University of Wisconsin Center for Cooperatives
Rural Cooperatives, May/June 1997, pp. 28-29.
Published by the Rural Business and Cooperative Development Service
Capper-Volstead Remains Critical to the Future of Cooperation
Randall E. Torgerson
Seventy-five years ago, Congress enacted into law the Capper-Volstead Act of 1922 to provide limited antitrust immunity for farm operators organized in cooperative marketing associations. This significant legislation provided authority for farmers and ranchers to join together in cooperative associations without, per se, violating antitrust laws.
Absent Capper-Volstead, a combination of farmers in marketing cooperatives might be considered an unreasonable restraint of trade or attempt to monopolize trade. For these reasons, the CapperVolstead Act has been called the "Magna Carta" of cooperative legislation, even though cooperatives are typically incorporated under state laws. The significance of this law to farm operators is of growing importance to this day.
Agricultural marketing cooperatives are business associations, the principal purpose of which is to market farm products for producer members. In 1995, there were an estimated 3,070 cooperatives that had sales from marketing. Volume of marketing sales by cooperatives in the same year was $69.3 billion. This represented about 32 percent of the total value of agricultural products marketed by farmers at the first-handler level in 1995.
The period from 1919 to 1922, when this legislation was before Congress, was one of the most active farmer-organizing periods in Ameiican history. Thousands of cooperatives were being organized as a response to marketing problems encountered with the emergence of large-scale commercial production. Since farmers were small in size and large in number, they often found themselves taken advantage of by unscrupulous merchants, bankers and railroads. Organized selling empowered them to get improved returns from the marketplace and a modicum of market power in dealing with their buyers.
Many cooperatives were already organized locally in many farm communities, particularly in the Eastern and Midwestern states. Organizational efforts led by Aaron Sapiro, an attorney with the Califor-nia Department of Markets, encouraged farmers to organize into commodity associations that could become dominant marketers in their respective sectors. The American Farm Bureau Federation promoted this organizational strategy and featured Sapiro at several national meetings.
Marketing cooperatives were already well represented by the National Milk Producers Federation and westem citrus and dried fruit marketing organizations. Together with Sapiro, farm leaders crafted the bill and worked with the influential Farm Bloc Members of Congress to enact the new legislation.
According to USDA histoiian (retired) Wayne Rasmussen, conditions in 1921-22 seemed encouraging for securing passage of a federal law favorable to cooperative organizations. An attempt was made in 1919 by the National Cooperative Milk Producers' Federation to amend the Clayton Act of 1914 by giving capital stock cooperatives the same consideration given to non-stock cooperatives.
However, the bill met opposition from commercial interest groups. The bill was then re-written and introduced by Senator Arthur Capper of Kansas and Congressman Andrew Volstead of Minnesota. It passed both houses of Congress in 1920, but the two legislative bodies could not agree on a final version.
The organization of the Farm Bloc in Congress in 1921-a coalition of Midwestern and Southern legislators interested in strengthening agricultureworked closely with the newly organized Farm Bureau Federation to provide necessary support for renewed action. Work in the Department of Agriculture under
Secretary Henry C. Wallace gave cooperative marketing greater attention and guidance. Congress established a commission which evaluated the position of agriculture compared to the rest of the economy.
One of its recommendations was that legislation be enacted to strengthen the legal position of marketing cooperatives. Later, Secretary Wallace secured permission from President Warren Harding to call a National Agricultural Conference. The report of this conference gave strong support to enact affirmative legislation that would permit farmers to act together in associations for marketing purposes without being in violation of existing laws.
Meanwhile, the House of Representatives in May 1921 passed, by a large majority, a redraft of the Capper-Volstead bill. The Senate took up debate on the bill early in 1922, noting strong support for the legislation in the House of Representatives and support voiced by the National Agricultural Conference. After several days of debate, the House version of the bill was passed by the Senate on Feb. 8, 1922, with a minor amendment. President Harding signed the Capper-Volstead Act into law on Feb. 18, 1922.
Features of the Act
The law contains two sections. Section 1 stated that "persons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers may act together in associations ... in collectively processing, preparing for market, handling and marketing in interstate and foreign commerce such products of persons so engaged." Such organizations could have marketing agencies-in-common and could use contracts to affect their purposes.
The act also listed qualifying requirements an association had to conform to in order to be considered a Capper-Volstead cooperative. The association had to be operated in the mutual interest of members as producers and conform to one or both of the following requirements:
• No member would be allowed more than one vote because of the amount of stock or membership capital he may own in the association;
• The association could not pay dividends on stock or membership capital greater than 8 percent per year. In any case, the association could not deal in the products of non-members in an amount greater in value than that which it handled for members. This latter qualification was added following the Senate debate.
Section 2 provides for a unique regulation by the secretary of agriculture under the act. If the agriculture secretary finds that a cooperative has "unduly enhanced prices," he or she is authorized to order it to cease and desist from enforcing such prices. This provision provides protection to consumers and the general public against any abusive pricing practices by cooperatives.
Significance of Capper-Voistead
The Capper-Volstead Act places no limits on the size of cooperatives. Courts have ruled that cooperatives may grow by voluntary membership until all producers of a product belong to the cooperative, giving it a 100-percent share of the market. This fact provides an opportunity and a challenge to farm operators who generally have not made as much use of the act due to their independent nature and to their lack of interest in taking responsibility to better manage their own industry.
The act's language does not define and interpret completely some basic tenns used in it. For instance, it doesn't clarify the meaning of the word "marketing" or what is meant by "undue price enhancement." Furtherrnore, use of the word "cooperative" is not found in the act. Perhaps more importantly, the act does not define who is an agricultural producer. Legislative history shows that this issue was debated and that turpentine and other naval stores were excluded from the act because publicly held or large, closely held corporations producing those products were not construed to be producers for which the act's protection was being granted.
It can reasonably be concluded from this debate that the Congress did not intend for this act to be used as a collusive device for large, publicly owned firms that might be engaged in agricultural production. Congress expressly refused to extend the benefits of Capper-Volstead to the processors or packers to whom farmers sell their commodities, even if these parties choose to share certain costs and risks. Case history supports the interpretation that Capper-Volstead farmers are persons engaged in agriculture who are insufficiently integrated to perform their own processing and who therefore can benefit from the exemption for cooperative handling, processing and marketing.
Case history has also shown that the law enables farm operators to use both bargaining and processing/marketing cooperatives. In the former, producers may organize simply to exchange market information among themselves, or to negotiate contract terms with their buyers. In marketing/processing cooperatives, producers physically assemble products, add value to it and market it in distribution channels as raw, semi-processed or branded processed items.
The law also permits cooperatives to work together in marketing agencies-incommon. This enables farmer cooperatives to develop marketing strategy and market together as if all farmer members were direct members of a single cooperative.
With major changes taking place in concentration of asset ownership in food processing and distribution channels by investor-owned firms, the ability of fanners and their cooperatives to join forces as a pro-competitive, countervailing force in those markets takes on increasing significance. Cooperatives are truly a means for smaller farm entrepreneurs to survive and compete in a world of bigness.
The significance of Capper-Volstead is that it allows farm operators to organize effectively and to judiciously use what market power they gain through cooperative marketing and bargaining associations.