Judge OKs $30M Dean Foods settlement in anti-trust suit

Jersey cows in Randolph. VTD/Josh Larkin

Jersey cows in Randolph. VTD/Josh Larkin

A federal judge in Vermont recently granted preliminary approval to a settlement of an antitrust suit that has pitted milk giant Dean Foods against New England dairy farmers. Under the revised agreement, Dean Foods would pay New England dairy farmers $30 million to settle an antitrust lawsuit over alleged milk price-tampering. A full review of the settlement is expected in mid-July.

Dean Foods, one of the largest milk companies in the world and owner of the Garelick Farms, Borden and Horizon Organic milk brands, is poised to pay dairy farmers in New England and New York roughly between $2,000 and $3,000 each.

The revised settlement approved by U.S. District Court judge Christina Reiss struck a requirement that the milk company buy 10 percent to 20 percent of its milk from independent sources, rather than exclusively from the two major milk cooperatives in the region. Dean Foods does not admit any wrongdoing in the settlement.

Dean Foods isn’t the only player in the milk industry that has faced the legal ire of the region’s dairy farmers. Originally, the lawsuit also named the milk company Hood and the region’s two largest milk cooperatives as defendants. The suit against Hood was thrown out, but dairy farmers still are continuing legal action against the two cooperatives, Dairy Farmers of America and Dairy Marketing Services.

The suit alleges that Dean and the two milk cooperatives conspired to create a closed market that kept milk prices artificially low. Benjamin Brown, one of the lawyers from a Washington D.C.-based firm representing the dairy farmers, said the three entities created an unfair system where farmers had no choice but to go through a middleman to sell to the biggest milk buyer in the region.

“If you lived next to a Dean plant and wanted to sell your milk there, you couldn’t do it without contracting through Dairy Marketing Services as a middleman,” said Brown.

Dairy farmers have few options of where to sell their milk. Many independent milk processors in New England were bought up by Suiza, the milk company that eventually merged with Dean Foods.

Both Dairy Marketing Services and Dairy Farmers of America once had ownership stakes in Suiza. When it merged with Dean, the milk cooperatives exchanged ownership for the milk contracts that dictate that dairy farmers must go through the two cooperatives to sell to Dean. Such an arrangement can cause a conflict of interest and create conditions where the cooperatives don’t have an incentive to bargain for the highest milk prices, said Brown.

“You really don’t have a strong voice for the farmers, and that’s a problem,” Brown said.

Long-held Suspicions

Many dairy industry observers have long suspected that milk prices have been artificially deflated by large milk companies like Dean. The lawsuit is part of a wave of antitrust legislation involving Dean Foods.

Milking time at Island Acres Farm in South Hero. VTD/Josh Larkin

Milking time at Island Acres Farm in South Hero. VTD/Josh Larkin

In March, the U.S. Justice Department reached a settlement with the dairy giant, requiring the company to divest a milk processing plant in Wisconsin and some other holdings in the Midwest. The agreement also stipulates that Dean Foods must inform the Justice Department before making any purchase of milk processing plants valued at more than $3 million, according to a Justice Department press release.

There’s been a shift in tone in the Justice Department, said Mark Kastel, executive director of the Cornucopia Institute, a food industry watchdog. Under the Obama administration, the Justice Department has created a separate office within its antitrust division to handle agricultural cases. The idea of pursing antitrust cases has been unpopular in the Clinton presidency and both Bush presidencies, said Kastel.

“That word was almost expunged from the vernacular of this country,” he said.

Objections Moot

Liliana Esposito, a spokeswoman for Dean Foods, said the milk company chose to settle the dispute in order to move on.

“We’re confident we conducted our business lawfully and fairly,” Esposito said.

But the settlement might have the effect of creating adversaries out of what were close allies. Dairy Marketing Services and Dairy Farmers of America, the two cooperatives named in the suit, had objected to the initial settlement, saying it would have negatively impacted the farmers that are cooperative members.

Meanwhile, some advocates for dairy farmers see the antitrust settlement as a missed opportunity. Peter Hardin, a farmer and the publisher of the dairy newspaper Milkweed, believes the plaintiffs settled for a fraction of what they could have won from Dean Foods. Worse, one-third of that $30 million could be eaten up by legal fees, he said.

“To Dean foods, $30 million is nothing,” Hardin said.

More importantly, the public lost an opportunity at full disclosure of the business dealings of Dean Foods, he said. There long have been rumors of strong-arm tactics against farmers who have gone against the milk company, and a day in court might have brought some sensitive Dean Foods documents to light.

“Go to court, go to court; get some of the documents into the public arena,” Hardin said.

Desperate times

Jersey cows heading up the lane. VTD/Josh Larkin

Jersey cows heading up the lane. VTD/Josh Larkin

The recent antitrust interest surrounding Dean Foods has been fueled in part by the dire condition of the milk market during the prolonged economic downturn.

During the worst days of the recession, milk prices plummeted while production costs soared. Demand for milk exports dropped at the same time that high oil prices and demand for biofuel raised feed prices. For the first time, the organic milk market slowed its growth and organic milk companies began cutting ties with dairy farmers that only recently had been lured into converting to organic. Conventional milk farmers, many who were barely surviving during the country’s boom years, got the brunt of the downturn even worse. The bottom fell out of conventional milk prices as export demand dried up.

Farmers already on the margin suffered greatly in recent years, said Ed Staehr, executive director of NY FarmNet, a farmer-support program connected with Cornell University. The program’s hotline received some 6,000 calls in 2010 from people seeking mental health and financial counseling for New York dairy farmers.

It’s all too easy for a farmer to bring his or her work home, he said. That can be difficult when the farm isn’t doing well.

“You can’t separate the family and emotional issues from the farm,” Staehr said.

The results can be disastrous. Last year in Copake, N.Y., in 2010, a farmer shot half his herd before taking his own life. The farmer chose to shoot only the cows that needed milking apparently because he didn’t know who else would take care of them.

George Beneke was that farmer’s veterinarian. Now retired, Beneke has dealt with many stressed dairy farmers in the region during his 41 years on the job. He was quick to point out that many emotional factors most likely led to the Copake farmer’s choice to take his life, but economic stress certainly played a part.

Beneke had never seen anything like the conditions that have confronted the region’s dairy farmers in recent years.

“It was devastating,” he said. “It was the largest downturn I’ve ever seen.”

Many farmers took the hard times personally, he said. Even though they used good stewardship to boost milk production by one-third from the previous generation, they found themselves sinking deeper and deeper into debt. And this happened during a time when consolidation and suburban sprawl isolated them from their peers.

“They don’t have the community that they used to have. They’re not going to sit around the potbelly stove and discuss the Boston Red Sox and their favorite cow,” Beneke said. “These guys are going it alone and they’re not doing very well.”

An unclear landscape

Milk prices have climbed again, buoyed by an increased demand from countries like China and India for U.S. milk.

But there’s little guarantee the milk market will become much more competitive for New England dairy farmers, even if the pending antitrust actions force Dean Foods to change its business practices.

The milk giant is in trouble, with stock prices dipping from $46 a share in 2007 to just over $7 a share today. Dean CEO Gregg Engles is embattled; he recently was ranked 338th by Chief Executive Magazine, dead last among his peers for wealth creation.

According to dairy industry observers, Dean is trying to sell off what it consolidated under Suiza. Some wonder if the milk giant is making itself more attractive for an eventual sale, but Dean spokesperson Esposito only would say that she had no information to offer about the subject.

Even if Dean loses its grip on the dairy market, that’s no guarantee that the business landscape will get easier for dairy farmers, said Cornucopia’s Kastel. There’s nothing stopping another major company coming in and repeating the same practices that some found objectionable with Dean.

“Meet the new boss. He’s the same as the old boss,” said Kastel, quoting a song lyric from the rock band, the Who.

Comments

  1. Bob Rottenberg :

    The new yogurt plant in Brattleboro will need lots of milk, and apparently is ready to buy from as many local farmers as possible to keep their costs down. This just might create the market demand that could help our dairy farmers — as long as we all buy plenty of yogurt!

  2. The new yogurt plant in Brattleboro, like all dairy manufacturers including the Great Ben & Jerry’s, have the privilege granted to them by the federal government to buy milk at class II and III prices, set by that law well below the farmers’ cost of production. Class I or beverage milk sometimes returns a price equal to the farmers’ cost of production but not often. The “utilization” which is the ratio of Class I milk to CLass II, II and IV milk is now about 40:60, meaning that 40% of the farmers’ production goes into Clas I milk, where he stands a slight chance of making a profit, and 60% goes into these lower price products, where he stands virtually no chance. The new yogurt plant in Brattleboro will make no difference to dairy farmers.

  3. Tom Pelham :

    In September, 2009, Vermont’s congressional delegation called a meeting with farmers in St. Alban’s to discuss Dean Foods. As Dean Foods processes 70% of New England’s milk, our delegation brought with them Christine Varney, the assistant attorney general for the Antitrust Division of the U.S. Department of Justice to bolster the antitrust concerns about Dean Foods. She said, “Competition is not very well served when you have one player in the market who controls 70 percent of the market. We look very carefully at the activity in a market when you have that kind of dominance.” The meeting was well promoted and covered.

    http://vtdigger.org/2009/09/20/antitrust-division-to-probe-complaints-about-dean-foods%e2%80%99-alleged-monopolistic-practices/

    http://sanders.senate.gov/newsroom/news/?id=fcc5095e-72cc-4f99-a35f-be295f2fc6fc

    http://www.vermonttiger.com/content/2010/08/leahy-milking-votes.html

    Since then, a group of dairy farmers (but not the Antitrust Division of the US. Dept. of Justice) has sued Dean Foods. Dean Foods is willing to settle for $30 million, with the farmers’ Washington lawyer getting 33% of the settlement. Farmers will get a pittance, maybe $2,000 – $3,000 each on average, the value of one good milker or 600 or so gallons of diesel fuel.

    For a $30 million settlement, Dean Foods may have dodged the anti-trust bullet once more. A feat they’ve accomplished often over the past decade.

    Last week, in Barron’s, Dean Foods topped the NYSE exchange as the biggest percentage “winner” of the week as their stock price rose by 22.2%. In 2008 and 2009, Dean Foods reported Net Income of $184 million and $240 million respectively. For 2010, times were a bit tough with Dean Foods reporting Net Income of $91 million. But, as the current surge in their stock may indicate, better days are coming; though Net Income was down, revenues at $12.1 billion (more than twice the entire Vermont state budget) were a billion higher than 2009’s $11.1 billion.

    So here’s a request to Vermont Digger regarding continued coverage on this topic. Can Vt. Digger dig a bit with our Congressional delegation, or Christine Varney, or Elliot Burg at the Vermont AG’s Office who’s following the Dean Foods settlement case and find out if the U.S. Dept. of Justice is going to take any action, or whether the meeting in St. Albans was all for naught?

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