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.

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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