Imagine a scenario where all the manufacturers of blue jeans reached an agreement where they agreed to sell their jeans at the same predetermined price. Without price competition, the jeans manufacturers would be free to increase profits by continually driving up the price to its maximum and reducing outputs when sales failed to maintain those high prices.
Is that hard to conceive? Sure, this is a somewhat simplified and fanciful concept. But it pretty well summarizes the operations of OPEC (Organization of the Petroleum Exporting Countries). It is also a straightforward restraint of trade that violates any number of federal and state antitrust laws.
This example also illustrates, to a certain extent, the operations of agricultural cooperatives. Further, it demonstrates what many producers would like to see cooperatives do more of – limit supplies of milk to increase prices.
In this article, I want to touch on some of the possibilities and limitations of supply control available under the exemption from antitrust laws enjoyed by cooperatives. (I am, however, constrained by the fact that a single court decision on this topic almost certainly exceeds the length of this article).
To state what is probably obvious to anyone interested enough in dairy farming to read this article, cooperative associations permit individual producers to band together in the collective marketing of their outputs. Cooperatives are able to engage in these activities due to a specific exemption from antitrust laws set out in the Capper-Volstead Act.
Capper-Volstead has been described as the “Magna Carta” of cooperative marketing. It provides agricultural producers a right to combine their efforts “in collectively processing, preparing for market, handling and marketing in interstate and foreign commerce” agricultural products.
In very general terms, the protections afforded by Capper-Volstead apply if the cooperative association consists entirely of producers and the cooperative does not deal with non-members in an amount greater than it deals with its members.
In practicality, Capper-Volstead provides to producers the economic power of its collective body that, in the absence of its antitrust exemption, would be illegal. The exemption originates from the basic notion that individual farmers do not have the same bargaining power that purchasers of agricultural products enjoy.
The perishable nature of most agricultural products places the farmer at a further marketing disadvantage because if the producer is unable to market his production, its value quickly falls to zero.
As producers of a commodity product, the larger agricultural handler is basically indifferent to the supplier of the raw product and can exercise tremendous leverage against the producer whose product must be sold. The producer is the classic illustration of a “price taker” who holds little bargaining power in the marketplace.
The cooperative, by combining the output of multiple producers, allows marketing risk to be spread across the entire membership. It also allows the cooperative, as marketing agent, to provide greater volumes of product and levels of service to the purchasers in a manner that individual producers would not be able to provide.
Capper-Volstead does, however, have its limitations. The act includes a provision stating 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,” charges can be brought against the cooperative. This rather squishy language creates a bit of a conundrum.
Obviously, the underlying reason for producers to form or join a cooperative is to make more money. Clearly Congress intended for Capper-Volstead to enhance prices. But the same law says if a cooperative’s actions “unduly” enhance the price of an agricultural product, that is impermissible.
Where should the line be drawn between price enhancement, which is the goal of Capper-Volstead, and price enhancement that is unduly excessive? Perhaps more importantly, does a cooperative and its members want to see how close they can get to that line?
A continual topic of discussion in the dairy world is that of production limitations or supply management (in whatever permutation or flavor you desire). And one of the considerations in weighing the desirability of those production limitations must be whether they would comply with Capper-Volstead.
Let’s consider the simple case of a single cooperative limiting the amount of milk it will market from its members. Assuming that a cooperative has contracts to supply a set volume of milk, to me it is not only legal for that cooperative to not accept more milk than it can profitably market, it is good business to do so.
It does not take long to begin thinking about the real-world complications to this overly simplified scenario.
What about the balancing needs of the cooperative? What about having a reserve supply of milk to handle a disruption? What about broader considerations like low milk prices? What about other competing cooperatives that produce additional milk, thereby creating surpluses?
Capper-Volstead does include specific language that allows for multiple cooperatives to form common marketing agencies and further leverage their marketing power. In fact, marketing agencies are routinely used by dairy cooperatives to set over-order premiums and other coordinated activities to more efficiently market producer milk.
The court cases that attempt to define the boundaries of the Capper-Volstead exemption do not provide a great deal of help in determining when the legitimate actions of price enhancements transcend over into the areas of excess.
In fact, the vast majority of judicial decisions that examine the bounds of the Capper-Volstead exemption concern issues such as who is an agricultural producer (handlers of agricultural products with no producer interest are not) and whether obtaining a full monopoly is allowable under Capper-Volstead (it is). What is less clear in the judicial decisions is what specific activities the law permits and where cooperative activities run afoul.
Dairy cooperatives are no stranger to antitrust lawsuits. Readers of this magazine probably have a recent case or two come to mind.
There is one cluster of cases that does serve to provide a fair amount of contours to the boundaries of Capper-Volstead activity. Those cases involve Dairymen Inc. (DI), a cooperative that operated in the Southeast and is one of the dozens of smaller cooperatives that eventually became Dairy Farmers of America.
In one of those cases, a Georgia milk handler sued DI arguing that it had engaged in illegal practices through operating a marketing agency in common, applying unilateral premiums, demanding full supply agreements and otherwise monopolizing the market. The argument of the handler was that these actions were “predatory” and therefore prohibited, Capper-Volstead notwithstanding.
In citing a previous court decision involving another dairy cooperative, the court hearing the case cited the following impermissible actions, “tactics as picketing and harassment, boycotts, coerced membership and discriminatory pricing.”
Kinnett Dairies Inc. v. Dairymen Inc. (I should note here this case is one of several involving dairy cooperatives that wound their way through the federal court system during the 1970s and early 1980s.
A full-scale review of those decisions would provide any number of quotations, comments and findings that might be used to oppose or justify cooperative activity.) I selected this one case for discussion in this article because I found it to be the most thorough in describing the situation the court was reviewing. It also set forth the ultimate question in determining whether a cooperative’s activity is permissible: Is the cooperative’s activity predatory?
Returning to the issue of a cooperative’s imposed volume limitations and their propriety under Capper-Volstead, the initial question is whether any individual cooperative can limit supply. That answer is clearly yes.
But it brings about a second question about collective production limitations by an association of cooperatives. The decision in the Kinnett Dairies case, as well as others interpreting Capper-Volstead, firmly establishes that whatever a single cooperative can do in its individual capacity, an association of cooperatives can also do. So organized efforts to limit supplies of milk would seemingly be legal also, nor would such actions be “predatory.”
The only remaining question would be whether the price increases resulting from the limitation of production would be “undue.” It seems to me that this question is one that turns on the facts of individual situations. That is, some level of price enhancement is not only contemplated by the Capper-Volstead Act, it is its very purpose.
Certainly there would have to be some point where collective activity could drive prices to unacceptable levels. In conclusion, production limitations that are voluntarily imposed by cooperatives individually or in concert would likely be lawful as long as in enforcing those limitations cooperatives do not engage in predatory activities. PD
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