CONSIDERATIONS FOR MINNESOTA AGRICULTURE COOPERATIVES

By: Emily Buchholz, Billy Bigham & Maci Burke

Cooperatives have long been popular in Minnesota, due in part to the state’s sizeable agriculture industry and Scandinavian population.[1] In fact, Minnesota is home to the top two revenue-producing agriculture cooperatives in the United States: CHS Inc. and Land O’Lakes, Inc.[2] While these top revenue-producing agriculture cooperatives are prominent figures in the Minnesota business landscape, there are far more small and mid-size agriculture cooperatives in Minnesota,[3] many of which have historically struggled to garner enough capital to run. This Post outlines the Minnesota cooperative statutory structure, articulates why funding may be an issue for cooperatives, and explains the two methods—consolidation and joint ventures—that agriculture cooperatives have historically used to generate funding despite the obstacles they face.

A Cooperative is “an organization or enterprise owned by those who use its services.”[4] In cooperatives, members own the cooperative and help make decisions while also receiving a share of the profits.[5] Cooperatives are used across various essential industries, such as agriculture, utility services, housing, healthcare, grocery, financial services, and education.[6] In an agriculture cooperative, “individual farms work together to buy necessary supplies and services, as well as distribute, market and sell their products.”[7] Any income that is earned from farmer-owned agriculture cooperatives is “reinvested into the business or returned to its members.”[8]

Minnesota cooperatives may be formed either under Chapter 308A or Chapter 308B of the Minnesota Statutes. Minnesota’s original cooperative statute, Chapter 308A, denies equity investment from non-cooperative members. This limitation was one factor prompting Chapter 308B enactment in 2003, which allows non-cooperative member investment.[9] While Chapter 308B appears to be an easy solution for agriculture cooperatives needing capital, agriculture cooperatives that choose to organize under Chapter 308B risk losing important antitrust exemptions.[10] So, organizing under Chapter 308B is likely not the best solution for agriculture cooperatives seeking to raise capital.

The Sherman Antitrust Act prevents the restraint and monopolization of trade in the United States.[11] Agriculture cooperatives are granted an exemption to the Sherman Antitrust Act via the Capper-Volstead Act.[12] The Capper-Volstead Act creates a limited exemption for antitrust liability for associations of persons or entities who produce agricultural products relating to the production, handling, and marketing of farm products.[13] This permits farmers to come together to decide on a mutually agreeable product price and thus have greater bargaining power with buyers.[14] This antitrust exemption, however, must meet the following two requirements: “(1) no member of the association is allowed more than one vote because of the amount of stock or membership capital he may own or the association cannot pay dividends on stock or membership capital in excess of 8% per year; and (2) 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.”[15]

In 1967, the United States Supreme Court heard Case-Swayne Co. v. Sunkist Growers, Inc., and held that a cooperative that has a non-producer member does not qualify for the Capper-Volstead antitrust exemption,[16] meaning that each cooperative member must be “engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers.”[17] Practically, agriculture cooperatives would risk losing their antitrust status by accepting outside equity investment, which could lead to “civil and criminal penalties against officers, directors, and members.”[18] This may not matter for cooperatives that do not rely on the Capper-Volstead antitrust exemption, such as those that are not engaged in the production of agricultural products. However, accepting outside equity investment is out of the question for the many agriculture cooperatives that do rely on the Capper-Volstead Act antitrust exemption. Such agriculture cooperatives in need of capital have survived by utilizing joint ventures and consolidation.

Joint ventures can be a fruitful option for agriculture cooperatives struggling to maintain or raise capital. Cooperatives may garner capital by working “with other cooperatives or firms in a joint venture company” or they could increase business through “wholly-owned subsidiaries.”[19] The USDA conducted a survey of 185 agriculture cooperatives in 2010–2011.[20] The survey identified that the 185 agriculture cooperatives “reported being in 317 ventures, with 108 being wholly-owned subsidiaries and 209 being joint ventures.”[21] The joint venture business operations varied from agronomy to fuel distribution to ethanol & biodiesel.[22] This joint venture and wholly-owned subsidiary strategy has been used successfully for decades, but if an agriculture cooperative using this strategy is still not maintaining the capital required to run a profitable agriculture cooperative, consolidation should be considered.

Consolidation is “the unification of two or more corporations or other organizations by dissolving the existing ones and creating a single new corporation or organization.”[23] Agriculture cooperative consolidation became popular in the 1980s and 1990s when consolidation was necessary to survive the struggling agriculture market.[24] Consolidation conserves costs by sharing equipment, for example by using one, rather than two or three grain elevators, which often requires farmers to travel greater distances with their products. Consolidating also brings more farmers and therefore resources together, which in turn raises more capital.

If an agriculture cooperative does not wish to expand but is facing difficulties raising capital, the joint venture and wholly-owned subsidiary strategy is an option to consider. If, however, the agriculture cooperative is open to expanding, consolidation is often the solution.  Agriculture cooperatives facing capital issues should consult with an attorney to review the pros and cons of these strategies. With over 2100 agriculture cooperatives in the United States today, these capital financing issues are not fleeting. Agriculture cooperatives should consider these two primary avenues to secure necessary funding.

 

[1] Scandinavian America, Library of Cong., https://www.loc.gov/classroom-materials/immigration/scandinavian/scandinavian-america/ [https://perma.cc/8TYC-4RVB] (last visited Apr. 22, 2021).

[2] USDA, Top 100 Agric. Coop. (Sept./Oct. 2014), https://www.rd.usda.gov/files/RD_CoopTopSales.pdf [https://perma.cc/9BTP-2QJP].

[3] In 2015, the UWCC census identified 1023 cooperatives in Minnesota. “The highest number of firms were found among providers of housing, financial services, and agricultural supply and marketing. The largest co-ops by asset size were in the field of financial services, while most of the annual revenue was earned by agricultural cooperatives.” Emily Anderson & Tom Pierson, Cooperatives in Minneapolis: An inventory and assessment, C-TAP (Apr. 2016), https://community-wealth.org/sites/clone.community-wealth.org/files/downloads/paper-anderson-pierson.pdf [https://perma.cc/C2KC-RDGY].

[4] Cooperative, Black’s Law Dictionary (11th ed. 2019).

[5] Agriculture Co-ops, Coop. for a Better World, https://betterworld.coop/sectors/sector-ag/ [https://perma.cc/B48L-BFLX] (last visited Apr. 22, 2021).

[6] Co-op Sectors, Nat’l Coop. Bus. Ass’n CLUSA Int’l, https://ncbaclusa.coop/resources/co-op-sectors/ [https://perma.cc/8NZU-88HT] (last visited Apr. 22, 2021).

[7] Id.

[8] Id.

[9] Robert Hensley & David Swanson, Minnesota Legislature Adopts New Cooperative Associations Act: Coops Should Carefully Review Options to Avoid Pitfalls, Dorsey & Whitney LLP, May 2003, at 1, https://www.dorsey.com/~/media/files/newsresources/publications/2003/05/minnesota-legislature-adopts-new-cooperative-ass__/files/tbls21publicationspdfupload141352mnlegislaturema__/fileattachment/mnlegislaturemay2003.pdf [https://perma.cc/98G8-S4U9].

[10] Id. at 2.

[11] 15 U.S.C. §§ 1–2 (2004).

[12] 7 U.S.C. § 291 (1922); John C. Monica, Jr. & Jetta C. Sandin, Agricultural Antitrust Pitfalls, 5 Md. B. J. 14, 14 (2017).

[13] 7 U.S.C. § 291.

[14] Aaron Gott, The Capper-Volstead Act Gives Farm Cooperatives a Limited Exemption from Antitrust Liability, The Antitrust Attorney Blog (Oct. 29, 2019), https://www.theantitrustattorney.com/the-capper-volstead-act-gives-farm-cooperatives-a-limited-exemption-from-antitrust-liability/ [https://perma.cc/C8RV-9GCF].

[15] Hensley & Swanson, supra note 9, at 3.

[16] Case-Swayne Co., Inc. v. Sunkist Growers, Inc., 389 U.S. 384, 395–96 (1967).

[17] 7 U.S.C. § 291.

[18] Hensley & Swanson, supra note 9, at 3.

[19] Bruce J. Reynolds, Joint Ventures and Subsidiaries of Agricultural Cooperatives 1 (U.S. Dep’t Agric. ed. 2012), https://www.rd.usda.gov/files/rr226.pdf [https://perma.cc/8AGC-ZVDZ].

[20] Id. at 1.

[21] Id. at 1.

[22] Id. at 4.

[23] Consolidation, Black’s Law Dictionary (11th ed. 2019).

[24] Dan Kowalski, Number of ag cooperatives declines, co-op influence does not 2–3 (CoBank ed. 2019), https://www.cobank.com/documents/7714906/7715332/Coop-Consolidation-Jul2019.pdf/92dd7966-b617-a2e4-057a-1749f7054df1?t=1606493180410 [https://perma.cc/R2UN-GV7W].