Imagine that you and your family have run a family farm for generations, raising a legal and healthy food crop that is popular with American consumers. Until recently, you dealt with middlemen (“handlers”) who processed, packed, and sold your crop to consumers but held some back from the marketplace. You have determined, however, that using handlers is costing you a great deal of money, and you would like to sell all of your crop, so you decide instead to process, pack, and sell the crop yourself.
This should benefit you and ultimately consumers, but the federal government decides to fine you a huge amount of money for your wise business decision. Moreover, by regulation, all other farmers who grow your crop also will face severe sanctions if they follow your example.
One might think that this kind of interference with the free market could not happen in America, but one would be wrong. This factual summary describes what actually happened to the Horne family, long-time California raisin growers who sought to evade the California raisin “marketing order”—a federal government regulation that raises the price and restricts the sale of American raisins to the detriment of free-market competition and consumer welfare. More generally, a series of similar marketing orders, overseen by the U.S. Department of Agriculture (USDA), for decades have artificially reduced output, raised prices, and undermined competition in the production and sale of key agricultural products.
It is time for Congress to repeal the law that authorizes these harmful regulations and restore free markets in a key sector of the American economy.
Rise of the Agricultural Marketing Agreement Act
During the early 20th century, the U.S. agricultural industry experienced an economic boom. Increased consumer income, a growing population, and more efficient transportation and distribution systems gave rise to increased demand and higher prices for many agricultural goods. Despite the nation’s growing prosperity, however, the fruit and vegetable sector fared differently, struggling to resolve an assortment of issues associated with its perishable products. These problems included low consumer confidence in food quality, “unfair and discriminatory trade practices,” and intense competition that “led to periods of shortages and high prices followed by periods of glut with low prices and waste.”
Shortly after prices began to fall in the early 1920s, fruit and vegetable farmers experienced an additional problem: Consumer income declined, and the entire country entered the Great Depression. In an attempt to retain autonomy, several growers and handlers formed voluntary cooperative marketing associations to control levels of production and restore commercial stability. None succeeded. Thus, in 1937, in keeping with the New Deal’s penchant for federal economic regulation, Congress passed the Agricultural Marketing Agreement Act (AMAA).
In the name of the “public interest,” the AMAA authorizes the Secretary of Agriculture to establish marketing orders, primarily to maintain “orderly market conditions” and “establish parity prices.” Marketing orders are initiated by the industry, overseen by administrative committees, and enforced by the Agricultural Marketing Service (AMS) of the U.S. Department of Agriculture (USDA). They have the full force and effect of law and “regulate the production and sale” of fruits, vegetables, and certain specialty crops.
In particular, these orders are designed to reduce fluctuations in market prices and reduce losses due to crop perishability by establishing detailed regulations such as volume controls on distribution, minimum quality standards, and market support tools—all of which are mandatory. For example, if growers were to violate a marketing order regarding volume control by distributing more than their specified sales allotment, they would be subject to fines issued by the federal government.
Given their emphasis on volume limitations and price stability for producers, agricultural marketing orders function as government-controlled agricultural cartels that harm consumers of the products they cover in plain derogation of antitrust principles. Nevertheless, the AMAA exempts these orders from the federal antitrust laws.
History of AMAA Controversies
Since its inception in 1937, the AMAA has been controversial. Numerous highly publicized cases of waste and abuse heightened national concern and prompted questions about marketing orders’ credibility. For instance, in 1981, journalist Ann Crittenden harvested widespread discontent with marketing orders in a New York Times article in which she vividly described the California navel oranges scandal: “From afar, it looks like a red haze on the horizon. But…it becomes clear that what lies in the distance really is mounds of oranges…all abandoned to rot…hav[ing] been dumped under what is known as a Federal marketing order.”
In 1985, prompted by several highly publicized news accounts, along with rising concerns from the public sector, the U.S. General Accounting Office (GAO, now known as the U.S. Government Accountability Office) conducted a formal review to assess the benefits and shortcomings of marketing orders and to determine whether the goals set forth in the AMAA were being fulfilled. The GAO reviewed only nine of the 47 federal marketing orders, which covered 11 different commodities valued at $1.24 billion. Its evaluation resulted in three major findings.
- Two of the marketing orders—hops and spearmint oil—stifled competition by preventing new growers from entering the marketplace, and one order—lemons—increased un-harvested (i.e., wasted) crop;
- Ten of the orders for the 11 commodities examined were found to be restrictive because they determined when, or even if, supplies were to go on the market; and
- Orders that governed commodity grade, size, and maturity required producers to improve their products’ quality, and these minimum quality standards increased consumer confidence.
The GAO made three additional findings concerning the AMS’s administration of the marketing orders program.
- The AMS failed to provide adequate information and educational meetings to the agricultural industry and the public;
- The USDA’s program operations manual had not been updated since its publication 20 years earlier and therefore lacked essential information; and
- The USDA had no criteria by which to evaluate marketing order effectiveness.
Before concluding its report, the GAO made two recommendations to the Secretary of Agriculture: that the AMS should “develop and apply criteria for measuring the performance of individual marketing orders and make the results available” to the public and that it should “update and keep current the operations manual for marketing orders.”
In response, the USDA affirmed its support for marketing orders while stating that “its position is transcended by the administration’s strongly held belief that all Americans would benefit most by a significantly reduced level of government interference in their business[es] and lives.” In reality, however, despite its general reference to reduced government interference, the USDA did not significantly reform the marketing order system. It merely commented that while its goal would be “to develop and implement policies in the public interest…it [would] not seek to encourage the development of additional governmental programs.”
Furthermore, the serious problems highlighted by the GAO failed to move Congress. Rather than disposing of the nearly rotten marketing order regulatory scheme, Congress preserved its existence.
What Are Marketing Orders?
Agricultural marketing orders come in various configurations. In an attempt to fulfill the objectives set forth by the AMAA effectively, each order is custom tailored to address the commodity’s particular needs.
Generally, an order can include any combination of the following terms and conditions: volume controls, minimum quality standards, container and pack requirements, recordkeeping, market support tools, and mandatory inspections. A close examination of the two principal regulations—volume controls and minimum quality standards—demonstrates how marketing orders function.
Volume Controls. Volume controls, which police how much of a commodity may enter the market, are marketing orders’ most controversial regulations. In practice, volume controls do not stop producers from harvesting an unlimited crop; rather, they handcuff producers by controlling how much crop can be sold.
For example, assume that the average farmer can harvest 10,000 units per acre per year of a particular crop. In the absence of a marketing order, average Farmer A, who owns 20 acres, currently harvests and sells 200,000 units a year. Above-average Farmer B, who owns 12 acres, currently harvests and sells 120,000 units but plans to innovate and raise production and sales to 150,000 units a year.
Now assume that the government institutes and enforces a marketing order restriction limiting farmers from selling more than 120,000 units per year. Farmer A’s potential annual sales would automatically decrease by 80,000 units (40 percent), and production and harvesting would be curtailed accordingly. Farmer B would lose his incentive to raise productive efficiency and produce and sell 30,000 more units per year (since he would be limited to his current sales volume of 120,000 units). Total future annual sales volume attributable to these two farmers falls by 110,000 units (80,000 plus 30,000), and this reduction is magnified greatly as other producers of the affected product also reduce or fail to expand their output.
This example demonstrates the detrimental effect that government-constructed restrictions have on free enterprise (disincentives to procompetitive efficiency and limitations on sales) and on consumers (diminution in supply available for purchase, with a consequent rise in price).
In general, the USDA employs three primary methods to implement volume controls: producer allotments, handler withholding restrictions, and reserve pools. Before examining these methods individually, it is important to note that while a marketing order may contain a volume control provision, the regulation may be “active” or “inactive.”
Producer Allotments. Producer allotments are restrictions on the amount of product that commodity producers can deliver to handlers. Each allotment is calculated by analyzing two factors: the product’s expected demand and the producer’s historical yield. If a producer delivers more product to the handler than is permitted by the allotment, the excess product must be diverted to “non-commercial, charitable, non-competitive, non-human food use, or other markets” as defined by the marketing order. While producer allotments may guarantee a consistent volume of commodities available on the market each year, they also “provide the strongest regulatory controls” and “are the most effective way [for] producers to curtail supplies and raise prices.”
Handler Withholding Restrictions. Handlers are firms that receive crops from producers and perform “middleman” functions that enable the crops to be brought to market. Handler withholding restrictions establish percentages that limit the amount of commodities handlers are able to place on the market. Similar to the excess product created by producer allotments, all product that handlers are prohibited from placing on the market must be diverted to “non-commercial, charitable, non-competitive, non-human food use, or other markets” as defined by the marketing order. Essentially, a handler withholding regulation is a secondary restriction on producer allotments: a restriction on a restriction.
Reserve Pools. Reserve pools are the ultimate volume control method implemented by marketing orders. Operated by a commodity’s producer committee, reserve pools seize and hold a portion of all products for later use. In theory, reserve pools are designed to stabilize a commodity’s price and consistently meet market demands by controlling the commodity’s available supply at any given time; this method is most efficient when a particular commodity experiences widespread shortages. In reality, reserve pools establish a system in which committees have the power to siphon off supplies and manipulate product prices.
According to the USDA, “volume controls can benefit the economic wellbeing of an agricultural community by helping maintain the value of its product, keeping producers and marketers in a profitable solution when prices would otherwise have been depressed.” This method used by the USDA to evaluate the pros and cons of volume controls is fundamentally flawed for one major reason: The consumer, not the producer, should be the focal point. Rather than concentrating on how volume controls maintain producer profits, the USDA should consider the effect that volume controls have on consumer prices. Volume controls raise prices and supplant market-driven sales decisions to the detriment of economic efficiency and consumer welfare.
Minimum Quality Standards. In addition to volume controls, marketing orders may include provisions implementing minimum quality standards. Minimum quality standards, which regulate size, quality, grade, maturity, and type, establish homogeneity and consistency among commodities in a particular industry.
Minimum quality standards are observed largely because they safeguard consumer interests by demanding high-quality products. However, minimum quality standards can also be administered by independent state and federal regulations; marketing orders are not the only means by which to achieve the desired end. Additionally, it is important to recognize that minimum quality standards can also function as quasi-volume controls. Size standards, for example, “could be used as quantity controls by raising standards to remove greater quantities during large crop years and lowering standards to remove lesser quantities during small crop years.”
In short, although minimum quality standards may serve as a beneficial quality assurance device for many consumers, they also may preclude highly price-sensitive consumers from being able to purchase lower-quality products at bargain prices. Moreover, in the absence of regulation, free-market mechanisms (such as quality assurance marks) could allow producers to provide high-quality assurances to quality-sensitive consumers while allowing more price-sensitive consumers to buy lower-quality but less expensive products.
Establishing, Administering, and Amending Marketing Orders
The steps that must be followed to establish a marketing order are complex and slow. The formal process may begin only if the commodity that the marketing order would regulate is eligible pursuant to 7 U.S.C. § 608c(2). Once the commodity’s eligibility is confirmed, an initial meeting will be held in which members within a specific industry, including growers, handlers, and their representatives, “identify mutual marketing problems and determine whether a marketing order could help…solve these problems.”
Once general agreement on an arrangement is reached, a “steering committee of key industry people” prepares a preliminary proposal, which is subsequently sent to the AMS along with a request for a public hearing. According to the USDA, each proposal “should indicate the degree of industry support, the problems the program would address, and suggest a possible hearing site and approximate date.” The AMS reviews the proposal upon its receipt, along with supporting documents and any alternative proposals submitted by concerned parties. Up until this point, USDA officials are permitted to comment on the proposal’s substantive elements; however, once a “Notice of Public Hearing” is issued, USDA officials may speak only to procedural questions.
During the public hearing, which is presided over by a USDA Administrative Law Judge, testimony from all parties involved, including USDA personnel, is compiled into a formal record. Briefs may be filed with the USDA after the hearing, and the proponents bear the burden of proving that the program is necessary. Eventually, the USDA will publish its recommended proposal and allow a short period for comments or objections, after which a final proposal will be issued. The final proposal becomes binding when at least two-thirds of the growers within the designated geographic area vote in the proposal’s favor. Once the final proposal is approved, the Secretary of Agriculture issues the marketing order, whereupon it assumes the force of law. In its entirety, this multi-layered process can take up to 18 months.
Once an order is established, its day-to-day administration is performed by marketing order committees. Each committee, which is composed of industry-nominated or USDA-appointed producers and handlers, is responsible for numerous duties, including compliance oversight. To ensure compliance, committees must regularly issue instructions detailing specific requirements and important dates; committees may also conduct on-site inspections and perform handler audits. If a marketing order is violated, the committee is authorized to resolve the non-compliance without USDA intervention.
In addition to establishment and administrative procedures, there is a formal amendment process. As a precautionary measure, marketing orders are flexibly designed to withstand changes in the industry and market needs. If a committee determines that an order does not adequately meet the industry’s needs, the order may also be amended or eliminated. Identical to the establishment process, all proposed changes are subject to the full formal rulemaking process. For example, if a committee decides to enforce a volume control regulation, yet the original marketing order does not include such a provision, then the proposed volume control must withstand a public hearing, notice and comment period, and two-thirds approval by the growers within the designated geographic area in order to become enforceable.
Marketing Orders Today
There currently are 28 federal agricultural marketing orders for fruits, vegetables, and certain specialty crops. While 10 of the 28 marketing orders include a provision for volume control, only two control programs—in the tart cherries and spearmint oil orders—are currently active. The Florida citrus marketing order includes a volume control variation called a “flow-to-market” regulation, which is used only in emergency situations.
Recently, the American Pecan Board submitted a proposal for a federal marketing order. This potential order is undergoing the formal rulemaking process; the public hearing occurred on July 2, 2015.
The Supreme Court’s Horne Decision
Precisely 30 years after the GAO’s 1985 formal review, the marketing order program became subject to another formal review, this time by the U.S. Supreme Court in Horne v. U.S. Department of Agriculture. Horne concerned a USDA California raisin marketing order, which requires growers to transfer a percentage of their crop to the Raisin Administrative Committee (RAC). The raisins owed to the RAC are called “reserve raisins.” The RAC then “sells, allocates, or otherwise disposes of the reserve raisins in ways it determines are best suited to maintaining an orderly market.”
The RAC regulates the California raisin allocation requirement, independently determines compensation prices, and retains unchecked discretion in deciding how reserve raisins should be sold and/or disposed. Once all raisins have been peddled and handlers have been compensated, the RAC then distributes any remaining profits to the growers. This regulation creates a governmentally constructed restriction on raisin sales that exploits consumers and violates free-market principles.
After years of cooperating with the raisin marketing order, California raisin farmers Marvin and Laura Horne chose to handle their own raisins and thereby sought to avoid participating in the RAC scheme. The USDA, however, maintained that they were still subject to RAC regulation and assessed them a $200,000 fine for failing to sacrifice their raisins, plus an additional $480,000 charge equal to the “missing” raisins’ market value.
The Hornes then brought suit, claiming that because the raisin marketing order enabled the RAC to take their private property (raisins) for a public use (maintain an orderly market) without paying just compensation, the government clearly violated the Fifth Amendment’s Takings Clause. During this litigation, the crony capitalist nature of the California raisin order was made manifest as the greatest beneficiaries of the order’s cartel scheme, Sun-Maid Growers of California (the world’s largest marketer of raisins) and the Raisin Marketing Association (which represents farmers who produce 30 percent of the California raisin crop), filed an amicus curiae brief defending the order.
On June 22, 2015, the Supreme Court reversed the U.S. Court of Appeals for the Ninth Circuit and held that “neither the text nor the history of the Takings Clause suggests that appropriation of personal property is different from appropriation of real property.” Moreover, the Court held that the regulation requiring producers to surrender some of their crop as a prerequisite to entering the raisin business is a per se taking; therefore, because the government “has a categorical duty to pay just compensation for a physical taking,” regardless of whether the taking amounted to a full deprivation of economic value, the Hornes must be compensated.
While this ruling promotes economic freedom and individual liberty, it does not significantly constrain government regulatory authority. As Justice Sonia Sotomayor highlighted in her dissent (and as the Supreme Court’s majority opinion acknowledged), “the Government…can permissibly achieve its market control goals by imposing a quota without offering raisin producers a way of reaping any return whatsoever on the raisins they cannot sell.”
Nevertheless, although Justice Sotomayor was correct that such quota-based regulation would be within Congress’s constitutional power over interstate commerce, the current statutory scheme authorizes output restrictions through marketing order schemes, not through quotas set directly by the USDA. Thus, absent further congressional action authorizing direct government-imposed quotas, the USDA faces the risk of having to pay various growers harmed by “undercompensated” transfers to “middleman” committees provided for under marketing orders.
The Future of Marketing Orders
The Agricultural Marketing Agreement Act was enacted during a period of economic downturn that led some public officials to believe that “stabilization” of key agricultural markets through government-sponsored cartels was in the public interest. Today, economists reject the notion that government cartels can improve the economy. In fact, there is a broad consensus that government restrictions on output are economically harmful and should be rejected.
Quality-related restrictions imposed pursuant to the AMAA are unneeded and counterproductive. The free market allows agricultural producers to advertise and promote quality, and it enables consumers who prefer to trade quality for lower prices to be served as well. Joint promotional activities likewise can be undertaken efficiently in an unregulated marketplace. In short, the free market can best meet the needs of the agricultural community and achieve more efficient resource allocation. Finally, even though many AMAA marketing order schemes may currently lack output limitation provisions, they are costly to administer, and as long as self-interested producers shelter under the AMAA’s regulatory umbrella, there exists a substantial risk that output restrictions and other counterproductive cartel-like strictures will be reimposed.
For all of these reasons, there is no public policy justification for retention of the AMAA or any similar output-restrictive agricultural schemes. All such statutory provisions should be repealed.
USDA agricultural marketing orders have long since lost any utility they once may have had. In our modern, highly sophisticated economy, they are not needed either to promote research or to carry out other efficient joint functions (such as product promotion) as envisioned by the AMAA. Moreover, to the extent that they are used to restrict output and raise prices of covered agricultural products (as may happen if more orders’ output restrictions are reactivated), they harm consumer welfare and undermine economic efficiency to the detriment of the American economy.
Congress should therefore repeal the AMAA and in so doing clarify that the USDA may not engage in similar regulation of the marketing of legal crops under any other legal authority it may possess.—Alden F. Abbott is Deputy Director of and John, Barbara, and Victoria Rumpel Senior Legal Fellow in the Edwin Meese III Center for Legal and Judicial Studies at The Heritage Foundation. The author gratefully acknowledges the research assistance of Heritage Foundation Intern Kyser Blakely and the helpful comments of Heritage Foundation Research Fellow in Agricultural Policy Daren Bakst in the preparation of this paper.