper-Volstead Act gave producers that ability.

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By collecting all the milk together, farmers could decide what to do with the extra milk (make powder, feed hogs or dump it). Cooperative marketing made the milk routes more efficient, eliminated inefficient balancing plants, provided reserve markets for milk, raised quality standards and in other, not-so-obvious ways, raised mailbox prices.

Dairy cooperatives bring cooperative strength to the side of their members. By representing larger blocks of milk, they can offer buyers of milk different levels of service and supply tailored to the needs of the plant, and by doing so, maximize pricing with the plant.

Whether a member of a cooperative or not, every dairy farmer benefits from cooperatives in the marketplace. Virtually all of the handling of excess milk in the U.S. is done by cooperatives at the expense of the members of those cooperatives. Because the cooperatives balance the supply, plants can offer individual producers higher prices than would be the case if there were no cooperatives.

Some individual producers are able at times to get relatively higher prices than they would if a member of a cooperative. This is because the plant is shifting service of balancing the plant’s supply (which costs money) to the cooperative and not its independent supply. At the same time, because it is paying less for this milk, it forces the cooperative to reduce the price it sells. The cooperatives respond with lower prices, which result in lower prices for the producer. In the end, all producers, independent and cooperative alike, lose.

Those who buy milk understand the power of cooperatives, and some seek to challenge it. Some producers see competing co-ops as their enemy, not an ally. In an environment of poor milk prices, it is easy to blame someone else. As the largest marketers of the milk, co-ops are the target. Complaints about dairy co-ops has reached a boiling point, and the USDA and DOJ are holding joint hearings regarding whether or not there is antitrust violation in the operation of such co-ops and whether the law should be changed. What specific changes are being proposed is unclear but the tone of the message is to reduce or even strip cooperatives of their exemption under the Capper-Volstead Act.

When someone sues a cooperative, they are suing every individual dairy farmer who is a member. This is because the proceeds from the sale of all milk from their farm goes first to paying the bills of the cooperative. This includes the enormous cost of defending these antitrust cases. Antitrust litigation is very expensive. Dairy producers will pay millions upon millions of their milk money to lawyers to defend their cooperatives from these assaults. That is going on today.

Aside from the economics, these challenges put a chill on the formation of new cooperatives and marketing agencies in common. The longer producers are unorganized, the less money overall they will make. So these challenges are suits against all producers, members of the cooperative or not.

A hundred years have passed since Tucker and his committee fought off a challenge to their right to collectively sell their tobacco. The fight has not ended. Today dairy farmers need cooperatives more than they ever did, but the legal challenges continue. And dairymen will pay to save them, or receive even less if they give them up. As dairymen when we see other dairymen being sued because they wanted higher prices, we should defend them. In doing so, we are defending ourselves. PD

PHOTO: There was a time, not all that long ago, when state laws prohibited, even to the point of criminal sanctions, farmers from coming together to price and market their products. Image by PD staff.

Ben Yale
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