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VOLUME 17, NUMBER 7, WHOLE NUMBER 200 JUNE 2000

gr
Ag icultural
ricultur legal
al le researc
gal r esearch
esearc h on the
Internet
The Internet provides legal researchers with an enormous amount of information
about agricultural law to sift through. This paper provides a starting point for
conducting agricultural law research. The sites listed are current only to the date
of this paper (May, 2000). This list is not exhaustive. For example, The Farmer’s
Guide to the Internet, has over 2000 web sites and constantly changes every day.
The Agricultural Law Research and Education Center cannot and will not vouch

INSIDE for the accuracy of the information presented in these sites. After compiling research
from the Internet, a researcher must verify the accuracy of the information gathered.

Agricultural employment
• New Generation USDA Coordinator of Agricultural Labor Affairs
http://www.usda.gov/oce/oce/labor-affairs/
farmer cooperatives This site provides information about USDA policy and program objectives with respect to agricultural labor. Specific
areas of concern include immigration, the H-2A Temporary Agricultural Worker Program, Worker Protection
Standards for pesticide use, agricultural labor supply, and farm worker employment.
Agricultural Personnel Management Program
http://are.Berkeley.EDU/APMP/
This site provides information on farm labor management and related issues for practitioners, educators, service
providers, students, and researchers.

Agricultural law and policy
American Agricultural Law Association (AALA)
http://www.aglaw-assn.org/
The AALA is the only national professional organization focusing on the legal needs of the agricultural community.
This site contains an Agricultural Law Bibliography with forty-eight categories. The entries in the bibliography are
primarily law review articles, but the bibliography does contain citations to some books, reports, and articles from
journals other than law reviews.
American Farmland Trust (AFT)
Solicitation of articles: All AALA http://www.farmlandinfo.org/
members are invited to submit The AFT site includes farmland protection fact sheets, full-text literature, laws, maps, statistics and more resources.
articles to the Update. Please in-
C ontinued on page 2
clude copies of decisions and leg-
islation with the article. To avoid
duplication of effort, please no- ebr
Ne braska
br Supreme
aska Supr Court
eme Courtrrules
ules in
tify the Editor of your proposed
article. Prog
Pr ogr
og ress Pig case
Article 8 §12 of the Nebraska constitution establishes several requirements for
corporations to legally qualify as family farm or ranch corporations. Under one

IN FUTURE provision, a majority of the family farm or ranch corporation’s shareholders must be
family members, “at least one of whom is a person residing on or actively engaged
in the day to day labor and management of the farm or ranch.” In Hall v. Progress

I SSUES
• Crop share rental
Pig Inc., 259 Neb. 407 (May 12, 2000) (Progress Pig II), the Nebraska Supreme Court
ruled that where no family member resides on the farm or ranch, a family member
must perform daily physical labor on the farm or ranch for the corporation to legally
qualify as a family farm or ranch corporation.
arrangements and Progress Pig Inc. is an Otoe County farrow-to-finish swine operation, with David
sample lease Zahn the sole shareholder. Zahn, who lives on a farm three miles from the Progress
Pig site, handles the operation’s finance, management, and marketing and works
with production consultants. The Progress Pig production manager and other
• The Agricultural Risk employees care for the swine. Zahn was physically onsite one to three days per week.
Protection Act of 2000 Zahn contended that the article 8 §12 daily labor requirement included production
activities in addition to physical labor, such as bookkeeping, marketing, etc. The
district court judge concluded that Zahn did provide labor and management for the
farming operation, but ruled that Zahn’s labor was insufficient to qualify as the daily
Continued on page 3
INTERNET/CONTINUED FROM PAGE 1

maintains an agricultural law library collection and also Council For Biotechnology Information
Texas Institute of Applied Environmental Research
maintains current bibliographies on specific agricultural http://www.whybiotech.com/
(TIAER)
law topics. The Council for Biotechnology Information has been
http://tiaer.tarleton.edu/
Penn State Agricultural Law Research and Edu- founded by leading biotechnology companies to create a
TIAER functions as a multi-disciplinary research orga-
cation Center public dialogue and share information about biotechnol-
nization. The Institute’s mission is to conduct high quality
http://www.dsl.edu/aglaw/aglaw.html ogy that is based on objective scientific research, inde-
investigation of environmentally related issues and prob-
Penn State’s Agricultural Law Research and Educa- pendent expert opinion and peer-reviewed published
lems through an open research process. The Institute
tion Center is a collaboration between the University’s reports.
then works to identify and implement workable solutions
Dickinson School of Law and College of Agricultural Nature Biotechnology Directory and Buyer’s Guide
and policies which are based upon research findings.
Sciences. The Center is funded in part by the Pennsylva- Online
Publications are available from the web site.
nia Department of Agriculture. The Center is designed to http://guide.nature.com/
Council for Agricultural Science and Technology
provide the highest-quality educational programs, infor- This site is a global information resource listing over
(CAST)
mation, and materials to those involved or interested in 9,000 organizations, product and service providers in the
http://www.cast-science.org/
the agricultural industry. biotechnology industry.
The mission of CAST is to identify food and fiber,
Drake School of Law, Agricultural Law Center
environmental, and other agricultural issues and to inter-
http://www.law.drake.edu/lawCenters/agLawCenter/ Cooperative Extension Service
pret related scientific research information for legislators,
Drake’s Agricultural Law Center supports an array of USDA Cooperative Extension Service
regulators, and the media for use in public policy decision
courses, publications, conferences, and research initia- http://www.reeusda.gov/statepartners/usa.htm
making.
tives about legal issues involving the full scope of food This site hosts the directory of land-grant universities
and agriculture, including marketing and finance; bio- which are state partners of the Cooperative State Re-
Agricultural law research centers
technology; international trade; tax planning; soil and search, Education, and Extension Service. Also included
National Center for Agricultural Law Research
water conservation; land use and environmental issues; is the CSREES Online Directory of Professional Workers
Institute (NCALRI)
food safety; and federal farm programs. in Agriculture, the State Extension Service Directors and
http://law.uark.edu/arklaw/aglaw/
Administrators Directory as well as links to the web sites
The NCALRI conducts research and analysis and
Agricultural Loans of the schools of forestry, higher education, human sci-
provides up-to-date information to farmers and
Farm Service Agency (FSA) ences, veterinary science, and state extension experi-
agri-businesses, attorneys, community groups, and oth-
http://www.fsa.usda.gov/ ment stations.
ers confronting agricultural law issues. NCALRI attor-
FSA is part of the USDA. The FSA administers farm Journal of Extension (JOE)
neys disseminate information through symposia, publi-
commodity programs; farm ownership, operating and http://www.joe.org/
cations, television, and radio presentations. The NCALRI
emergency loans; conservation and environmental pro- JOE is an all electronic journal available on the Internet.
grams; emergency and disaster assistance; domestic The Journal is the peer reviewed publication of the
and international food assistance and international ex- Cooperative Extension System. It seeks to expand and
port credit programs. update the research and knowledge base for Extension
professionals and other adult educators to improve their
Agricultural search sites effectiveness.
Farmer’s Guide to the Internet
VOL. 17, NO. 7, WHOLE NO. 200 June 2000 http://www.rural.org/favorites.html Farm Bureau
AALA Editor..........................Linda Grim McCormick This site compiles nearly 2,000 different links to useful American Farm Bureau (ABF)
Rt. 2, Box 292A, 2816 C.R. 163 sites all around the Internet. http://www.fb.org/
Alvin, TX 77511 As the national voice of agriculture, AFB’s mission is to
Phone: (281) 388-0155
FAX: (281) 388-0155 Alternative dispute resolution work cooperatively with the member state farm bureaus
E-mail: lgmccormick@teacher.esc4.com Pennsylvania Community Connection to promote the image, political influence, quality of life and
Contributing Editors: Christopher R. Kelley, University
http://www.communityconnectionpa.org/ profitability of the nation’s farm and ranch families. This
of Arkansas, Fayetteville, AR; Jeff Feirick, Dickinson Community Connection connects citizens, leaders, site contains links to numerous agricultural sites as well
School of Law; J.David Aiken, University of Nebraska. and other groups in Pennsylvania communities with the as state farm bureaus.
For AALA membership information, contact
William P. Babione, Office of the Executive Director,
information and guidance they need to communicate
Robert A. Leflar Law Center, University of Arkansas, openly and to work together effectively in their efforts on Farmers markets
Fayetteville, AR 72701. behalf of their communities. USDA Agricultural Marketing
Agricultural Law Update is published by the Udall Center for Studies in Public Policy http://www.ams.usda.gov
American Agricultural Law Association, Publication http://udallcenter.arizona.edu/ The Agricultural Marketing Service includes six com-
office: Maynard Printing, Inc., 219 New York Ave., Des The Udall Center for Studies in Public Policy sponsors modity divisions-Cotton, Dairy, Fruit and Vegetable, Live-
Moines, IA 50313. All rights reserved. First class
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This publication is designed to provide accurate and Center specializes in issues concerning environment, and market news services for those commodities. They
authoritative information in regard to the subject
matter covered. It is sold with the understanding that natural resources, and public lands; American Indian enforce such Federal laws as the Perishable Agricultural
the publisher is not engaged in rendering legal, governance and economic development; the U.S.-Mexico Commodities Act and the Federal Seed Act.
accounting, or other professional service. If legal advice Rooster.com
or other expert assistance is required, the services of
border; and related topics.
a competent professional should be sought. Policy Consensus Initiative http://www.rooster.com/
Views expressed herein are those of the individual http://www.agree.org/ Rooster.com is an independent, online marketplace
authors and should not be interpreted as statements of
policy by the American Agricultural Law Association.
The Policy Consensus Initiative works with leaders in where producers can market their crops and buy their
states to establish and strengthen consensus building seed, fertilizer, crop protection products, equipment and
Letters and editorial contributions are welcome and and conflict resolution. other supplies.
should be directed to Linda Grim McCormick, Editor,
Rt. 2, Box 292A, 2816 C.R. 163, Alvin, TX 77511.
Biotechnology Federal environmental
Copyright 2000 by American Agricultural Law U.S. Biotechnology Regulatory Agencies U.S. Environmental Protection Agency
Association. No part of this newsletter may be
reproduced or transmitted in any form or by any means, http://www.aphis.usda.gov/biotech/OECD/usregs.htm http://www.epa.gov/
electronic or mechanical, including photocopying, The agencies primarily responsible for regulating bio- EPA National Agriculture Compliance Assistance
recording, or by any information storage or retrieval technology in the United States are the US Department Center
system, without permission in writing from the
publisher. of Agriculture (USDA), Environmental Protection Agency http://www.epa.gov/oeca/ag
(EPA), and the Food and Drug Administration (FDA). The National Agriculture Compliance Assistance Cen-
Products are regulated according to their intended use, ter is the “first stop” for information about environmental
with some products being regulated under more than one requirements that affect the agricultural community. The
agency. EPA with the support of the USDA created the Ag Center.
Cont. on p.3

2 AGRICULTURAL LAW UPDATE MAY 2000
EPA TMDL http://www.lawsource.com/also/ Pennsylvania Environmental
http://www.epa.gov/owow/tmdl/index.html ALSO provides a comprehensive, uniform, and useful Pennsylvania Department of Environmental Pro-
The primary mission of the TMDL program is to protect compilation of links to all on-line sources of American law tection
public health and ensure healthy watersheds by assuring that are available without charge. This site contains http://www.dep.state.pa.us
that waterbodies are meeting water quality standards. additional links to sources of commentary and practice Pennsylvania Department of Conservation and
This site provides specific data on the TMDL program. aids that are available without charge (or available at a Natural Resources
EPA Animal Feeding Operations (AFO) reasonable charge from governmental and nonprofit http://www.dcnr.state.pa.us
http://www.epa.gov/owm/afo.htm providers). Pennsylvania Enviro Help
The Office of Wastewater Management has several Hieros Gamos http://www.pa-envirohelp.org
fact sheets available with information on water quality http://www.hg.org/ The ENVIROHELP program was established by the
concerns from AFOs and NPDES regulations concerning Billed as the largest comprehensive legal site with over Pennsylvania Department of Environmental Protection to
horse, beef cattle, dairy cattle, poultry, swine, and sheep 54,000 links to US federal and state law, legal organiza- assist small businesses with understanding and comply-
feeding operations. tions and every government in the world. Also includes ing with local, state and federal environmental regula-
EPA’s Enviro Sense links in over 200 practice areas, 300+ discussion groups, tions.
http://es.epa.gov and 50 doing business guides.
As part of the U.S. EPA’s web site, this site provides a The Pennsylvania State University
single repository for pollution prevention, compliance Libraries Penn State University Home Page
assurance, and enforcement information and databases. Library of Congress http://www.psu.edu
Our search engine searches multiple web sites (inside http://www.loc.gov/
and outside the EPA), and offers assistance in preparing Penn State University Library Penn State College of Agricultural Sciences
a search. http://www.libraries.psu.edu/ http://www.cas.psu.edu/
USDA Natural Resources Conservation Service National Agricultural Library (NAL)
http://www.nrcs.usda.gov http://www.nalusda.gov Pesticide Information
The Natural Resources Conservation Service is a The NAL is one of the world’s largest and most Extoxnet Pesticide Info Profiles
federal agency that works in partnership with the Ameri- accessible agricultural research libraries and plays a vital http://ace.orst.edu/info/extoxnet/pips/ghindex.html
can people to conserve and sustain our natural re- role in supporting research, education, and applied agri- Pesticide Information Profiles (PIPs) are documents
sources. culture. which provide specific pesticide information relating to
National Association of Conservation Districts health and environmental effects. PIPs are not based on
(NACD Livestock an exhaustive literature search. The information does not
http://www.nacdnet.org/ Breeds of Livestock in any way replace or supersede the information on the
NACD develops national conservation policies, influ- http://www.ansi.okstate.edu/BREEDS/ pesticide product labeling or other regulatory require-
ences lawmakers and builds partnerships with other This site provides a fascinating overview of the breeds ments.
agencies and organizations. NACD also provides ser- of cattle, house, swine, sheep and other species. American Crop Protection Association
vices to its districts to help them share ideas in order to http://www.acpa.org/
better serve their local communities. ACPA is the not-for-profit trade organization repre-
Organic senting the major manufacturers, formulators and dis-
Federal government National Organic Program tributors of crop protection and pest control products,
U.S. Senate Committee on Agriculture, Nutrition, http://www.ams.usda.gov/nop/ including biotechnology products with crop production
and Forestry The mission of the National Organic Program is to and protection characteristics.
http://agriculture.senate.gov/ develop and implement national standards that govern
U.S. House Committee on Agriculture the marketing of agricultural products as organically United Nations agriculture
http://agriculture.house.gov/ produced, to facilitate commerce in fresh and processed Food and Agricultural Organization of The United
U.S. Department of Agriculture food that is organically produced, and to ensure consum- Nations
http://www.usda.gov ers that such products meet consistent standards. http://www.fao.org/
Immigration and Naturalization Service FAO is active in land and water development, plant
http://www.ins.usdoj.gov/ Pennsylvania State Government and animal production, forestry, and fisheries, economic
U.S. Department of Labor State of Pennsylvania Homepage and social policy, investment, nutrition, food standards
http://www.dol.gov/ http://www.state.pa.us/ and commodities and trade. It also plays a major role in
U.S. Food and Drug Administration Pennsylvania Department of Agriculture dealing with food and agricultural emergencies.
http://www.fda.gov/ http://www.pda.state.pa.us/
Internal Revenue Service Pennsylvania Association of Township Supervi- The purpose of this publication is to
http://www.irs.ustreas.gov/ sors help you understand more about agricul-
http://www.psats.org/ tural legal research. The material is
Federal government publications Pennsylvania Association of Conservation Dis- general and educational in nature. It is
Legislative Information on the Internet (THOMAS) tricts not intended to be legal advice. If you
http://thomas.loc.gov/home/ http://www.pacd.org/ need legal advice, contact an agricultural
Code of Federal Register, and Federal Register Pennsylvania Code Web Site law attorney in your area.
www.access.gpo.gov/nara/index.html http://www.pacode.com —Jeff Feirick, The Agricultural Law
Pennsylvania Bulletin Web Site Research and Education Center, The
Legal research http://www.pabulletin.com
American Law Sources on Line (ALSO) Dickinson School of Law

Progress Pig/Cont. from p. 1 pigs or cattle, the expectation is that activities were primarily management,
labor and management required by ar- one would need to be involved on an and that he provided only minimal physi-
ticle 8 §12. Judge Reagan stated: everyday basis. If the product were cal labor (less than one hour per month).
It is my opinion that the drafters of this grain, for example, “day to day” [labor] The court ruled that Zahn did not provide
Initiative intended that the words “day would encompass the various stages of the daily labor required for non-resident
to day” be directed to the particular [planting], fertilizing, and harvesting, corporate owners by article 8 §12.
[agricultural] product involved. “Day which might not have to be addressed Under article 8 §12, Zahn will have to
to day” labor in this context must be on an everyday basis. begin providing daily physical labor at
seen as respecting the output or prod- the swine facility, sell the corporation
uct of the farm. When the product is The supreme court ruled that Zahn’s Cont. on page 7

MAY 2000 AGRICULTURAL LAW UPDATE 3
ew
Ne Generation
w Gener farmer
ation f cooperati
armer cooper atives
ati ves
By Christopher R. Kelley

Farmer cooperatives have long been a continue to provide valuable benefits to operatives that raise and market hogs,
part of the agricultural economy. As their members. Nevertheless, they are with the hogs consuming corn produced
mutual self-help enterprises, farmer co- not generating the interest or enthusi- by the cooperatives’ members.5
operatives provide economic benefits to asm that a “new wave” of cooperatives is The basic premise for the formation of
their farmer-members. Most are orga- producing. Instead, the so-called “New New Generation cooperatives is that
nized as corporations, but they operate Generation” cooperatives are the coop- farmers should position themselves to
differently from ordinary business corpo- eratives that are producing “co-op fever” “capture” or realize the increases in value
rations. Cooperatives operate “at cost” in among farmers and rural development that occur in converting a raw agricul-
the sense that their net earnings are advocates in some parts of the country.2 tural product into a further processed
distributed to their members on a pa- Although it may be a close relative to product.6 In other words, their formation
tronage basis.1 Instead of receiving re- the traditional marketing cooperative, is motivated by “the desire to develop
turns based on their investment in the the New Generation cooperative is mark- new value-added products and to gain
enterprise, as is the case with ordinary edly different in several respects. This access to an increased share of the con-
business corporations, members of a co- article is intended to provide an intro- sumers’ food dollar.”7 To the extent that
operative benefit from their use of the duction to the New Generation coopera- they are successful, therefore, these co-
cooperative. Also, cooperatives are tive, including the features that distin- operatives can increase the wealth of
democratically controlled; most operate guish it from the traditional farmer mar- their members. They also have the poten-
on a one-member, one-vote basis. Voting keting cooperative. As an introduction, tial for adding wealth to the communities
power is not determined by the number this article does not address the myriad in which they are located by creating new
of voting shares owned, as is the case legal issues that the organization and employment opportunities in their facili-
with ordinary corporations. Finally, most operation of a New Generation coopera- ties. In sum, New Generation coopera-
cooperatives are primarily member-fi- tive can present. Some of these issues, tives are commonly viewed as instru-
nanced. Unlike ordinary business corpo- such as whether stock in a New Genera- mental in rural development.8
rations, the members of a cooperative tion cooperative is a “security” under the Numerous New Generation coopera-
provide most of the cooperative’s equity, federal securities laws, have yet to be tives are operating or are in the planning
not outside investors. resolved definitively. In keeping with its stage.9 In North Dakota, for example,
Farmer cooperatives are often catego- modest goal, this article will confine it- where a substantial number of New Gen-
rized by the functions they perform. Sup- self to the framework of a type of coopera- eration cooperatives are located, sixty-
ply cooperatives provide the inputs farm- tive that may, over time, significantly seven cooperatives were formed from 1990
ers need, such as seed, chemicals, and alter the economic and legal landscape of through 1997. This averages to 8.3 coop-
fuel. Marketing cooperatives sell the prod- farmer cooperatives. eratives per year. Though not all of these
ucts of their members. Service coopera- “New Generation” is a name that has cooperatives were “value-added” coop-
tives provide various services, ranging been given collectively to a number of eratives, twenty-six of the sixty-seven
from custom chemical application to fi- farmer cooperatives formed in the last new cooperatives add value to raw agri-
nancial planning. Bargaining coopera- decade or so, mostly in the Upper Mid- cultural products.10
tives bargain on behalf of their members west. As the term “New Generation” is William Patrie, an economic develop-
for the sale of their products. Increas- used in this article, a New Generation ment specialist, has been a leader in the
ingly, individual cooperatives have be- farmer cooperative is a “value-added” formation of New Generation coopera-
come “multiple-service” cooperatives by cooperative that processes or otherwise tives in North Dakota. Patrie’s work with
providing several of these functions. converts the raw agricultural products of farmer “value-added” cooperatives earned
The cooperative elevator or gin that its members into one or more higher- him the title of “the man who helped
stands as a predominant landmark in valued products. For example, one of the spark co-op fever in the Northern
many farm communities is often viewed early and best known New Generation Plains.”11
as emblematic of the “traditional” mar- cooperatives is the Dakota Growers Pasta Patrie has identified several features
keting cooperative. Though some tradi- Company based in Carrington, North that distinguish New Generation farmer
tional marketing cooperatives process Dakota. The Dakota Growers Pasta Com- cooperatives from traditional farmer co-
raw agricultural products into a higher pany converts durum wheat into pasta operatives, such as supply and market-
valued product, most do not. Instead, products, including products bearing its ing cooperatives. The first of these fea-
they market the raw agricultural prod- own label. Formed in 1991, it had become tures is that New Generation coopera-
ucts of their members. Except for the the second largest pasta maker in the tives effectively limit the number of per-
cleaning or conditioning that may be re- United States by 1998.3 sons who may become members in the
quired to place the raw product on the Though many of the New Generation cooperative. This feature has resulted in
market, these cooperatives market the farmer cooperatives process field crops, New Generation cooperatives being de-
product in essentially the same form in such as wheat, soybeans, or corn, into scribed as “closed cooperatives” as dis-
which it was delivered. Any subsequent higher-valued products, some handle live- tinguished from “open cooperatives.”
processing or conversion of the product stock. For example, another North Da- Patrie places traditional supply and
into a higher-valued product, such as kota New Generation cooperative, the marketing cooperatives in the category
into food, is done by a subsequent pur- North American Bison Cooperative, pro- of “open cooperatives,” a reference to the
chaser, not the marketing cooperative. cesses and markets bison meat. Formed willingness of most farmer supply and
Traditional marketing cooperatives in 1992, its members raised $1.6 million marketing cooperatives to admit any
to construct a new processing plant in qualified person to membership without
New Rockford, North Dakota. “Live bi- imposing a limit on the total number of
Christopher R. Kelley is Assistant Profes- son go in one side of the plant, and white members.12 New Generation farmer co-
sor of Law at the University of Arkansas packages of neatly trimmed buffalo meat operatives, on the other hand, typically
School of Law and is Of Counsel to the come out the other.”4 In Minnesota and effectively limit the number of members
Vann Law Firm in Camilla, GA. elsewhere, corn farmers have formed co- who may join the cooperative. As more

4 AGRICULTURAL LAW UPDATE MAY 2000
fully explained below, they do this by interest in the cooperative, for subscrip- production, such as bushels or acres,
tying membership to the right to deliver tions to delivery rights are the most mean- each delivery right represents the right
to the cooperative the commodity pro- ingful indication of interest in the coop- to patronize the cooperative to the extent
cessed by the cooperative. Since the erative from persons eligible to join it. of that unit. Therefore, to use a short-
cooperative’s processing facilities have a Any cooperative requires capital for its hand phrase, delivery rights constitute
capacity limit, delivery rights are lim- establishment and operation, and New “units of participation” in the coopera-
ited. Once sufficient quantities of the Generation cooperatives are no excep- tive. A member of a New Generation
commodity are “lined-up” by the coopera- tion. In fact, the capital needs of a New cooperative can only patronize the coop-
tive through the allocation of delivery Generation cooperative can be substan- erative by holding one or more units of
rights, no more delivery rights are avail- tial. Much of the cost of establishing a participation and then only to the extent
able. The result is a limit on the number New Generation cooperative is attribut- of the number of units of participation
of members who may join the coopera- able to the cost of leasing, purchasing, or which the member holds.
tive. It is this limit that causes New constructing a processing facility and A common method used by New Gen-
Generation farmer cooperatives to be outfitting it with the necessary equip- eration cooperatives to establish delivery
characterized as “closed cooperatives.” ment. rights is to link them to a class of stock in
In addition to being “closed coopera- Even the process of organizing a New the cooperative. For example, a coopera-
tives,” New Generation cooperatives, ac- Generation cooperative can entail sub- tive might establish two classes of com-
cording to Patrie, are distinguished by stantial expenditures. A cooperative that mon stock, Class A and Class B. Class A
the following features: intends to process raw agricultural prod- common stock is deemed to be member-
· Equity investment is required prior ucts into value-added consumer prod- ship stock. Each qualified person who
to establishing delivery rights. ucts will likely face competition from desires to be a cooperative member is
· Producer agreements between the businesses already established in the required to purchase one share of Class A
cooperative and the producer link de- contemplated market. For this reason, stock. No delivery rights are attached to
livery of products to equity units pur- engaging the services of consultants for Class A stock, however. Instead, delivery
chased. Total delivery rights make the preparation of a feasibility study is rights are attached to Class B stock.
equal processing capacity for sale. usually necessary. This study and the Attaching delivery rights to stock, Class
· Purchase of commodities is autho- business plan that emanates from it add B stock in this example, is commonly
rized by the cooperative for undeliv- to the organizational costs that are ordi- accomplished by the cooperative’s articles
ered contracts. narily incident to the formation of a coop- or bylaws, often supplemented by a “mem-
·The transferability of equity feature erative. The organizational budget for bers’ agreement,” specifying that each
means that shares can be sold to other the Dakota Growers Pasta Company, for share of the stock entitles its holder to
eligible producers at prices agreed to example, was $300,000.14 deliver to the cooperative a specified
by the buyers and sellers. Equity shares The more substantial costs, however, amount of commodity to the cooperative
appreciate or depreciate in value based are the capital expenditures required for which will generate a large sum for the
on the earnings potential they repre- the construction, purchase, or lease of a cooperative, particularly if the number of
sent. Although the cooperative’s board processing facility. Again using Dakota members is effectively limited by a mini-
of directors doesn’t set prices, they Growers as an example, its organizers mum Class B “delivery rights” stock pur-
must approve all stock transfers so contemplated a state-of-the-art facility,15 chase requirement.
that shares do not get into the hands of and they set an equity goal for the capi- The purchase price of Class B “delivery
ineligible persons. talization of its pasta plant at $12.5 mil- rights” stock, on the other hand, is usu-
·High levels of cash patronage refunds lion.16 ally set at a sum large enough so that sale
are issued annually to the producer. The feature of requiring an equity in- of a pre-established amount of stock will
Since equity is achieved in advance of vestment prior to establishing delivery generate at least the minimum amount
business startup, a majority of the net rights is distinctive because traditional needed to satisfy the early capital needs
can be returned annually to producers farmer supply and marketing coopera- of the cooperative. In other words, “[t]he
in cash.13 tives usually do not sell the right to initial price of each share is generally
patronize the cooperative in units. A tra- determined by taking the total amount of
An examination of each of these distin- ditional marketing cooperative, for ex- capital the cooperative wishes to raise for
guishing features as identified by Patrie ample, typically permits a farmer to start up and dividing it by the number of
reveals how New Generation farmer co- market his agricultural products through units of farm product that can be ab-
operatives are typically organized and the cooperative for the payment of a sorbed by the processing facility.”18 Un-
operated. membership fee or the acquisition of one der this formula, it is the sale of Class B
share of membership stock. In most in- stock that provides the bulk of the mem-
Equity investment stances, the amount of this fee or the ber-contributed equity.19 Class B stock or
Though most cooperatives rely on mem- price of the share of membership stock is its equivalent, therefore, is sometimes
ber equity for most of their capital needs, nominal. Once a farmer pays the fee or denominated by the cooperative as “eq-
the distinctive feature identified by buys the share, he or she can market uity stock.”
Patrie–the requirement of an equity in- through the cooperative any amount of By requiring an equity investment be-
vestment prior to establishing delivery his or her products without making any fore granting delivery rights, the goal of
rights–is largely driven by the substan- other “up-front” investment. While other the cooperative is to raise the large
tial costs of establishing a value-added investments may be made, they usually amount of capital that is usually re-
cooperative. Specifically, the primary pur- will take the form of retained patronage quired to begin operation.20 If enough
pose of requiring prospective members to refunds or per-unit retains.17 farmers with sufficient financial re-
make an equity investment before grant- New Generation cooperatives, on the sources to make the investment believe
ing them delivery rights is to provide the other hand, essentially sell the right to that the investment will be sound, the
cooperative with the necessary member- patronize the cooperative in units at a goal is usually met. At the same time, the
ship “start-up” capital early in the orga- price that represents an “up-front” in- cooperative seeks to ensure that at least
nizational process. This requirement also vestment in the cooperative. These units some, if not most, of the capitalization of
serves the secondary purpose of provid- are “delivery rights.” Since delivery rights the cooperative is provided by those who
ing a measure of prospective member are usually measured in terms of units of Continued on p. 6

MAY 2000 AGRICULTURAL LAW UPDATE 5
COOPS/Continued from page 5 a traditional marketing cooperative to The ability of New Generation coop-
will use the cooperative. This goal is a obligate its members to patronize the erative equity stock values to appreciate
reflection of the “user-financing” coop- cooperative, the agreements used by New or depreciate is illustrated by the experi-
erative principle. Moreover, this method Generation cooperatives typically bind ence of several of these cooperatives.
aligns investment with anticipated pa- the members to a greater degree than is Equity shares in the Dakota Growers
tronage. Once the cooperative begins the case with traditional marketing co- Pasta Company were initially offered at
operation it is “an example of a very strict operatives, an attribute that largely flows $3.85 each. By the end of 1998 they were
base capital plan in that a member’s from the delivery rights feature. selling for $10.00 a share. When adjusted
patronage and a member’s equity are for an earlier three-for-two stock split,
always equal.”21 Purchase of commodities not that price is equivalent to $15.00 per
delivered share.28 On the other hand, shares in
Producer agreements Patrie also notes as a distinguishing Snowflake, a Minnesota cooperative, be-
The next item in Patrie’s listing of the attribute of New Generation coopera- came worthless when the cooperative
distinguishing features of New Genera- tives their right to purchase commodities closed in 1998, two years after it raised
tion cooperatives is that “[p]roducer agree- “for undelivered contracts.”24 This at- $500,000 from sixty-eight farmer mem-
ments between the cooperative and the tribute reflects the fact that the produc- bers.29 Less drastic reductions in equity
producer link delivery of products to eq- ers or members agreements usually pro- stock prices occurred for several other
uity units purchased.”22 In other words, vide that the cooperative has the option New Generation cooperatives in the Up-
the linkage between the right to deliver of purchasing any amount of the com- per Midwest.30
and equity is created by agreements be- modity that a member fails to deliver The transferability of equity stock es-
tween the members and the cooperative. under the agreement. The member who sentially gives members a third economic
These agreements, however, typically do fails to make the delivery is responsible benefit, though it may only be a potential
more than create this linkage. Perhaps for reimbursing the cooperative for its benefit. The first economic benefit is the
most significant, they also tie the right to purchases on behalf of the defaulting price paid for the commodity on delivery.
deliver the product to the obligation to member. The second is the right to receive a pa-
deliver the product according to a sched- Producer or member agreements also tronage refund. The third benefit, the
ule established by the cooperative. In commonly provide that if a member is benefit created by the transferability of
addition, they may also specify the price unable to deliver the commodity because equity stock, is the possibility of realizing
or the formula for calculating the price of a crop failure, the member is obligated a gain through the transfer of appreci-
that the member will receive for the to purchase a sufficient amount of the ated equity stock.
product when it is delivered. commodity to satisfy his or her delivery The transferability of equity also offers
Delivery rights are used by the coop- obligation. The intent of such provisions the potential for benefits to the coopera-
erative to “line up,” on an annual basis, a is to limit the burden on the cooperative tive. Specifically, the potential or the
sufficient amount of the commodity that that would result if the cooperative had reality of appreciation in the value of
the cooperative processes. The coopera- to make the substitution arrangements.25 equity stock “may provide an incentive
tive also needs to ensure that the com- for producers to not only become involved
modity will be available when it is needed. Transferability of equity in the initial formation of the coopera-
Accordingly, New Generation coopera- As his fourth distinguishing feature of tive, but to also further the success of the
tives usually require their members to New Generation cooperatives, Patrie lists cooperative beyond the initial expecta-
sign uniform “producer agreements” or the transferability of equity. “Equity,” in tions.”31
“members’ agreements” that obligate each this context, means the stock to which This feature is a distinguishing one
member to deliver the commodity cov- delivery rights are attached. In this re- because the stock issued by traditional
ered by their respective shares of “deliv- gard, New Generation cooperatives typi- farmer supply and marketing coopera-
ery rights” stock. cally permit shares of their equity stock tives either is not transferable or, if it is
Most New Generation cooperatives do to be transferred to other eligible farm- transferable, no market exists for it be-
not own, lease, or otherwise have access ers, subject to the approval of the board cause it is readily available for purchase
to sufficient space to store the total of directors. As Patrie notes, the prereq- at its par value from the cooperative.
amount of the commodity harvested by uisite of the board’s approval is intended Therefore, the economic benefits flowing
its members. Therefore, these uniform to prevent equity stock from being held from such cooperatives do not include
producer or member agreements typi- by persons not eligible for cooperative gains from the appreciation in stock
cally provide that deliveries are to be membership.26 Eligibility is ordinarily value.32
made in accordance with a delivery sched- limited to producers of the product pro-
ule established by the cooperative. Usu- cessed by the cooperative. High levels of cash patronage
ally these schedules require each mem- The board does not set the transfer refunds
ber to make delivery in one or more price. Instead, the price is set by the The final distinguishing feature of New
installments. parties to the transaction, and the value Generation cooperatives listed by Patrie
The producer or member agreements of the stock is likely to reflect its earning is the ability of these cooperatives to pay
of many New Generation cooperatives potential. As to this value, high levels of cash patronage refunds.
provide that the members will receive a [t]he share prices during the operation This ability, according to Patrie, is at-
payment upon delivery of the commodity phase reflect the returns members ex- tributable to the fact that New Genera-
to the cooperative. This payment is often pect to receive from the cooperative tion cooperatives typically have estab-
based on a percentage of the current local over time. In valuing the returns, mem- lished their needed equity in advance of
market price for the commodity, although bers can be expected to examine the beginning operations through the sale of
some cooperatives pay the current mar- difference between the cost of produc- equity stock.33 Therefore, because most
ket price at the time of the delivery.23 ing the farm product and the revenue of their equity needs have been met, they
These agreements are usually for a generated from processing this prod- do not have to retain significant portions
term of years. Accordingly, they repre- uct and selling it to a further down- of the patronage refunds paid to the
sent long-term commitments by both stream market.27 members to build equity. This contrasts
parties. While it is not unprecedented for with the practices of most traditional

6 AGRICULTURAL LAW UPDATE MAY 2000
14
farmer supply and marketing coopera- Id. at 3. tain. The SEC has declined to issue a “no action” letter
15
tives, which rely on retained patronage Kim Zueli et al., Dakota Growers Pasta Company pertaining to the issuance of delivery rights stock by at
refunds as their source of member eq- and the City of Carrington, North Dakota: A Case Study least one New Generation cooperative, American Crystal
uity. 14 (Mar. 1998) (unpublished manuscript, on file with the Sugar. See Kathy T. Wales, 1994 Report of the LTA
The distinguishing features of New author). Reporting Subcommittee on Capital Formation and Fi-
16
Generation cooperatives offered by Patrie Patrie, supra note 10, at 4. nancial Structures of Cooperatives Including Use of Writ-
17
are not common to all New Generation Retained patronage refunds are returns to a ten Notices of Allocation (Nov. 15, 1994) at 12-13 (unpub-
cooperatives. Nevertheless, these fea- cooperative’s members from the cooperative’s net earn- lished manuscript, copy on file with the author).
33
ings from business done with or for the cooperative’s Patrie, supra note 10, at 2.
tures illustrate the basic architecture of 34
members that are added to the members’ equity in the Egerstrom, supra note 8, at 220 (quoting a Minne-
a New Generation cooperative. Over time,
cooperative by the cooperative. Per-unit retains are ad- sota cooperative general manager and president).
this architecture may change as New ditions to member equity in a cooperative based on the
Generation cooperatives learn from their volume or value of business done with the cooperative by
experiences and respond to external each member. For example, a corn marketing coopera- PROGRESS PIG/Continued from page 5
changes. tive might deduct 10 cents per bushel from corn marketings within two years, or restructure the op-
For many observers of the agricultural as per-unit retain additions to capital. Unlike patronage eration as a sole proprietorship or gen-
economy, New Generation cooperatives refunds, per-unit retains are not dependent on the eral partnership. If Zahn could prove
offer considerable promise. Some New cooperative’s net earnings. that he had previously met the daily
Generation cooperative advocates see the 18 labor and management requirement and
Harris et al., supra note 7, at 17.
19
New Generation cooperative movement “In general, the [New Generation cooperatives] therefore qualified for family farm corpo-
as evidence that “‘[f]armers are getting have followed recommendations to raise between 30 and ration status, Zahn might now qualify for
up off the ground’” and “‘are moving up 50 percent of their total capital requirements through the the fifty-year requalification provision
the food chain so they aren’t totally de- sale of delivery right shares. Remaining capital require- under article 8 §12 so long as his family
pendent on commodity prices for their ments are met through debt or the issue of preferred retained a majority interest in the corpo-
income.’”34 If that vision is correct and if shares.” Id. at 16. ration.
20
its implicit promise of an improved agri- The advantages of this “up-front” approach to The district court judge noted that
cultural economy is realized, then attor- raising capital are several: daily labor requirements would vary de-
neys who assist farmers in developing The generation of significant up-front equity contribu- pending on whether the farm were a crop
tions from members facilitates the involvement of [New
and operating New Generation coopera- operation or a livestock operation. Live-
Generation cooperatives] in capital-intensive, value-added
tives will have made a valuable contribu- stock would require daily care, while
processing activities. Up-front equity provides a signifi-
tion to rural America. cant equity base that allows the weathering of business crop operations might require physical
cycles. The acquisition of debt financing is also made labor only seasonally (e.g., at planting or
1
For example, if a member did 10 percent of the easier because banks are given a solid indication of harvesting). This issue was not addressed
business done with the cooperative, that member’s pa- producers’ commitment for the project. by the Supreme Court. However, future
tronage refund would be 10 percent of the net earnings Id. at 19. litigation seems inevitable regarding
available for distribution. Subchapter T of the Internal 21
Id. at 16. A “base capital plan” is an equity redemp- whether a non-resident corporate owner
Revenue Code, I.R.C. §§ 1381-1388, permits coopera- tion plan that seeks to keep each member’s equity in the has provided sufficient daily physical
tives to achieve single-taxation on their taxable income at cooperative in proportion with his or her respective pa- labor to qualify for family farm corpora-
either the cooperative or patron level. tronage of the cooperative. tion status, particularly, for example,
2
See, e.g., Dan Campbell, Temperature Rising: Co- 22
Patrie, supra note 10, at 2. where an older farmer is phasing out his
op Fever is Still Sizzling Across North Dakota; But Will the 23
See Randall E. Torgerson et al., Evolution of Coop- or her physical labor contribution to the
First Failure Cause It To Dissipate?, Farmer Coopera- erative Thought, Theory, and Purpose, 13 J. Coopera- operation.
tives, Aug. 1995, at 12 [hereinafter Campbell]. tives 1, 13 (1998) (noting that “a few new generation
3
Des Keller & Jim Patrico, The Boom in Value-Added Progress Pig II was an important vic-
cooperatives have recently learned expensive lessons by tory for family farm proponents. The
Co-ops, Progressive Farmer, Sept. 1998, at 1. paying market prices to members on delivery to the pool,
4
Campbell, supra note 2, at 12. lawsuit was originally filed in 1993, and
5
only to find that they could not afford to pay these prices plaintiffs (who include leaders of Ne-
John Reilly & Bruce Reynold, Furrow to Farrow: New based on income received from product sales”).
Hog Technology Helps Local Cooperatives Add Value to 24
braska populist farm organizations) won
Patrie, supra note 10, at 2. an important procedural victory when
Corn, Farmer Cooperatives, Apr. 1994, at 4. 25
These provisions can pose difficulties for a coopera-
6
See, e.g., Dan Looker, Unite for Success: Value- the Nebraska Supreme Court ruled in
tive that seeks to qualify as tax-exempt under I.R.C. § 521
added Co-ops Help Families Capture Greater Margin in because of the limitations this section imposes on the Hall v. Progress Pig Inc., 254 Neb. 150,
the Food Chain, Successful Farming (Special Issue 1999) marketing of products of non-producers. Products that 575 N.W.2d 369 (1998) (Progress Pig I)
at 16. are purchased after harvest do not constitute “producer that the farmer-plaintiffs could enforce
7
Andrea Harris et al., New Generation Cooperatives products.” See generally John E. Noakes, Taxation of article 8 §12 under its citizen suit provi-
and Cooperative Theory, 11 J. of Cooperatives 15, 15 Agricultural Cooperatives in 14 Neil E. Harl, Agricultural sion even after the county attorney had
(1996) [hereinafter Harris et al.]. Law § 135.02 (1998). declined to bring suit. Nebraska Attor-
8
See generally Lee Egerstrom, Make No Small Plans: 26
Patrie, supra note 10, at 2. ney General Stenberg earlier disquali-
A Cooperative Revival for Rural America 217-43 (1994) 27
Harris et al., supra note 7, at 17. fied his office in the case as he had
[hereinafter Egerstrom].. 28
Lon Tonneson, Are We Rich Yet? Farmers Ride the prepared incorporation documents for
9
A directory of New Generation cooperatives is avail- Value-Added Investment “Roller Coaster,” The Farmer, Progress Pig Inc. while in private prac-
able at the Web site of the Illinois Institute for Rural Affairs, Jan. 1999, at 8. tice prior to his election.
http://www.iira.org. 29
Id. at 9.
10 Progress Pig II has important implica-
William Patrie, Creating ‘Co-op Fever’: A Rural 30
Id. at 9-11.
Developer’s Guide To Forming Cooperatives (USDA, tions particularly for swine production in
31
Harris et al., supra note 7, at 20. Nebraska, where family farm corporate
Rural Bus.-Coop. Serv., Serv. Rept. No. 54, July 1998) at 32
Membership stock in traditional supply and market-
5 [hereinafter Patrie]. owners providing management and non-
11
ing cooperatives generally has not been considered to be family employees providing the physical
William Patrie, Fever Pitch: A First-Hand Report a “security” under federal securities laws. See, e.g., Jon
from the Man Who Helped Spark Co-op Fever in the labor is common.
K. Lauck & Edward S. Adams, Farmer Cooperatives and
Northern Plains, Rural Cooperatives, July-Aug. 1998, at —J. David Aiken, UNL Water &
the Federal Securities Laws: The Case for Non-Applica-
18. Agricultural Law Specialist
12
tion, 45 S.D. L. Rev. 62 (2000). Whether the same will
See Patrie, supra note 10, at 1-2. hold for stock in New Generation cooperatives is uncer-
13
Id. at 2.

MAY 2000 AGRICULTURAL LAW UPDATE 7