Don’t Let Your Herdshare Agreement Land You In Court

Herd-DontLetYourHerdshare-600x626By Carl Little, JD

As raw milk demand increases, more and more dairies are creating cow and goat herdshare arrangements to satisfy the demand. It is inevitable that increased scrutiny by state regulatory agencies will come with the increased use of these arrangements. If your arrangement is not narrowly and carefully drafted and your operation is not in harmony with your documents, you may find yourself on the receiving end of bureaucratic wrath and possibly in court.

In some states it is illegal to sell raw milk for human consumption. For those states that do allow raw milk sales, the regulatory requirements create an impenetrable cost barrier for some small dairies. To breach this barrier farmers are increasingly turning to herdshare arrangements. It is a testament to the farmers that use these arrangements that there have been very few problems or complaints. There have been a few, however, and a careful analysis of the laws of your state and your arrangement may keep you in the milking parlor and out of the courtroom.

Cow and goat herdshares work from a very simple premise. A person is entitled to consume raw milk from a cow or goat he or she owns. The milk never enters the stream of commerce because the owner of the cow, and therefore the cow’s, milk never “sells” it but consumes it. Therefore, when state law forbids the “sale” or “transfer” of non-pasteurized milk, the farmer and consumer can honestly assert that no milk was “sold” or “transferred.” To accomplish this, a farmer sells his cow or herd of cows to a person who wants the cow’s milk. Since most families can’t consume all the milk one cow or a herd of cows make, the farmer sells the cow or herd to a number of people and they own an undivided share of the cow or herd. Since it would be impractical and often times impossible for each owner to take the cow home for a share of the time with the cow, the farmer makes a boarding arrangement with the owners of the cow. The owners pay the farmer to feed, care for and milk the animal and the owners take whatever production of milk that comes from the cow. Presumably, if the cow is ever sent to slaughter while still being owned by the shareholders, the hamburger in proportion to the share of ownership would also go to the owners.

As you can see, the legality of these arrangements centers around the legal issues of what a “sale” is and whether the shareholders of the cow or goat or herd “own” the animal. It may be unfortunate, but regulatory agencies and the courts will not just look over the documents and declare the arrangement as legal. They will look at the facts and circumstances of the particular case to determine whether the arrangement is really a “sale” hiding behind a piece of paper that says it isn’t. If they do find the arrangement a sham and a “sale” of raw milk has occurred, then the farmer may find himself on the receiving end of a multitude of sanctions, the least of which will be an injunction or a cease-and-desist order.

How to Protect Yourself

In order to protect yourself from this kind of nightmare, you need to step back and take a dispassionate look at everything you do concerning your cow share arrangement. When law students first enter law school, they are often passionate advocates of one issue or another. Often that’s why they were attracted to law school in the first place. But one of the very first things they teach in law school is how to argue both sides of an issue. It’s one of the hardest things to do. You’ll often know right away which side is right or wrong by instinct or reason, but learning to think like the other side is what you must do. So practice this technique with your herdshare arrangement. Step back and ask yourself whether there is anything that I am doing that looks like a sale of milk or that makes it look as though I am the owner of the cow instead of the shareholders?

Ownership Versus Sale

First, start with your documents, which should include your herdshare agreement and your boarding agreement. Is there anything in them that a bureaucrat or a judge could hang their hat on as a “sale” of milk? One thing I would look for is any language that links a sales price to an amount of milk. For instance, does the share agreement adjust amounts when the cow or herd’s production rises or falls or is there a set amount to which the shareholder is entitled?

One of the telltale giveaways of a “sale” versus true ownership has to do with whether the shareholders take on the risk of owning the cow or herd. For example if you sell an undivided interest in one cow and the cow becomes ill, dies or dries up, will the owner lose out just as a farmer would, or would those interests be transferred to another cow in the herd? If your answer is the latter, I would argue this an indication of a sale rather than ownership. If the agreement is a herdshare the same principle applies. If the production of the whole herd is down, the distribution of milk to owners should decrease by the appropriate amount.

I thought about putting a sample herdshare agreement and boarding contract on my website and charging for it, but you can download an excellent example, approved by the state of Indiana, for free at the Weston Price Foundation’s website, www.realmilk.com. (UPDATE: With the launch of the Farm-to-Consumer Legal Defense Fund, we have moved the sample herdshare agreements to farmtoconsumer.org website.)

Records

Second, you may want to look at your barn records. If you’ve sold a 1/20th interest in a cow but the owner gets more or less than 1/20th of the production, this too make be indicative of a sale. Look at your literature that promotes your cow-share agreement. Does it look like you’re trying to sell a share of your cow or herd, or does it concentrate on milk? For instance, instead of saying, “a 1/20th share of one of our cows will entitle you to 2 gallons of milk per week. You should say, “Bessie on average produces 25 gallons of milk per week, so if you purchase a 1/20th share you should expect to pick up approximately 1 1/4 gallons per week. Amounts may vary with production.” The same principles apply to herdshare agreements, except on a larger scale.

Payment

Third, examine how transactions take place. Payments for boarding or the share itself should not in any way be connected with the transfer of milk. This may seem a little nit picky and impractical, but this also instills in the owner’s mind the fact that they own a cow or a part of the herd; they are not “purchasing” milk. If a shareholder happens to be summoned into a hearing they will be asked about the perception. Was it the shareholder’s perception that they had bought a share of cattle, or were they buying milk? That’s when you’ll be glad that you didn’t say to them, “Here’s your two gallons. You owe me eight bucks.” I recommend that you bill on a regular cycle and not collect money when the owners come to collect milk.

Proof of Sale

Fourth, examine other documents for indications of ownership. If you sell livestock you should really sell it. For example, many of us have children that show our livestock in 4-H. When registering livestock to show, you are often asked to provide the registration papers and the date you purchased the animal. If you show animals in fairs and breed shows and you declare yourself to be the owner of the animal after you’ve sold it to 20 shareholders, this will be evidence used against you.

Costs of Ownership

Fifth, and this might be the most important, consider the costs of ownership in your share agreement and boarding arrangements. Let’s say for the sake of simplicity you have one cow in your herd for which you will sell 20 shares. If that cow’s fair market value is $600, then your share price for 1/20th of that cow should be $30 not $10. Remember, you are selling cows not milk. And I’m sure that you will take that into consideration when you compute the boarding fee. This is what you are really being paid for, to take care of someone else’s cattle. Consider your labor costs, feed, vet fees, depreciation on equipment, etc…

Learning the Lingo

Finally, I would suggest learning a whole new lingo. If you really want to withstand the scrutiny that’s sure to come, you should not talk like conventional dairy farmers. You should talk like herd managers and employees of the herd owners. Talk to the owners about what you do and get them involved. In reality you are the caretaker of their property. Ensuring clean wholesome clean milk is just one of the services you provide to the owners of the herd, but not the only service.

This may stick in the throats of some, because farmers are an independent lot. We like to talk about “our cattle,” “our herd,” and our operation. But changing attitudes is well worth the effort in benefits to consumers and farmers. If you really don’t believe that what you are doing is providing a service to the real herd owners, then you are lying to yourself, and you are just trying to get around the law. If you can’t convince yourself, how will you ever convince a bureaucrat or a judge?

Fantastic Opportunity

Cow, goat and herdshares may be a fantastic opportunity to reintroduce consumers to their source of food; that’s something that has been lost in the industrialized age. However, herd-sharing arrangements should not be entered into lightly. The most successful herd-sharing farmers have done their homework and have worked with state and local officials and a competent attorney to ensure there are no surprises to any of the parties involved.

Farmers must also be meticulous in their record keeping to show just who owns what and how the organization ensures that shareholders are the true owners. Many farmers just want to farm and sell their surplus milk, so the temptation is to cut corners and do share arrangements on a handshake. Resist that temptation. It really isn’t worth losing the farm.

See also The First Cowshare Program

This article was first published in Countryside Magazine and is reprinted with permission from the author in the Winter 2006 edition of Wise Traditions, the quarterly journal of the Weston A. Price Foundation.

Carl Little is an attorney and small scale farmer in Southwestern Indiana. He publishes a monthly newsletter titled, The Small Farm Legal Bulletin. Information about the newsletter can be obtained on his website smallfarmlaw.com or you can email Carl at carl.little@smallfarmlaw.com . The information in this article is not intended as legal advice. If you have questions regarding your specific circumstance you should contact competent legal counsel in your state.

 

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