Can My Farm Cooperative Impose Production Restraints During Covid-19 Without Violating the Antitrust Laws?

Author: Aaron Gott and Nick McNamara

As the effects of the ongoing COVID-19 pandemic continue to ripple across all sectors of the economy, agriculture has been hit especially hard. The widespread closure of restaurants combined with the general hit on most Americans’ wallets has precipitated a massive demand shock, which in turn has sent the prices of agricultural products such as cornsoybeansmilk, and fresh produce tumbling. While this may be good news for consumers (at least in the short run), it does not bode so well for farmers, who in recent months have had to resort to dumping milk and culling herds of livestock—practices which are both wasteful and potentially environmentally harmful.

Can farmers work together to mitigate these issues by agreeing, prior to production, to set production caps so that prices may be stabilized, and waste avoided? The answer depends on whether such controls on output are covered by the Capper-Volstead Act’s antitrust exemption for farm cooperatives.

Under normal circumstances, a concerted agreement among horizontal competitors to restrict output is per se violation of Section 1 of the Sherman Act. But the Capper-Volstead Act, enacted in 1922 amid populist fervor in the agricultural sector, provides a limited antitrust exemption to “[p]ersons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers.”

You can read a more detailed primer on the Capper-Volstead Act here. But, in brief, the act allows agricultural producers to collectively process, prepare, handle, and market their products. Now, it is important to note again that the exemption applies only to agricultural producers, not processors. This past year, there has been a flurry of antitrust litigation against pork and beef processors who are alleged to have agreed to restrict output, among other things. As discussed in the primer, the Supreme Court has held that a cooperative cannot include processors because they do not fit into the category of “farmers, planters, ranchmen, dairymen, nut or fruit growers.” Thus, only those entities at the most basic level of the food supply chain get to enjoy the exemption.

For producers, the farm cooperative exemption has been interpreted by courts to include a blanket exemption from antitrust liability for price fixing, a practice which also normally incurs per se liability under Section 1 of the Sherman Act. No court has ever directly ruled on the question of whether the exemption applies also to output controls, but there are indications they might find output restrictions outside the narrow confines of the act.

 

In 2011, the District of Idaho stated in dicta that restrictions on output are not immune from antitrust liability under the Capper-Volstead Act because the language of “processing, preparing for market, handling, and marketing” appears to refer exclusively to activities which take place after production has already occurred, i.e. after crops are harvested or livestock have reached maturity. Similarly, the FTC stated in a 1977 administrative opinion that “there are strong indications that Congress did not intend to allow farmers to use cooperatives as a vehicle by which they could effectively agree to limit production.” And, in 2009, the U.S. Department of Justice Antitrust Division head signaled the Justice Department’s disfavor toward the farm cooperative exemption in testimony before the Senate Judiciary Committee.

On the other hand, it is illogical to treat output restrictions differently from price fixing because they are two sides of the same coin. In a price-fixing scheme, the participants will naturally restrict output such that marginal cost equals marginal revenue. The output restriction is necessary to maintain upward pressure on prices. Additionally, the text of the Capper-Volstead Act itself permits collective action in “preparing for market,” which could plausibly be interpreted to encompass both those planning activities which occur after harvest and those which occur before the seeds are even in the soil. Still, the Supreme Court has consistently held that antitrust exemptions are disfavored and should be interpreted narrowly.

It is also difficult to see how subjecting farm cooperative producers to Section 1 liability for output controls—but not direct price-fixing—would advance consumer welfare. Indeed, agricultural products have a limited shelf-life and must be disposed of in situations where production outstrips consumer demand. Recently, pig farmers have had to make the difficult decision to euthanize large numbers of their pigs due to a lack of buyers, and the resulting need for the bulk destruction of pig carcasses has created an environmental debacle. Why should farmers and ranchers have to wait until they have already invested substantial time and resources into producing goods before they have the ability to control the amount of those goods that are brought to market? The District of Idaho’s logic thus seems to turn on a distinction of dubious value: controlling output is fine as long as it is done post-production and not pre-production.

Nevertheless, the fact is that if you are a member of a farm cooperative (or are a farm cooperative) that is imposing output restrictions, you have significant antitrust risk because the law is far from clear and both the FTC and the Antitrust Division have indicated their aversion. If you or your cooperative is considering output controls during Covid-19, please contact us today.

Contributing Advisors