• Milking the dairy industry?
     | August 02,2009
    AP Photo / Toby Talbot

    Not everyone in the dairy industry is hurting right now.

    Vermont farmers, to be sure, are feeling the pain. A severe drop in milk prices, compounded by the ever-rising cost of production, has exacted an unprecedented financial toll on the roughly 1,050 dairy operations in the state.

    But as producers of the region's hallmark agricultural commodity wither – 32 Vermont dairy farms have folded in 2009 alone – the main buyer of their product has enjoyed a correlating surge in profits.

    Dean Foods, which controls roughly 70 percent of the buying market in New England and 40 percent nationwide, is the largest fluid-milk buyer in the country. In the company's first fiscal quarter of 2009, gross sales dropped by more than 10 percent over the same time period last year.

    Net profits, however, soared, from slightly more than $30 million in 2008 to $76.2 million in 2009. Dean Foods itself attributes the good news to lower input costs – during the first four months of 2008, the company paid almost $19 for 100 pounds, or hundredweight, of milk, the industry's standard unit of measurement. In 2009, that price fell to below $12.

    Record profits aren't illegal. But the methods by which Dean Foods has achieved them, according to Sen. Bernard Sanders, violate U.S. antitrust legislation. In a letter to the Department of Justice's chief antitrust investigator, the independent congressmen will formally request a probe into "monopolistic" schemes employed by Dean Foods to artificially depress the price of milk in Vermont, New England and much of the rest of the nation.

    "You've got a situation where it is clear that farmers do not have many options as to where they can sell their product," Sanders said Friday. "And if I'm the only game in town, you will take the money that I give you."

    By cornering huge segments of the dairy sector, Sanders argues, Dean Foods has secured the kind of broad market control that antitrust laws are intended to prevent.

    "Based on our research and conversations with agricultural economists, we believe that Dean Foods has been so successful because it exercises monopoly pricing power in many parts of the country," Sanders wrote in a letter to Christine Varney, assistant attorney general at the U.S. Department of Justice's Antitrust Division. The letter is expected to arrive at Varney's office early this week.

    Sanders isn't the first person to raise questions about Dean Foods. In August of 2006, Sanders says, the Department of Justice concluded a 26-month probe into anti-competitive practices in the dairy industry. Investigators recommended action against some of the industry's largest firms. Dean Foods, Sanders says, was among them. The Justice Department, as per policy, will not confirm or deny the investigation.

    "Do I have provable evidence for this? No," says Sanders, who claims the Bush Administration blocked DOJ staffers from pursuing the charges. "But we have every reason to believe that what I'm saying is absolutely true."

    Dean Foods already faces several antitrust lawsuits filed by private parties in civil courts. In 2007, more than 4,000 dairy farmers filed class-action suits in the Middle District of Tennessee. The complaint alleges that Deans Foods, with the aid of Dairy Farmers of America, the country's largest milk cooperative, conspired to monopolize milk markets in southeastern states.

    A more recent suit, filed by grocery retailers last month in Tennessee, claims that Deans Foods, among others, used its virtual monopoly to fix the price of milk in stores.

    "This isn't just me coming up with some brilliant idea of investigating Dean Foods," Sanders says.

    Pete Hardin, editor of the Wisconsin-based publication The Milkweed, and one of the country's foremost agriculture journalists, says the Sanders' allegations have merit. Hardin, the first to break the story on the DOJ investigation, says Dean Foods has, through a series of corporate acquisitions, exerted a virtual stranglehold in numerous regions of the country.

    "Dean Foods has evolved to the point – through mergers acquisitions and other acts that may or may not be savory – where it controls 35 to 40 percent of all milk sold," Hardin says.

    "The milk business is incredibly crooked and when you have firms with such market power they are going to tend to abuse it," Hardin continues. "… The bottom line is Dean Foods in my opinion is run like a cash cow for selected insiders. And both farmers, through lower milk prices, and consumers, through higher milk costs, have been victims here."

    Sanders and Hardin both say the relationship between commodity milk prices and retail milk prices reveals Dean Foods' undue market control. Though Dean Foods paid almost 40 percent less for milk during the first quarter of 2009, retail prices, according to Hardin, fell only by about 12 percent.

    "Surely, if Dean Foods – with its massive market power in numerous metropolitan areas around the United States – had passed through to consumers fluid milk price cuts more in keeping with the company's reduced raw milk costs, Dean Foods wouldn't have made so much profit in the first quarter of 2009." Hardin writes in the May issue of The Milkweed. "Failure to pass through such lower costs is a clear sign of a non-competitive fluid milk marketing picture across the country."

    Peter Carstensen, a professor of law at the University of Wisconsin and an expert in antitrust laws, says he's seen troubling developments in the U.S. dairy industry.

    "And one of my recurring concerns has been the way in which dairy markets have become concentrated, with mergers that have created the present Dean Foods being a major source of concern," Carstensen says. "I have expressed repeatedly my concerns that something should be done."

    Carstensen says consolidation by Dean Foods on the processing side, and Dairy Farmers of America on the cooperative side, have created a power imbalance that leaves dairy farmers vulnerable to price manipulation.

    "As milk markets move toward monopoly buyers, the prices paid to dairy farmers go down," Carstensen says. "Everything that I've seen and heard makes me think there are very serious competitive problems in the dairy area resulting from the relationship between Dean and Dairy Farmers of America. It is my belief that antitrust violations probably exist, and that the problem, as I see it, is to get the Justice Department to move."

    Dean Foods declined to comment on Sanders' allegations for this story. Chairman and CEO Gregg Engles, who made more than $25 million last year, according to Forbes, declined Sanders' invitation to testify before Congress recently. In a letter to Sanders, he said that the federal government, not Dean Foods, controls milk prices via its milk-pricing system.

    Sanders counters that the government Federal Milk Marketing Orders set only a base price for milk. He likens Engles' assertion to an employer assuming total control of a regional job market and paying everyone minimum wage.

    Dean Foods will release its second-quarter 2009 earnings report early next week.

    Sanders says his pursuit for an investigation into Dean Foods is among the longer-term actions needed to remedy a dairy-farm industry on the brink of collapse. The temporary increase in dairy-price supports announced Friday, according to Sanders, is an important short-term step to help stop the financial bleeding. Increases in direct payments to farmers via the Milk Income Loss Contract program, Sanders says, also are needed.

    But the fate of the state's small, medium and even large dairy farms, Sanders says, rests largely on the government-mandated disintegration of corporate consolidation in the processing sector.

    "The struggle here is to maintain family-based agriculture in our state, and in order to do that we need to be successful in fighting concentration of ownership in the industry," Sanders says. "We have a lot of work to do that, and I intend to be on the forefront of that."


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