By John Park, Ph. D. 

Agriculture in the United States today is a major industry with 2.04 million farms that contribute $223.5 billion (about 0.9%) to U.S. GDP. On a larger scale, all agriculture and its related industries contribute $1.420 trillion to U.S. GDP and provide 10.4 % of U.S. employment. And, one could argue, this is all made possible by agricultural cooperatives.

Prior to 1860, agriculture was the primary source of household wealth in the United States. We had an agrarian economy where most farms provided subsistence for the family and small local markets. The coming decades were heavily influenced by immigration, industrialization and urbanization, opening new lucrative markets for manufactured goods. The economy started to shift, and agriculture became a business, but it wasn’t easy. Farms were forced to become larger and more efficient, and found themselves further from final markets.

As railroads developed, farmers had a means of bringing larger crops to distant markets, and efficiency gains would come from increased scale of production and by lowering costs of purchased inputs. However, the new industrialized market failed to present farmers with the solutions they sought. They now faced extensive market power from monopolies controlling shipping rates, commodity prices at market, and the prices of kerosene and other inputs.

Thus, farmers formed cooperatives initially to help them reduce costs of production and improve their bargaining power. Unfortunately, as our country was striving to address antitrust issues with these monopolies, farmer associations were often included as a target. It wasn’t until 1922 that the Capper-Volstead Act allowed the formation of the modern cooperative we recognize today. Specifically, it gave “persons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers” legal permission to “act together in associations, corporate or otherwise, with or without capital stock”. It allowed farmers to act as one entity provided that they “are operated for the mutual benefit of the members”. Additionally their associations might also act in association with one another.

The Capper-Volstead Act gives farmer cooperatives only limited exemption from antitrust laws. As individual entities, these associations are as answerable to antitrust laws as any other firm. If such an association of producers monopolizes or restrains trade to the point that the price of an agricultural product is “unduly enhanced”, the Secretary of Agriculture could direct the association to cease and desist its monopolizing behavior and possibly become fully subject to antitrust law. Cooperative associations cannot therefore restrict their members’ agricultural output, fix prices with third parties, or coerce competitors or customers. The act was intended to be a countervailing force to protect weak market participants, allowing them to be stronger by acting together.

Cooperatives, then, provide a way for agricultural producers to be competitive in markets that might otherwise be dominated by large firms with greater ability to negotiate prices. In this sense, cooperatives play a role that promotes greater competition in these markets for everyone. Unfortunately, this effect is not obvious. It lies behind the scenes of the market. It was clearly obvious to the farmers of 1922 that they needed greater ability to act collectively to bargain for improved prices, when that ability was denied. But, a farmer entering the market today could view the cooperative as just one more market option. They might not recognize that without the cooperative, the market might unravel to a noncompetitive state. For this reason, the very best cooperatives strive to 1) ensure that members truly receive value and mutual benefit from their association, and 2) educate members about the need for cooperative action.

Sometimes that message is simply passed on by other experienced members. The Texas Agricultural Cooperative Council acts as a voice for cooperatives and seeks to educate farmers and others about the need for cooperatives. Each year, the council holds a conference for cooperative board chairs. At times they have asked participants of this conference, “why should I do business with a cooperative?” Here are some of their responses:

“Co-ops generally offer greater expertise and service regarding products they sell and market, versus the large box and chain stores that literally sell products only and thus no sense of allegiance to the customer.”

“Whether it is perception or reality, many people associate quality, durability, and honesty when they trade through a co-op.”

“There is a sense of ‘unity’ and ‘community’ in a cooperative due to the nature of joint ownership among the patrons.”

“The structure has become so popular during recent turbulent decades, that although some new businesses are not chartered as a cooperative, they have copied, act like, and operate like a cooperative (i.e. independent cotton marketing pools, etc.).” 

“Dollars spent at the co-op generally stay in the community and are not shipped off to another state or country.”

“Being a member of a co-op allows you annually to attend the business meeting of the firm to explore how it is operating financially and administratively.  In an independent business you are not allowed to do so.”

“For many who trade in the co-op, there is a feeling that ‘by doing business in the co-op, I am helping the survivability of the backbone of this country — farmers and ranchers.’  It is almost a sense of duty, honor, and patriotism.”

“Co-ops generally formed during periods of economic adversity and as such they are born of conviction, resulting in greater staying power and loyalty of the patron.”

“In a cooperative, rather than the board of directors being hand-picked by large investors, they are elected from within the members of the organization, thus handily demonstrating democratic control.”

“Unlike the big box stores, upon entering a cooperative, generally speaking, you are treated with instant respect because the employees usually know you and what you are looking for.”

“The joint ownership of a cooperative by numerous farmers not only spreads the risk of operating a business within a very volatile industry, but it also lowers the exposure to those producing the food and fiber.”

The Capper-Volstead Act (in its entirety)

Thanks to the Capper-Volstead Act and the many pioneering members of our farmer cooperatives, we have the means to take some control over adverse market conditions and compete together as one.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That persons engaged in the production of agricultural pro- ducts 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 conform to one or both of the following requirements:

First. That no member of the association is allowed more than one vote because of the amount of stock or membership capital he may own therein, or,

Second. That the association does not pay dividends on stock or membership capital in excess of 8 per centum per annum.

And in any case to the following:

Third. That the association shall not deal in the products of nonmembers to an amount greater in value than such as are handled by it for members.

Sec. 2. That if the Secretary of Agriculture shall have reason to believe that any such association monopolizes or restrains trade in interstate or foreign commerce to such an extent that the price of any agricultural product is unduly enhanced by reason thereof, he shall serve upon such association a complaint stating his charge in that respect, to which complaint shall be attached or contained therein, a notice of hearing, specifying a day and place not less than thirty days after the service thereof, requiring the association to show cause why an order should not be made directing it to cease and desist from monopolization or restraint of trade. An association so complained of may at the time and place so fixed show cause why such order should not be entered. The evidence given on such a hearing shall be taken under such rules and regulations as the Secretary of Agriculture may prescribe, reduced to writing and made a part of the record therein. If upon such hearing the Secretary of Agriculture shall be of the opinion that such association monopolizes or restrains trade in interstate or foreign commerce to such an extent that the price of any agricultural produce is unduly enhanced thereby, he shall issue and cause to be served upon the association an order reciting the facts found by him, directing such association to cease and desist from monopolization or restraint of trade. On the request of such association or if such association fails or neglects for thirty days to obey such order, the Secretary of Agriculture shall file in the district court in the judicial district in which such association has its principal place of business a certified copy of the order and of all the records in the proceeding, together with a petition asking that the order be enforced, and shall give notice to the Attorney General and to said association of such filing. Such district court shall thereupon have jurisdiction to enter a decree affirming, modifying, or setting aside said order, or enter such other decree as the court may deem equitable, and may make rules as to pleadings and proceedings to be had in considering such order. The place of trial may.; for cause or by consent of parties, be changed as in other causes.

The facts found by the Secretary of Agriculture and recited or set forth in said order shall be prima facie evidence of such facts, but either party may adduce additional evidence. The Department of Justice shall have charge of the enforcement of such order. After the order is so filed in such district court and while pending for review therein the court may issue a temporary writ of injunction forbidding such association from violating such order or any part thereof. The court may, upon conclusion of its hearing, enforce its decree by a permanent injunction forbidding such association from violating such order or any part thereof. The court may, upon conclusion of its hearing, enforce its decree by a permanent injunction or other appropriate remedy. Service of such complaint and of all notices may be made upon such association by service upon any officer or agent thereof engaged in carrying on its business, or any attorney authorized to appear in such proceeding for such association, and such service shall be binding upon such association, the officers, and members thereof.

Approved, February 18, 1922. (42 Stat. 388) 7 U.S.C.A., 291-192