It's an ironic joke. By saying that you raise "free-range kids" you are accusing (correctly these days for the U.S.!) that other parents are raising caged, confined kids.

Yes it does! FWIW it doesn't come off as patronizing to me, it has connotations with organic / locally grown / health food.

Yes, although the fact that the law is remotely necessary validates the patronizing nature of the term.