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, firstname.lastname@example.org
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.
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.
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
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.
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
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.
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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