Health & Human Services

Agribigness

Midwestern states are experiencing a round of legal challenges to longstanding laws that ban corporate ownership of farms.
by | September 2005

In a valley adjoining Nebraska's South Loup River lies Jim Jones' ranch. He has 450 head of cattle on 4,400 acres. He grows corn and alfalfa for feed. His son keeps hogs on the ranch as well. The soil here is well suited to the tall grasses on which livestock graze. In addition to tending his ranch, Jones served a dozen years in the state legislature, representing a largely rural district until this past January.

In that role, Jones sponsored three bills aimed at modifying Nebraska's anti-corporate-farming law, known as Initiative 300. Nebraska is one of nine states--along with Iowa, Kansas, Minnesota, Missouri, North Dakota, Oklahoma, South Dakota and Wisconsin--that prohibit corporate ownership of farms. Most of the laws were passed a quarter-century ago in response to concerns about large agribusiness enterprises gobbling up small farms.

Given that Jones himself is a family farmer, his crusade against I- 300 may seem ironic. But, he notes, the law also prevents incorporation by non-family members, which makes it nearly impossible for young farmers to get started. "We can't tie the hands of the young people," he says. "We're losing hundreds every year."

In its 2004 session, the legislature considered a bill that would have formed a committee to examine Initiative 300 and recommend possible changes. Despite support from then-Governor Mike Johanns, who is now U.S. Secretary of Agriculture, the bill never got out of committee. Opponents claimed it was an attempt to gut Initiative 300. "The bill, as written, was stacked against Initiative 300," says Jon Bailey of the Center for Rural Affairs, a group that advocates on behalf of small businesses and family farms. "We thought the task force would have already had their minds made up." With his legislative efforts ultimately unsuccessful, Jones, along with five other plaintiffs, decided to sue.

Although the reasons for opposing anti-corporate-farming laws vary, there has been a notable flurry of legal activity in many Midwestern states in the past couple of years against longstanding statutes. The recent attack is the result of a new strategy that has met with some initial success: challenging that such laws violate the commerce clause of the Constitution, which restricts a single state's interference with interstate actvity.

LEGAL PIGGYBACKING

Since 1982, when Nebraskans voted the Initiative 300 farming law into the state constitution, it has been challenged in court four times, including 1986 when the plaintiffs claimed it violated the equal protection clause of the Constitution. The U.S. Supreme Court, however, upheld the law.

Jones and the other parties to the current lawsuit are pinning their hopes on a 2003 ruling by the 8th Circuit Court that declared South Dakota's anti-corporate-farming law unconstitutional because it violated the commerce clause. The court has jurisdiction over six of the nine states with such legislation, including Nebraska.

Voters passed South Dakota's law, known as Amendment E, in 1998 as an amendment to the state constitution. Although the measure received 59 percent of the vote, it was immediately challenged in court and was never enforced.

In the opinion of the 8th Circuit, Amendment E discriminated against out-of-state firms, violating the commerce clause. The ruling was based in part on the intent of its proponents. "Because Amendment E has a discriminatory purpose, and because the Defendants have not satisfied their burden of showing that non-discriminatory alternatives would not advance Amendment E's interests, we must conclude that Amendment E violates the dormant Commerce Clause." In May 2004, the U.S. Supreme Court declined to hear an appeal of the case.

The 8th Circuit Court's ruling came 30 years after South Dakota passed its first anti-corporate-farming law, the 1974 Family Farm Act. Amendment E was put up as a referendum after an interpretation of the original statute by the state attorney general that would have allowed increased corporate ownership of livestock. Supporters of the Amendment also wanted an anti-corporate-farming law in the state constitution so the legislature could not weaken the law.

"We support the 1974 Family Farm Act in its current form," says Michael Held, the administrative director of the South Dakota Farm Bureau, which was one of the plaintiffs in the South Dakota case. "We had some members that would have had to drastically change the way they did business or go out of business (as a result of Amendment E)." Held claims Amendment E's attempts to keep out corporate farms would have impacted the ability of small farmers to engage in joint ventures, such as sharing a combine.

Not all farmers see it the Farm Bureau's way. Charlie Johnson, who worked with the group Dakota Rural Action in getting Amendment E passed, calls their argument a "myth." "There were plenty of ways for farmers to come together," Johnson says. He notes that farmers could still form general partnerships or operate as a family corporation.

The arguments that Jones has been making in Nebraska, however, echo those of the South Dakota Farm Bureau. He describes a scenario in which an older farmer wants to pass down his farm to a younger farmer. Unless the two farmers are related, Jones maintains, this can be impossible. He says the two farmers need to incorporate to make sure the younger farmer can take over the farm should something happen to the older farmer.

Supporters of Nebraska's Initiative 300 dispute Jones' assessment, pointing out that if the older farmer and the younger farmer form a limited partnership, and the older farmer gradually sells his farm to the younger farmer, the transaction can be completed.

FERTILE CONTRACTING GROUND

Across the Missouri River, Iowa is taking on a more traditional foe of anti-corporate-farming legislation: the large-scale hog processor. At issue is a state law forbidding processors of livestock from operating feedlots in Iowa or contracting out the feeding of their pigs to Iowa farmers.

In past generations, farmers traditionally raised their crops or livestock and then sold them at auction or market. This is changing. As of 2001, 36 percent of the value of crop and livestock production in the United States occurred under contract. That is, the owner of crops or livestock pays a farmer to raise corn or cows on its behalf. Contracts vary in the details, usually as to how much leeway the farmer has in the care and feeding of the animals or crops. Contracting has its pluses and minuses. On the one hand, the farmer is assured a set price for his goods. On the other hand, it's possible the farmer would have made more had he sold them in the marketplace. Large processors consider Iowa in particular to be fertile contracting ground because the low price of corn keeps feed costs down.

One of these processors is Smithfield Foods. Smithfield, headquartered in Virginia, seemingly represents the type of enterprise that anti-corporate-farming laws try to keep out. Its sales in 2004 exceeded $9 billion, and the company processes just over one-quarter of the nation's hogs and 6 percent of its cattle. In 1999, Smithfield purchased Murphy Farms of Iowa. Because Smithfield has processing capabilities, it was unlawful for the corporation to own Murphy's livestock. So, a new company was formed that owned Murphy's swine.

As a result of this move, the Iowa Secretary of State sued, arguing Smithfield had violated Iowa law. In 2000, an Iowa court ruled in favor of Smithfield. In 2002, the Iowa legislature amended its anti- corporate-farming statute. That prompted Smithfield to file suit, arguing that the new law violated the commerce clause. "We don't think it's constitutional for a state to interfere in commerce," says Dennis Treacy, Smithfield's vice president of environmental, community and governmental affairs. "Iowa is important not only to Smithfield but to others. We'd like the free market to control farming."

Smithfield Foods won in 2003. As in the South Dakota case, the court agreed that Iowa's law violated the dormant commerce clause. In the meantime, however, the Iowa legislature again modified its law. In May 2004, the 8th Circuit remanded the case back to the trial court in light of the amendment to the statute. It is scheduled for trial in 2006.

PLAYING IT BY EAR

Recent decisions by the 8th Circuit Court have not all gone against anti-corporate-farming legislation, though. Not surprisingly, that is causing some confusion. In 2001, for example, the court ruled that a Missouri statute requiring disclosure of prices at a livestock auction did not violate the interstate commerce clause. As a result, supporters of anti-corporate-farming legislation are questioning what the court is doing. Neither the South Dakota nor Iowa decisions referenced the Missouri case. "The 8th Circuit seemingly is denying its own precedent, says Neil Harl, an agricultural law professor at Iowa State University. "Even though they are different justices, you expect a modicum of continuity."

As the legal questions surrounding anti-corporate-farming laws continue to swirl, it is worth examining whether these laws are effective and how corporate farming impacts communities. Between 1978 (around the time many anti-corporate-farming laws were passed) and 1997, the percentage of farm sales by non-family-owned corporate farms with 10 or more shareholders dropped from 3 percent to 1.9 percent, according to data from the U.S. Department of Agriculture. This would seem to suggest success. But not all anti-corporate-farming laws are created equal. Nebraska's law is viewed as the strictest. As Iowa's situation demonstrates, many state's laws aren't as tough. And in Missouri, the law exempts three of the state's poorest counties in hopes of attracting corporate farming to grow the economy.

Opponents of corporate farm ownership point to studies that show the size of farms in a community affects its quality of life. Small farms are more likely to return their profits to the community in which they are located, which is better for the local economy. These studies relate only to the size of the farms, not necessarily their ownership, although corporate farms tend to be large farms.

The issue of corporate farming is more than just court rulings about the dormant commerce clause; it is farmers on both sides of the issue who feel their way of life is threatened. Future court decisions will have an impact on the agricultural landscape of the rural Midwest for a long time to come. "It's at least an open question as to how the court will rule," Bailey says. "I've practiced law enough years to give up predicting what a court is going to do."

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Ben Delman  |  Contributor

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