Volume 42 | Number 3 Summer 2007
The Agricultural Exemption in Antitrust Law: A Comparative Look at the Political Economy of Market Regulation
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II. The Agricultural Exemption in U.S. Law
The agricultural exemption in U.S. federal law was granted by Congress through the Clayton Act of 1916 and the Capper-Volstead Act of 1922.7 They were preceded by many state laws with similar content and objectives—namely to authorize the existence of agricultural cooperatives and to exempt them from antitrust liability.8 The background to the exemption was the atomistic nature of the farming industry and the inability of individual farmers to bargain on a leveled field with the few firms that dominated the processing and marketing of agricultural produce. The farmers were many and scattered, isolated from each other and from their consumers, making them easy prey for cunning middlemen. The prevailing situation was described by Baumer et al.:
As the physical and economic distance between farmer and consumer widened, a growing lack of complete supply and demand information made it increasingly difficult for individual farmers to make accurate market predictions before locking themselves into production decisions for the next harvest. The generally high perishability of agricultural products, the technological inability to store them for very long, and the absence of efficient transportation left many individual farmers dependent on one or a few handlers (processors and distributors). On many occasions the middlemen abused this power. In an effort to force down prices, the middlemen could simple threaten not to buy; the prospect of rotten vegetables or spoiled milk was often enough to make the farmer capitulate. In the dairy industry, where individual farmers were dependent on handlers for weighing milk to specify its volume and for testing its butterfat content, short-changing was a common practice.9
To countervail the power of the marketing firms and improve their lot, farmers sought to organize themselves in cooperatives. These organizations were intended to provide both transportation and marketing services for the farmers, thus connecting them better with the consumers. This would allow them to obtain fairer prices for their produce and establish a more efficient and equitable system of production and distribution. However, such organization of farmers was problematic from an antitrust standpoint: the cooperation between farmers for the sake of fixing common prices for their produce and marketing it jointly would seem to be in violation of the Sherman Act’s prohibition of agreements in restraint of trade.10 Indeed, a few cooperatives were found guilty of antitrust violations by the courts.11 The situation of the agricultural cooperatives in this regard was somewhat similar to that of the labor unions, in that both were necessary to put the individual workers/farmers on a level playing field with the more powerful firms that procured the fruits of their labor, but nevertheless may have been considered in violation of antitrust laws. Congress therefore came to their rescue through Article 6 of the Clayton Act of 1916, which provides:
The labor of a human being is not a commodity or article of commerce. Nothing contained in the antitrust laws should be construed to forbid the existence and operation of labor, agricultural or horticultural organizations, instituted for the purpose of mutual help, and not having capital stock or conducted for the profit, or to forbid or restrain any individual members of such organizations from lawfully carrying out the legitimate objects thereof; nor shall such organization, or the members thereof be held or construed to be illegal combinations or conspiracies in restraint of trade, under the antitrust laws.12
This law provides merely an authorization for farmers to organize themselves in cooperatives (and to workers in unions) “for the purpose of mutual help.”13 As long as they “lawfully carry[. . .] out the[ir] legitimate objects” they cannot be held illegal under the antitrust laws.14 But what type of “mutual help” may they extend to their members, and what exactly are their “legitimate objects”? In order to clarify that, and also in order to allow the cooperatives to raise the capital necessary for their efficient operation, Congress passed the Capper-Volstead Act in 1922.15 The Act identified the legitimate objects of agricultural cooperatives as “collectively processing, preparing for market, handling and marketing” the agricultural products of its members for their mutual benefit.16 Producers of such products were defined as “Persons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers.”17 While the Act allowed such cooperatives to issue capital stock, it also imposed several conditions aimed to ensure that the organization would retain its nature as a true cooperative for the benefit of its farmer members: (1) that no member of the association should have more than one vote because of the amount of stock or membership capital he may own therein; or (2) that the association should not pay dividends on stock or membership capital in excess of eight percent per annum; and in any case (3) that the association shall not deal in the products of non-members to an amount greater in value than such as are handled by it for members.18 An association that meets these conditions is allowed to act cooperatively in setting prices and selling conditions, and even cooperate with other such associations in setting up common marketing agencies—in manners which otherwise would have been considered illegal under the Sherman Act.19
However, the Capper-Volstead Act also added an important safety valve. It charged the Secretary of Agriculture with the responsibility of taking action if he believes that any such association “monopolizes or restrains trade . . . to such an extent that the price of any agricultural product is unduly enhanced.”20 In such cases, a decree can be issued against the association that requires it to cease and desist from such acts. In other words, the exemption is not an unfettered authorization to engage in anti-competitive behavior to the detriment of consumers. While the objective was to protect farmers from monopsonist buying power, it was recognized that this should not be done at the expense of the consumers. Congress was not willing to grant such immunity to farmers associations—so as to permit them to develop monopoly power over the consumers—thus substituting one market distortion for another. As stated in the House Report on the Act:
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. It is not sought to place these associations above the law but to grant them the same immunity from prosecution that corporations now enjoy so that they may be able to do business successfully in competition with them.21
The U.S. courts also considered themselves authorized under the Act, along with the Secretary of Agriculture, to prevent abuse of the exemption. In Maryland & Virginia Milk Producers Association v. Unites States, for instance, the U.S. Supreme Court held that section 2 of the Capper-Volstead Act was not intended to give the Secretary of Agriculture exclusive jurisdiction over abuses, thereby excluding any prosecutions under the Sherman Act.22 Thus, when there is anticompetitive behavior on the part of the agricultural association that unduly enhances prices, it can be prosecuted by the courts under the existing antitrust laws. The Maryland & Virginia Milk Producers Association, for instance, which had been found to attempt to monopolize and entering several anti-competitive agreements, was ordered to cancel all those contracts and to divest itself of all assets purchased from a competing dairy. The Supreme Court limited the exemption granted by the Capper-Volstead Act to the formation of cooperatives and did not extend it to their anticompetitive activities, such as combining with competitors that are not exempt cooperatives or using their dominant position to suppress competition with independent producers and processors.23
To sum up: the agricultural exemption in U.S., antitrust law was enacted in order to correct distortion of competition in the agricultural sector and to allow farmers to countervail the monopsonist or oligopsonist market power of middlemen. Hence, it only extends to the formation of cooperatives among farmers, and only among them24 and to the legitimate activities of such cooperatives, including joint processing, handling and marketing. A cooperative must act to the mutual benefit of its members and divide its profits among them up to a ceiling of eight percent each, and they are not immune from administrative or judicial supervision where they engage in anticompetitive activities, such as combinations with competitors, abuse of dominant position, and mergers.