Anti-Corporate Farming Laws
as Environmental Policy

Nancy L. Thompson, Consultant
Center for Rural Affairs and South Dakota Family Farm Coalition

State adoption of laws prohibiting corporations from engaging in farming began over twenty years ago. North Dakota was the first state to adopt a law restricting the ownership of farmland by corporations. Eight other states (Iowa, Kansas, Minnesota, Missouri, Nebraska, Oklahoma, South Dakota, and Wisconsin) have similar laws restricting the involvement of corporations and other limited liability entities in agriculture. Most of these laws provide some exemption for "family farm" entities, although the definition of a family farm differs considerably from state to state. The laws also often have many other exemptions, with one common exemption being the "authorized" farm corporation, usually defined as a corporation with a limited number of shareholders, some percentage of which are required to be "actively engaged" in agriculture. In some states, these numerous exemptions have made the laws weak and relatively ineffective at controlling intrusion by corporate agriculture. All of the laws, but one, are found in statute. The one exception is the state of Nebraska, where the anti-corporate farming restrictions are part of the constitution (Article XII, Section 8). In November of this year South Dakota will hopefully join Nebraska in having its anti-corporate farming law in the state constitution. The focus of this paper will be on Nebraska and South Dakota and their unique efforts at prohibiting the involvement by limited liability entities in farming and ranching.

For nearly a decade in the late 1970s and early 1980s, Nebraskans tried unsuccessfully to get the state's legislature to adopt an "anti-corporate farming" statute. Eight other states in the region had already enacted such restrictions and Nebraskans were feeling the significant impacts of corporate involvement in land ownership and livestock production. By 1979, approximately 20% of the state's sow herd was in corporate operations and one corporation, National Farms, Inc., was planning to increase its annual marketings by 365,000 head (a 6% share of all production by Nebraska's pork producers). In addition, an estimated 1.5 million acres were owned by "non-family farm corporations", including large land holdings by Prudential and Northwestern Mutual Life Insurance Company and much of the corporate land ownership was in the state's fragile Sandhills where irrigated crop production was being developed. Little about corporate farming was proving beneficial to the state's farmers and rural communities.

Corporations and other limited liability business organizations were created to encourage the accumulation of capital to allow for industrial scale enterprises. These structures are granted preferential treatment, including limited liability, and in the case of corporations, certain tax advantages. Limited liability reduces risk for investors who do not directly take part in management and labor functions, and corporate tax rates allow owners to avoid the progressive affect of personal income taxes on large farm profits. This helps corporations attract investment dollars from tax conscious high-income people, not inclined to labor on a farm. Also inherent to the corporate structure is the separation of the economic functions of ownership, management, and labor among different levels of people, leading to a farm structure where farm workers rarely have an opportunity to enjoy the benefits of ownership.

When the Nebraska legislature failed to put restrictions on corporate farming, citizens took matters into their own hands. In 1982, they collected enough signatures on an initiative petition to place on the ballot a proposed constitutional amendment banning "non-family farm corporations and syndicates" from owning farmland or engaging in farming or ranching. The proposed amendment received over 56% of the vote. The number 300 was the ballot designation given to the proposed amendment by the Secretary of State at the time and the law has been popularly known as Initiative 300 for nearly sixteen years.

In general, Nebraska's law states that corporations cannot own, rent, or have any other interest in farmland, or engage in farming or ranching (the cultivation of land or the ownership, keeping, or feeding of animals) unless it is a family farm corporation, meaning that a majority of the voting stock is held by members of a family related to one another within the fourth degree of kindred (generally 1^st cousins), at least one of whom resides on or is actively engaged in the day-to-day labor and management of the farm or ranch. This definition of a family farm is more restrictive than any other state anti-corporate farming statute since it requires both labor and management on the farm. Nebraska law places similar restrictions on limited partnerships, limited liability companies, and limited liability partnerships. General partnerships are exempt from the restrictions (except when one of the partners is a non-family farm entity) because this form of business structure does not grant limited liability to investors.

The constitutionality of Initiative 300 has been challenged in both state and federal courts and both times the law's legality has been upheld. The first case was Omaha National Bank v. Spire, 389 N.W.2d 269 (1986). The bank argued that since the law restricts the right to hold farmland as a trustee (a right they have under federal law), it violated the federal constitution's guarantee of equal protection and due process and also the supremacy clause (which says state laws cannot conflict with federal law). The Nebraska Supreme Court rejected both arguments. The Court said the federal law regulating national banks already allowed the states to restrict bank activity if they chose to do so. And, since the United States Supreme Court has said many times that states can enact statutes and constitutional amendments if they are "rationally related to a legitimate state interest", I-300 does not violate rights to equal protection or due process.

The Bank had also argued that the nature of the amendment was not the kind to be put into a constitution. In reply, the court said:

The second constitutional challenge was MSM Farms v. Spire, 927 F2d 330 (8^th Cir. 1991). In this federal case the argument was again that I-300 violated the federal constitution's guarantee of equal protection and due process. This time though, the challengers argued that the law wrongly exempted family farm corporations while restricting other types of corporations. I-300 was again upheld by both the District Court and the Court of Appeals, both saying that neither the due process clause nor the equal protection clause was violated. The United States Supreme Court refused to hear an appeal, leaving the Court of Appeals decision standing. Part of the Court of Appeals opinion says:

More recently, the Nebraska Supreme Court has ruled that so-called "non-stock cooperatives" are not exempt from I-300 (Pig Pro v. Moore, No. S-95-1163, 1997) and supporters of I-300 are before the Supreme Court through a private right of action to enforce the law against a non-family farm corporation.

Initiative 300 has been criticized by some for being too restrictive and by others for not keeping all large hog operations out of the state. Both assessments miss the mark. I-300 was only intended to prevent non-family farmers from using a limited liability entity to escape personal liability and from gaining certain tax benefits. It has done that and more. Nebraska's share of the national hog slaughter has increased since I-300 was adopted and, while Nebraska has tragically lost pork producers, it has done a far better job of retaining pork producers than any other leading pork producing state. In addition, Nebraska has a far larger percentage of operations with under 1000 head of hogs and far more of its hog inventory on those smaller farms. In short, smaller, family farms have built and maintained Nebraska's pork industry.

South Dakota has had restrictions on corporate farming since 1974 but, like other states, the multiple exemptions and the definition of a family farm have made the statute relatively impotent. The latest blow to the effectiveness of the state's "Family Farm Act" was a peculiar 1989 Attorney General opinion that said the law did not apply if a hog operation was engaged in less than all three areas of pork production, namely "breeding, farrowing, and raising". This odd interpretation left large integrators such as Murphy Farms and Tyson Foods free to begin contracting for the production of hogs in South Dakota and both companies announced plans to make significant investments in the state. For years, South Dakotans asked the state legislature to place tougher restrictions on large-scale hog operations but they were unsuccessful, just as Nebraskans had been over a decade earlier. As a result, in 1997 citizens collected over 35,000 signatures to put a proposed amendment on the 1998 ballot.

The South Dakota amendment is very similar to Nebraska's I-300, with one major exception. The South Dakota law will exempt land or livestock owned by a cooperative, if a majority of the ownership interests are held by members actively engaged in the day-to-day labor and management of a farm, and the members either purchase livestock or crops from the cooperative, or sell livestock or crops to the cooperative.

Incorporation alone does not change an operation's attitude towards protecting the environment, but since one of the major reasons for incorporating is to attract capital that will lead to expansion, there has been a direct connection between large, corporately owned livestock operations and the extent of damage to the environment. It is incontrovertible that the scale of operations now being developed leads to potentially greater risk to the environment. And, there is striking evidence regarding the linkage between incorporation and a company's attitude towards environmental responsibility. For example, National Farms, one of the corporations grand-fathered in at the time I-300 was adopted, has been sued four times for nuisance by its neighbors. Over $800,000 has been awarded in damages, but of course since it is a corporation, none of the personal assets of the Bass Brothers who own the operation is at risk. This is perhaps one reason why the operation for years didn't try to correct the nuisance problems. In another case, Murphy Farms objected to South Dakota's effort to make corporate owners of livestock liable for environmental damage by declaring that "The reason people use corporate forms of doing business is to avoid liability."

By restricting the existence of limited liability entities in Nebraska and hopefully South Dakota, both states seek to force personal responsibility on producers. In this regard, the anti-corporate farming laws are the first lines in the sand in preventing larger operations from dominating the states' livestock industry. But they haven't and won't stop individual investors from building large livestock operations because they aren't supposed to. Other lines have to be drawn such as better environmental standards and effective zoning laws in each county.

In addition, both public officials and the general public in the two states have to understand that whether or not a large operation violates the state anti-corporate farming law or whether or not it creates an environmental problem, the large operations are not beneficial to them. The operations are a problem not primarily because of the environmental risk they pose, but because of the economic and social damage they do to family farmers and rural communities. That is why locally controlled land use planning is essential for any state faced with these issues and why both Nebraska and South Dakota are lucky that their counties have wide authority to make land use planning decisions. Land use planning is about allocating values and making choices among alternative development and people have a right to decide that these operations aren't the kind of economic activity they want in their community. It is only when more people recognize that this is not simply an environmental problem will we make progress in all areas of the controversy.

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