Anti-Corporate Farming Laws and Industry Structure:The Case of Cattle Feeding

ANTI-CORPORATE FARMING LAWS AND INDUSTRY STRUCTURE:THE CASE OF CATTLE FEEDING JOHN R. SCHROETER,AZZEDDINE M. AZZAM, AND J. DAVID AIKEN Nine midwestern states have laws that restrict the involvement of publiclyheld corporations in agriculture. Opponents argue that the laws’ direct efforts to regulate ownership structure may have an adverse indirect impact on size structure. Restricting corporate involvement might stifle the emer- gence and growth of efficient, large-scale establishments if corporations have advantages over other organizational forms in meeting capital requirements. Since 1982, Nebraska has had an anticorporate farming law that prohibits corporate ownership of feedlots. We test whether the implementation of the Nebraska law had an impact on the stochastic process governing the evolution of the state’s feedlot size distribution. Key words: cattle feedlots, industry structure, Markov probability model. Nine states—Iowa, Kansas, Minnesota, Mis- Krause’s (1983) judgment that the main in- souri, Nebraska, North Dakota, Oklahoma, tent of these laws is to “preserve and protect South Dakota, and Wisconsin—have laws that the family farm as the basic unit of produc- restrict corporate involvement in agricultural tion”(p. 41). Corporations enjoy the protection production. (Haroldson 1992). The specific of limited liability, and there is a perception provisions of these laws, commonly known as that this gives them a significant advantage “anti-corporate farming laws” (Stayton 1991), over other organizational forms. Some have vary from state to state. Limitations on the size argued that restrictions are needed to provide of corporations’ agricultural landholdings are a “level playing field” among organizational a common provision. In some states, corpo- forms so that family farms operated as individ- rations are virtually prohibited from owning ual proprietorships or partnerships can com- farmland or operating farms. Other states sim- pete on an equal footing (Welsh 1998). ply outlaw corporate involvement in specific This rationale for anticorporate farming agricultural activities (Edmondson and Krause laws emphasizes business organizational form 1978). The laws in all of the nine states include and, to be sure, the direct impact of existing an exemption for the authorized “family farm laws is the regulation of the ownership struc- corporation,” which is defined in various ways ture of agriculture. Whether there is an indirect but generally means an incorporated farm en- impact on the size structure of agriculture is terprise with a limited number of stockholders also a matter of considerable interest, how- at least one of whom resides on or operates ever. Some have argued that influencing the the farm.1 Most observers seem to agree with size structure of agriculture is actually part of the intended purpose of these laws. Ed- mondson and Krause maintain that part of the John R. Schroeter is associate professor, Department of Eco- nomics, Iowa State University; Azzeddine M. Azzam and J. David motivation for the laws is to prevent large busi- Aiken are Professors, Department of Agricultural Economics, nesses from dominating agricultural produc- University of Nebraska-Lincoln. tion. The corporation is targeted by the laws, This project received financial support from the National Re- search Initiative Competitive Grants Program (Markets and Trade not because of any intrinsic faults, but because area), CSREES/USDA, Proposal No. 01-01641. The opinions ex- it is the organizational form typically used by pressed here are those of the authors and do not necessarily reflect large firms. Welsh cites the fear of monop- the views of CSREES or USDA. The authors are grateful for help- ful comments provided by Neil Harl, Darrell Mark, Marty Strange, olization of the food supply by agribusiness Clem Ward, and two anonymous referees. conglomerates as part of the justification for 1 North Dakota’s statute originally applied to all corporations but was brought in line with the other states’ laws by a 1981 amend- anticorporate farming laws. ment that added the “family farm corporation” exemption (Krause Others maintain that “bigness,” per se, is 1983). Harl (2001, section 51.04) details the provisions of the anti- not, and should not be, the target of anticorporate farming laws in these nine states. As Harl notes, a handful of additional states have relatively minor restrictions on corporate corporate farming laws. Following this point involvement in agriculture. of view, any impact on the size distribution Amer. J. Agr. Econ. 88(4) (November 2006): 1000–1014 Copyright 2006 American Agricultural Economics Association Schroeter, Azzam, and Aiken Anti-Corporate Farming Laws 1001 of agricultural producers would merely be a feeding industry.4 Nebraska’s law is a constitu- side effect rather than part of the laws’ le- tional amendment that was adopted as a result gitimate objectives. Opponents of anticorpo- of a public referendum. The designation used rate farming laws often argue, however, that for the referendum, “Initiative 300,” has be- the laws are likely to have indirect effects on come the common name for the constitutional size structure and that these potential effects provision. Our analysis looks for a change in are likely to be adverse. The argument support- the process of feedlot industry structure dy- ing this view draws on a theme that has been namics in Nebraska, pre- and post-Initiative present in the agricultural economics litera- 300. In determining whether such a change ture for decades: achieving economies of scale occurred, we can make use of data from the in agricultural production requires substan- other three major cattle-feeding states. Tests tial investment, and corporations may have will show whether the processes of industry advantages over other organizational forms structure evolution in these “control” states in meeting the capital requirements of large- are similar to that in pre-Initiative 300 Ne- scale, cost-efficient operation. Thus, the result braska. If evidence is found supporting the hy- of a market-wide restriction on corporate in- pothesis of a common process, data from one volvement in agriculture might be a producer or more of the control states can be used to help size distribution that, from the standpoint of establish the baseline for comparison with the cost-efficiency, is too heavily concentrated in experience in post-Initiative 300 Nebraska. the small-firm-size categories.2 The remainder of the article is organized as There have been relatively few economic follows. The next section summarizes the pro- or quantitative analyses of the effects of anti- visions of Nebraska’s Initiative 300. In the fol- corporate farming laws.3 The purpose of this lowing section, we briefly review the political article is to address the question of whether history of Initiative 300 because it is relevant anticorporate farming laws have had an im- to the question of whether the implementation pact on the size distribution of establishments of the law can be treated as the basis for a natu- engaged in one particular type of agricultural ral experiment for testing the impact of corpo- production: cattle feeding. In the next two sec- rate bans. We also consider the mechanism by tions of the article, we argue that this indus- which a state-level corporate ban might con- try provides a convenient natural experiment ceivably affect industrial structure within the for testing the effects of corporate restrictions state. The empirical model section describes on industry structure. Among the nation’s the method we use to test for an impact of four leading cattle-feeding states—Texas, Ne- Initiative 300. Briefly, we adapt techniques braska, Kansas, and Colorado—all have rel- discussed by Lee, Judge, and Zellner (1977) atively similar technologies of cattle feeding; to estimate a Markov probability model of the and all have laws that are regarded as be- dynamics of industry structure. The framework ing “friendly” to the cattle-feeding industry, in allows us to test for a change, between the pre- general; but only one, Nebraska, has an anti- and post-Initiative 300 eras, in the underlying corporate farming law that applies to the cattle stochastic process governing the evolution of the feedlot size distribution. Data and details of the model specification are introduced. Pre- 2 As will become clear later, matters are somewhat more com- sentation of our results follows. A final section plicated when considering the possible market structure impact of provides some concluding observations. a state-level corporate restriction. Q1 3 Johnson et al. (1988) examined the impact of Nebraska’s constitutional amendment restricting corporate farming and found “little Anti-Corporate Farming Laws in the Leading evidence that the amendment has either advanced the causes of its Cattle-Feeding States proponents or created the extreme negative impacts claimed by its opponents” (p. 52). Knoeber (1997) developed an indirect rent- seeking explanation for the existence of these laws: Restricting Nebraska’s anticorporate farming law is gen- corporate entry into farming helps to preserve the coalition that has been effective in lobbying for federal farm programs. Welsh, erally considered to be the most stringent Carpentier, and Hubbell (2001) considered how the restrictiveness in the United States.5 Adopted as the result of existing laws has changed over the years and used state-level data from the U.S. Census of Agriculture to show that strengthening a law does tend to limit the farmland acreage owned by nonfamily corporations. Matthey and Royer (2001) examined the adjustment 4 As of 1 January 2005, these four states accounted for about processes of state-level hog inventories for Nebraska and other 64% of all cattle on feed in the U.S. (USDA, Agricultural Statistics midwestern states and found evidence of a shift in the Nebraska Database). process that coincided with the enactment of the state’s corporate 5 To assess the restrictiveness of anticorporate farming laws, farming restrictions. The present article is an extension of an earlier Welsh, Carpentier, and Hubbell (2001) conducted a survey of article by Azzam and Azzam (1998).

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