In June 2015, the United States Supreme Court decided Horne v. Department of Agriculture, a case regarding the federal government’s authority to fine raisin growers who did not hand over part of their crop to the government. Fortunately, the court held that forcing growers to turn over their raisins was a taking of private property requiring just compensation.
While the “raisin case” received much attention because of the outrageous nature of the government’s actions, it is far from unique. In particular, the United States Department of Agriculture (USDA) uses its power to enforce a number of cartels through industry agreements known as marketing orders. Fruit and vegetable marketing orders allow the federal government to authorize supply restrictions limiting how much of their goods agricultural producers may sell. While these marketing orders should be eliminated, this Issue Brief focuses on arguably the most egregious aspect of marketing orders: the supply restrictions.
What Are Marketing Orders?
The Agricultural Marketing Agreement Act of 1937 authorizes the use of fruit and vegetable marketing orders. These New Deal programs attempt to create stable markets for certain commodities. Marketing orders, among other things, authorize research and promotion of commodities, establish minimum quality standards, and sometimes limit supply through volume controls.
Each individual order is initiated by industry and must be approved by a two-thirds vote of growers. Each order is enforced by the USDA and is binding upon the entire industry in the covered geographic area, regardless of whether an individual agricultural producer has supported it.
In practical terms, an industry uses the power and force of the government to compel everyone affected by the specific order to abide by the order’s legally enforceable regulations. In short, by using government to impose an order, industry members opt for government compulsion rather than private cooperation. Some order provisions, such as attempts to manipulate the market through volume controls, would likely violate federal antitrust law absent government intervention; in those cases, the government has effectively created fruit and vegetable cartels. These controls are supposed to help stabilize prices and match supply with demand. Representatives from industry engage in central planning by restricting supply based on what they have determined to be the proper supply of a commodity in a given time period, as opposed to letting the market dictate supply.
Problems with Volume Controls
The very idea that Americans should be unable to sell goods that they produce is outrageous, as is the idea that the federal government allows certain industry players to restrict supply, allegedly to benefit the entire industry. This is a form of price fixing, and the federal government gives such action its blessing. Consumer welfare and market demand is ignored, usually at the expense of maximizing income for an industry or possibly just the biggest members involved with the marketing order cartel. The regulations might come at the expense of certain competitors in the industry, possible new entrants, and enterprising suppliers who are trying to meet the demands of the market.
The absurdity of the raisin marketing order was not lost on the U.S. Supreme Court. During oral arguments in the “raisin case,” Justice Elena Kagan quipped, “And now, the Ninth Circuit can go and try to figure out whether this marketing order is a taking or it’s just the world’s most outdated law.”
Even Justice Sonia Sotomayor, who held that the government had not actually taken the raisins, explained in her dissent: “The Order may well be an outdated, and by some lights downright silly, regulation. It is also no doubt intrusive.”
The Supreme Court did hold that the raisin supply restrictions amounted to a taking requiring compensation. However, it did recognize that, as a legal matter, a quota system that directly limited production (rather than setting aside some existing production) would be permissible and not require compensation. This may offer hope to those who want to restrict farmers from being able to enjoy the “fruits of their labor.”
However, as a matter of economics and principle, quotas are likely just as problematic as the taking of commodities. Ultimately, farmers are prevented from selling their fruits and vegetables. As the 8-to-1 majority in Horne explained: “A physical taking of raisins and a regulatory limit on production may have the same economic impact on a grower.”
The Number of Marketing Orders, Volume Controls
There are now 28 fruit and vegetable marketing orders. Of these marketing orders, 10 have authorized volume controls and only two have volume controls that are considered active, i.e., in effect. (See Table 1.)
As Table 1 illustrates, volume controls are not that prevalent, so it is clear that such extreme provisions are far from necessary for agricultural producers. However, more volume controls could kick in quickly if those authorized but inactive controls are applied again, or the other orders add volume controls.
This small number may be used as justification for not taking action to address volume controls since they are not prevalent. However, volume controls do exist still and they are an outrageous restriction imposed upon farmers in the particular industry (one need only ask the farmers in the “raisin case”), and more volume controls can still be adopted. Further, since they are not prevalent now, eliminating these controls makes perfect sense; there is little reason not to.
What Congress Should Do
Congress should eliminate marketing orders altogether. At a minimum, Congress should amend the Agricultural Marketing Agreement Act of 1937 to prohibit volume controls of any kind. Further, the appropriations process should be used to deny funds for the implementation of any marketing order that has volume controls.
This should not be a controversial action. Industry participants covered in almost all of the existing marketing orders (26 of the 28) would not be affected today if volume controls were prohibited. Farmers should be able to grow and sell fruits and vegetables without fear that they could be breaking the law as developed by an industry cartel.
Agricultural policy is dominated by policies that divorce farmers and ranchers from the free market and encourage or require them to respond to a government program or regulation. Marketing orders are a perfect example of farmers focusing on government intervention instead of the market. By eliminating volume controls, Congress can take one step toward allowing farmers to grow and sell legal products as they deem fit, while respecting consumers in the process.—Daren Bakst is Research Fellow in Agricultural Policy in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom and Opportunity, at The Heritage Foundation.