Why Dairy Farmers Are in a Sour Mood

At Harold Howrigan's dairy farms in northern Vermont last year, the red ink flowed almost as fast as the milk. The dairyman lost nearly $100 per cow each month because the price for 100 pounds of milk fell to $11—well under the $18 cost of production. "It was bad. People had to borrow money just to make ends meet," says Howrigan. Prices have recovered some, though not enough to pay down the new debts, he says.

These are tough times for America's 60,000-odd dairy farms, thanks to a decade-long deflationary trend in prices and a particularly severe downturn last year. Industry sales fell 30 percent in 2009, to $24.1 billion, from the year-earlier period, according to the Agriculture Dept.

Congress, which spent $350 million on emergency dairy price supports last year, has taken notice. So has the Justice Dept. To assess the effect on prices, it is scrutinizing the biggest dairy cooperatives and food companies for possible anticompetitive conduct. Along with the USDA, Justice officials will hold a June 25 hearing in Madison, Wis., on dairy market concentration. Meanwhile, the Commodity Futures Trading Commission is reviewing complaints of price manipulation in the spot cash market for cheddar cheese, which also affects the price of milk.

Two big players, Dallas-based Dean Foods (DF) and the Dairy Farmers of America, a Kansas City (Mo.)-based cooperative, are the target of pending federal class actions (one filed in 2008, the other in January) in which they are accused of colluding to control market access and suppress milk prices. Dean Foods, which buys raw milk to bottle or to make cheese, cream, and other products, is the nation's largest processor. It is best known for brands like Garelick Farms, Land O'Lakes, and Meadow Gold. Dairy Farmers is a co-op of 18,000 members that transports milk to food companies. Yet it is more than just a distributor: The group also owns bottlers, processing plants, and retail brands including Borden Cheese, and is the exclusive supplier of milk to some of Dean's plants.

Rival dairy farmers say these two big players benefit from lower milk prices and use their market clout to keep them that way. "We have a nonfunctioning marketplace due to consolidation," says Joaquin Contente, a dairyman in Hanford, Calif., and president of the California Farmers Union. "In all the big metro areas, Dean Foods has 70 percent of the market share. There's no competition anymore."

Dairy Farmers says the allegations in the federal suits are without merit and that the interests of the co-op, which represents only 20% of U.S. milk volume, are aligned with its members. "We function to get the most out of their milk, and we're their true advocate," says John Wilson, a senior vice-president for marketing and industry affairs. Liliana Esposito, a spokeswoman for Dean Foods, said in an e-mail that the company is "confident an objective review of the facts in each case will reveal competition is alive and flourishing in the dairy industry."

Senator Bernie Sanders, an independent who represents Vermont, a big dairy state, has urged the Justice Dept. to investigate the antitrust allegations outlined in the two cases. Assistant Attorney General Christine Varney, head of the Justice Dept.'s Antitrust Div., said last fall that "we are very cognizant of the allegations at issue here."

On May 18, Sanders met with Rick Smith, chief executive officer of the Dairy Farmers co-op, to urge him to conduct his business in farmers' interest, not the interests of his company's processing facilities. "Of course there's a conflict," says Sanders. "You're a co-op and you're purchasing your product from farmers, but you make more money if the prices are low."

Regulators also have their eye on the Chicago Mercantile Exchange's (CME) spot market for cheddar cheese. This tiny market, where less than 1 percent of the cheddar supply is bought and sold, sets the price of most cheddar sold across the country and influences the federal milk price. (The federal government sets a minimum price that a bottler must pay farmers for milk using a formula tied to spot cheddar cheese prices on the Chicago Merc.) The Government Accountability Office in a 2007 report warned that the thinly traded market for cheddar was ripe for manipulation.

In 2008, the Dairy Farmers co-op and its former CEO and chief financial officer agreed to pay $12 million to settle accusations by the CFTC that they manipulated the price of cheese to boost the value of futures contracts they had bought. The co-op and the two officials, who retired before the CFTC case was filed, agreed to pay the fine without admitting or denying guilt. Chicago Merc spokeswoman Mary Haffenberg says the exchange has the regulations and surveillance systems needed to uphold the integrity of its markets.

Another concern is that with prices falling, dairies are trying to make up profit declines by increasing production, which in turn exacerbates price deterioration. Representative Jim Costa (D-Calif.) in mid-May offered a bill that would require dairies that boost production to pay into a fund that would distribute cash to those who don't. The larger concern of many family dairies is that the industry is a rigged game favoring a few powerful players. "There's no correlation between the milk price and how many farmers there are, or consumption," says Joel Greeno, a dairy farmer from Kendall, Wis., who is on the executive committee of the National Family Farm Coalition.

The bottom line: After a decade of dairy farm crises, antitrust enforcers and regulators are starting to scrutinize market power.

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