Testimony of Roger Johnson
Agriculture Commissioner
House Bill 1396
Senate Agriculture Committee
Brynhild Haugland Room
February 27, 2003

Chairman Flakoll and members of the Senate Agriculture Committee, I am Agriculture Commissioner Roger Johnson. I am here today to testify against HB 1396, which seeks to eliminate the "kinship requirement" in North Dakota's anti-corporate farming law. HB 1396 would, in effect, negate the purposefulness of the anti-corporate farming law in North Dakota.

HB 1396 is Poorly Constructed Legislation

There are many technical problems with HB 1396, which leave many questions unanswered and could potentially create serious loopholes in the anti-corporate farming statute.

HB 1396:

• Eliminates reference to the kinship requirement. Section 1, lines 8 & 9, of this legislation eliminate the kinship requirement. The elimination of this reference leaves undefined the term "class of individuals." What is a "class of individuals"? What is "a trust for the benefit of a class of individuals?" Removing the kinship requirement seems to make it possible for any individual, anywhere, to invest in a trust. However, such trusts seem to be prohibited on page two, lines 6-12.
  
  
• Contains a drafting conflict: Is a stockholder or member an individual, a trust or an estate? Section 2 of HB 1396 contains inconsistencies and contradictions with respect to the "family farm exception," establishing shareholder/member requirements for "individuals" in some cases (Section 2, lines 6 & 16), but leaving allowances for a trust or estate to be a shareholder in other parts of the section (Section 2, lines 13-15). Page two, line six clearly states that only "individuals" can be shareholders or members (i.e. trusts or estates are not allowed), but lines 13-15 at least imply otherwise. What really is the intent of these changes?
  
  
• Does not define "principal shareholder." Section 2, line 20, of the bill references a "principal shareholder," but neither the legislation (HB 1396) nor the current statute define what a principal shareholder is. "Principal shareholder" is not defined in this legislation. It is not defined anywhere in state law.
  
  What is a principal shareholder? According to Barron's Dictionary of Finance & Investment Terms, "principal stockholder" is defined as a stockholder who owns a significant number of shares in a corporation. Under Securities & Exchange Commission (SEC) rules, a principal stockholder owns 10% or more of the voting stock of a registered company. A "registered company" is defined as a company that has filed a registration statement with the SEC in connection with a public offering of securities and must therefore comply with SEC disclosure requirements. Is this the definition that the authors of this legislation had in mind? If this definition is used and this bill is enacted into law, family farmers could clearly stand to lose both their capital base in the farm and their control over all decisions relating to the farm corporation.
  
  
• Does not define "actively engaged." Section 2, line 24, of the legislation provides that at least one of the members of a limited liability company must be "actively engaged" in operating the farm or ranch. Neither the legislation nor the current statute define what "actively engaged" might mean.
  
  According to USDA, "actively engaged" is defined as: "An individual shall be considered to be actively engaged in farming with respect to a farming operation if the individual makes a significant contribution of: (a) Capital, equipment, or land, or a combination of capital, equipment, or land; and (b) Active personal labor or active personal management, or a combination of active personal labor and active personal management." What does that really mean? Current USDA interpretation of this provision is simply that the "actively engaged" farmer is one who owns some land and share rents it to someone else.

Is HB 1396 About Control or Capital or Both?

The many technical questions with this legislation beg the question: What did the authors of the legislation intend this legislation to do? My observations of the continued debate over corporate farming have lead to two main issues: capital and control.

Proponents of this measure continually say that farmers need more access to capital. While I agree that farmers and ranchers need adequate access to capital, I do not believe that HB 1396 is an appropriate or necessary way to address that need. Previous legislatures have created new beginning farmer programs that provide additional access to capital, and this legislature had opportunities to create similar tools, such as an equity trust fund for farmers (HB 1369). Those are the types of vehicles we should look to for increased access to capital.

Supporters of this legislation also minimize the potential effects that HB 1396 may have on the control and ownership of farms and ranches in North Dakota. HB 1396 leaves many unanswered questions - too many in my mind - with respect to who may farm and ranch in North Dakota.

Who will exercise control over this newly created corporate farm in North Dakota? There is nothing to prevent the corporate officers of the largest multinational corporations, XYZ Corp, from becoming the new shareholders of any number of new North Dakota corporate farms, transferring capital from XYZ Corp to numerous ND farm corporations and exercising substantial (perhaps even complete) control over the operation of such ND farm corporations!

If the intent of this bill was just to get capital into the hands of family farmers, this bill goes way beyond that intention and may very well hand over control of our farms and ranches to large corporate entities. In addition, outside entities that gain control of farm and ranch operations will have exclusive control over additional issues such as land access, hunting rights, etc…

Our Anti-corporate Farming Law Serves Us Well

The current anti-corporate farming law was overwhelmingly approved by North Dakota voters in 1932 and serves our state well. Seven other states have since enacted anti-corporate farming legislation. The state of Nebraska has gone further and has made an anti-corporate farming measure a part of their state constitution. Why would we weaken our anti-corporate farming law when only recently other states have enacted similar safeguards or strengthened their laws? We should be cognizant of the lessons others have learned.

Agriculture has changed dramatically since the 1930's, but the same economic principals remain in play. North Dakota is an agricultural state, and agriculture is one of our driving industries. If allowed, corporations will farm our land - either directly or indirectly through tenant farmers. The anti-corporate farming law is just as applicable today as it was seventy years ago and is responsible public policy. It is still necessary to protect the economy of our state and the welfare of our independent farmers and ranchers. Agricultural production should be reserved for individual and family enterprises, not corporate businesses.

States with Anti-corporate Farming Laws Fare Better

A study conducted by Dr. Rick Welsh, Clarkson University, and Dr. Thomas A. Lyson, Cornell University (August 2001) confirms something that we already know here in North Dakota - states that have anti-corporate farming laws fare better than those without anti-corporate farming laws.

Anti-Corporate Farming Laws, the "Goldschmidt Hypothesis" and Rural Community Welfare, found that… "in general, agriculture dependent counties in states with anti-corporate farming laws fared better (less families in poverty, lower unemployment and higher percentages of farms realizing cash gains) than agriculture dependent counties in states without such laws."

Why would we want to pass a law that would likely lead to more families living in poverty, higher unemployment and lower numbers of farmers making money?

Non-family Members Can Invest in Farms Under Current Law

Further, our current anti-corporate farming statute does not prohibit non-family members from investing in farms. There are many legal channels available (e.g. sole proprietorships, partnerships, limited partnerships, contracts for deed, secured or unsecured loans, etc…) for anyone - family or non-family members - to invest in a farming operation.

Changing the Anti-Corporate Farming Law Will Not Improve Prices, Prevent Economic Concentration, or Stop Outmigration

As we are all well aware, prices remain low for many agricultural products and commodities. Changing or eliminating the anti-corporate farming law won't do anything about the low prices farmers receive for their products. In fact, it will likely exacerbate the problem.

Another major issue facing agriculture today is economic concentration, spurred by the corporate bottom line. The driving force for economic concentration is not economic efficiency but rather economic power, the exercise of which results in lower efficiencies, poorer services and ultimately higher prices for food. This bill would exacerbate economic concentration, precisely the opposite of what independent farmers and ranchers (and our consumers) need.

On the state level, agriculture needs tools to help farmers and ranchers develop and use new technologies, to grow new crops and livestock and to invest for themselves in grower-owned agricultural production, processing and distribution cooperatives. This bill would have the opposite effect.

Some have even argued that our current anti-corporate farming statute has not stopped outmigration. While that may be true, loosening the anti-corporate farming law will only hasten the demise of the family farm, thereby driving away the economic engine that supports the vast majority of rural North Dakota. HB 1396 will most certainly hasten outmigration, not prevent it.

Conclusion

The bottom line is that changing North Dakota's anti-corporate farming law through HB 1396 won't make agriculture profitable for North Dakota farmers and ranchers, nor will it keep people on the land. It is much more likely to result in substantial statutory confusion, more economic concentration, less competition, more poverty, higher unemployment and increased outmigration.

Chairman Flakoll and committee members, I urge you to give HB 1396 a do not pass recommendation. I would be happy to answer any questions you may have.