AgDM newsletter article, July 1998

The farmer networking law – Chapter 10 of the Iowa code

by Larry Kallem, Executive Director, Iowa Institute for Cooperatives, 515.292.2667, iacoops@netins.net

Purpose

The Iowa Legislature passed a law in 1996, now known in the Code of Iowa as Chapter 501, which created a new type of cooperative.  It has been generally accepted as a very positive advancement, one that is now resulting in some healthy economic activity among farmers as they seek to capture more value from the commodities they produce.

There has been a growing recognition of the need to provide farmers with additional choices of organizational structure for livestock production.

As experience with this new law grows and as the trends which prompted it become clear to more people, there has been a growing recognition of the need to provide farmers with additional choices of organizational structures for livestock production which are not prohibited by the Iowa Corporate Farming Law.  Sometimes there are tax circumstances or other considerations which would make one organizational structure preferable, and therefore more feasible, than another.

New choices

On April 16, Governor Branstad signed HF 2335 creating a new chapter in the Code of Iowa, Chapter 10, which permits the use of two new livestock networking structures for farmers (four, if you count the returning participation in livestock production of the traditional farm supply and marketing co-op structure).

1.   Networking farmers corporation – The choice of a subchapter S corporation or a regular C corporation is made by the group of farmers as they file for a particular status with the IRS.  They will no longer be constrained by the Corporate Farming Law limit of 25 people in a company and participation in only one entity (assuming the person stays below the ownership percentage thresholds in this law which are discussed below).  It also allows farmer cooperatives, both local and regional, to participate with the group in a minority position (30% or less, but only once if their ownership exceeds 15 percent or 25 percent, depending upon the number of participants).

2.   Networking farmers limited liability company – This section has the same provisions as the corporation section above, except the structure being used is a limited liability company.

3.   Farmers cooperative association – These are, as earlier described, the traditional Chapter 499 co-ops or Chapter 490 companies operating on a cooperative basis.  There are still no limits on the number of these a person can join.  As always, a person can buy only one share and have only one vote.

4.   Farmers cooperative limited liability company – This section allows local cooperatives, or locals together with regional cooperatives, to join together in a new entity for livestock and poultry production.  However, regional cooperatives are limited to a 30% share and cannot participate except in conjunction with locals.  There are additional limitations if the regional is a lender to any of the other participants.  If a regional (or a co-op other than a Chapter 499 or 490) is participating, the project cannot involve hog production.  No crop production can take place on the land except on a cash rent basis, but the company may contract for the production on it.  The regionals are not subject to the tests for having the appropriate membership content.

What the law does

Below is a discussion of what the law allows these new entities to do and how it limits their use.

• These new choices enable farmers to jointly own land for livestock production, but not for cropping or foragepurposes.  At least 75 percent of the farmer networking entity’s gross receipts must be from the sale of livestock or livestock products.  (“Livestock” is defined as including poultry.)
• None of the entities can own more than 640 acres of land.
• At least 51 percent of the owners of the networking entities must be individual farmers (family farm entities such as family farm corporations and landlords are not included in this).  Individual farmers, family farm entities, and crop-share landlords who once were farmers, or their heirs, must make up at least 70 percent of the ownership.  The last 30 percent can be made up of any persons or entities that are legally allowed to own farmland including crop-share landlords who presumably bought the land for investment purposes, cash-rent landlords, other non-farm individuals, and farmer cooperatives.  Contrary to statements made by some of the new law’s opponents, however, the evil corporations who are being held at bay by the state’s Corporate Farming Law cannot participate in these either.
• A person or entity owning more than a 25 percent interest in one networking farmers company cannot participate in any others.  If more than six persons are involved, none of them can own more than 15 percent of the entity and still participate in others.  Individuals, so long as they stay under the maximum percentage thresholds, are not limited in the total accumulated interests they can have in these entities.  Cooperatives, however, can own no more than an accumulated total of 640 acres.
• Farmers cooperative associations (the traditional local Iowa co-op style), defined as Chapter 499 co-ops or Chapter 490 companies operating on a cooperative basis, are allowed once again to buy land for livestock and poultry production purposes if their membership meets tests similar to those described above for the networking entities.  All crop-share landlords in a co-op, however, regardless of why they have the land, are included in the first 70 percent.  Cooperatives are not allowed to produce crops on land they own for livestock and poultry production (as the networking farmers companies can do).  They can cash-rent the land to someone else.  However, the co-op may contract to buy crop production off the land.  The first time a farmers cooperative association plans to own an interest in agricultural land for purposes of livestock production, its board of directors must: a) pass a resolution stating that fact,
  b) tell the members what they’re planning, and
  c) allow any members who disagree with that to get their money out of the co-op under the same terms and procedures that would apply if the co-op were involved in a merger (10 equal payments over a period of 15 years).  There are a few cooperatives in Iowa who have for years owned beef cattle and poultry production facilities with the apparent support of their communities.  Now others can do it too, if they’re willing to jump through the hoops.
• Cooperatives may also participate with individual farmers in networking farmer entities, and they can get together with other cooperatives in a limited liability company.  Regional cooperatives (or any co-op not organized under Chapter 499 or 490) may participate in a minority position (up to 30%) in any of these entities if the project doesn’t involve hog production. In a farmers cooperative limited liability company there are additional limitations on the regional if it’s a lender to another co-op participant.  Local cooperatives may participate in a minority position (up to 30%) in a farmer's networking entity (including hog production projects) and they can own an unrestricted interest in a farmers cooperative limited liability company. Both regional and local cooperatives are limited to a total ownership of 640 acres of land used in livestock production.
• The new law has extensive reporting requirements in it for all of the entities.  This is done in order to assure that the limitations are honored in practice and to provide a basis for gathering statistics on the activity generated.

Chapter 501 is still an attractive option

A Chapter 501 cooperative requires that at least 60 percent of its ownership be farmers (including family farm entities), and that at least 75 percent be farmers, crop-share landlords (no distinction made between former farmers, their heirs, and investor landlords), and employees of the co-op.  The remaining 25 percent can be anybody else, including local and/or regional cooperative.  Their use for hog production is not restricted and cooperatives don’t have to prove they have certain membership percentages.

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