All Things Considered

Independent Farmers Feel Squeezed By Milk Cartel

By John Burnett
August 20, 2009, 12:00 PM

A close-up view of a diary cow pushing her face toward the camera. - Dairy farmers are starting to think creatively in order to survive. At Hedgebrook Farm in Winchester, Va., customers invest in a cow, like this one, in exchange for a gallon of milk per week. Hedgebrook Farm owner Kitty Nicholas says if it weren't for the program, she wouldn't be able to exist by milking only 20 cows. (Katie Hayes/NPR)

Behind that pure, wholesome, nourishing glass of milk, there's an insurgency.

The price of raw milk paid to farmers has dropped to its lowest level in 40 years. Dairy farms are going under across the country, and a few dairymen have grown so desperate they've taken their own lives.

As the crisis deepens, criticism grows that dairy giants are trying to monopolize the industry, to the detriment of independent farmers and consumers.

I don't think the American public realizes where the milk comes from. Or what they're going to do if we don't have fresh milk.

–Dairy owner Shorty Miller

(Katie Hayes/NPR)

Farmers Squeezed On Prices

Most of what we know about the dairy business is in the supermarket: gallon jugs of whole, 2 percent and organic milk; blocks of cheddar, Swiss and Monterey Jack; cartons of chocolate chip ice cream.

Shorty Miller owns a small dairy in central Texas. Like nearly every other dairy farmer in America, she's angry. Milk prices in the supermarket have come down only slightly, but the price she gets for the raw milk from her Holsteins has dropped nearly in half.

Dean Foods controls about 90 percent of the milk supply in Michigan, 80 percent in Massachusetts, over 80 percent in Tennessee and 70 percent in northern New Jersey. That's not a free market.

–Vermont Sen. Bernie Sanders

(John Burnett/NPR)

Borden milk is $3.99 a gallon. Oak Farms, which is bottled locally, is $3.49 a gallon, and that's a sale price," Miller says, pointing to cartons of milk in the dairy case at Brookshire's Grocery in McGregor, Texas.

How long can Miller's dairy hold out being squeezed the way it is?

"Depends on how long the bankers will work with us. If we want to put up everything we've worked 40 years for, we can hold out a little longer. But do we want to?" Miller says. "I don't think the American public realizes where the milk comes from. Or what they're going to do if we don't have fresh milk."

In the last few years, we have worked very hard at being more collaborative and much more transparent.

–Rick Smith, CEO of the Dairy Farmers of America

As the dairy industry concentrates into fewer and fewer players, some farmers complain it's killing off independents and reducing options for consumers who want to buy locally.

And they're speaking out.

A Tight Grip On Milk Market

Earlier this month, distraught dairy farmers packed a room in Tomah, Wis., to implore their elected representatives to do something. Their comments were broadcast on local radio station WCOW — Cow 97.

Rebecca Goodman and her husband run a 120-year-old dairy in Sauk County, Wis.

"We all worship at the altar of the free market — that's what we're taught as good Americans," Goodman said on the air. "But I don't know what is free about a handful of companies controlling the process from beginning to end."

Two entities have come in for the harshest criticism.

Dairy Farmers of America, or DFA, based in Kansas City, Mo., is the nation's largest dairy cooperative. It buys milk from 18,000 farmer-members and says it tries to get them the best price. DFA controls about a third of the nation's raw milk supply.

Dean Foods is a Fortune 500 company headquartered in Dallas. With brands like Horizon Organic and Land O'Lakes milk, Dean buys from DFA and bottles more than a third of the nation's milk.

Pete Hardin is publisher of The Milkweed, a monthly dairy marketing and economics report.

In the 30 years Hardin has been writing about the dairy industry, he has chronicled the decline of the family farm and the rise of "Big Milk." Hardin believes the fundamental problem with the dairy industry is a lack of honest competition and too little government oversight.

"That's why we have reached, in my opinion, the point we have reached, where farm prices are so abysmal," Hardin says. "And we know the money is in the marketplace — we see what the consumer's paying for these dairy products. If the farmer would get a fair share of that, we wouldn't be having this discussion."

As Farmers Flounder, Dean Foods Prospers

Let's take a minute to see how milk gets from the barn to your kitchen.

Raw cow's milk is gathered in a tank. Then a milk hauler takes the farmer's milk to a fluid milk plant, where it is pasteurized and bottled. Or, he trucks the raw milk to a different plant that makes it into cheese, butter, yogurt or ice cream.

The processor then wholesales the milk or dairy products to the supermarket, where you buy it.

The place in our cow-to-consumer chain that's causing the most grief these days is the processor: the middleman.

As businessmen, they want to buy raw milk at the cheapest price from the co-op and sell it at the highest price to the grocery store.

"Dean Foods, which is the largest fluid processor in the U.S., at their last annual meeting said, 'Hey, we've got super profits because we're buying the milk so cheap,' " says Texas dairy farmer Miller.

Dean's fluid milk profits jumped 35 percent in the first two quarters of this year. In a teleconference with analysts in May, Dean's CFO bragged that cheap raw milk had created "the perfect sunny day" for the $12 billion corporation. This, at a time when Miller is losing 45 cents on every gallon of milk she sells from her cows, because she's making less than the cost of production.

Sen. Bernie Sanders, whose home state of Vermont has lost 32 dairy farms so far this year, has gone on the offensive.

"Dean Foods controls about 90 percent of the milk supply in Michigan, 80 percent in Massachusetts, over 80 percent in Tennessee and 70 percent in northern New Jersey. That's not a free market." Sanders says.

Dean And DFA: Goliaths Link Arms

Marguerite Copel, vice president of corporate communications for Dean, insists it is a free market. There are lots of milk buyers besides Dean, and the price of raw milk is set by the marketplace, not by one company, she says.

But there's no denying that Dean is the embodiment of corporate bovinity.

Over the past decade, through mergers and acquisitions of co-ops and dairy processors, both Dean and DFA grew bigger and bigger. Then, the goliaths linked arms: DFA entered into a 100 percent, full-supply agreement with Dean.

So as Dean came to dominate regional markets, any dairyman who wanted to sell to one of Dean's 50 brands had to go through DFA, whether they wanted to or not.

Think Elsie the Cow as Gordon Gekko.

A group of dairymen are suing DFA, Dean Foods and others in federal court for allegedly engaging in anti-competitive and predatory behavior. The lawsuit claims that DFA has effectively created an illegal milk cartel in the Southeast.

John Harrison, owner of Sweetwater Valley Farm, an 800-cow operation near Philadelphia, Tenn., is one of the 17 dairymen bringing suit.

Harrison says the industry was different before DFA came into existence in 1998.

"Prior to that, it was kind of a beautiful market in our area, because you could pick up the phone today and go somewhere else tomorrow. "There was still a lot of competition," Harrison says. "Well, as DFA came in and began tying up all those supply contracts, those things disappeared. The net effect was that you had no other option. If you were dissatisfied or wanted to make a change, you had no option to go sell your milk."

Rather than enjoy the benefits of being part of a farmer-owned co-op, Harrison says DFA has artificially depressed prices for raw milk.

"The milk market does not function in the Southeast as a true market," Harrison says.

The observation is echoed by Peter Carstensen, an antitrust expert at the University of Wisconsin law school who closely watches the dairy industry.

"Where there is a competitive market for buying milk, dairy farmers are paid more. When DFA comes to dominate a market, then farmers are paid less. Monopolists behave like monopolies," Carstensen says.

Dairymen are not saying all their problems can be traced to the consolidation of their business. Farming is more complicated than that. Prices for animal feed, equipment and land have gone through the roof. And most significantly, today there's a surplus of milk on the market, most agree, because of too many milk cows and a shrinking export market.

Rick Smith, the CEO of the Dairy Farmers of America, laments the desperate straits his members are in, but he says some context is in order.

"In 2007, we had record prices. Farmers had record income. What we're really seeing is how this volatility in this industry at both ends is very destructive," he says.

Smith says there has been no collusion with Dean Foods; he says Dean has been a good customer for DFA's members. Smith also says DFA does not force dairymen to join the co-op. But he agreed that when he took over the co-op in 2006, it was time for a change.

"We recognize that in some places — not in all — our image needs work," Smith says. "I think the size and scope of DFA in some quarters was perceived as threatening. And thus, in the last few years, we have worked very hard at being more collaborative and much more transparent."

On The Trail Of Big Milk

Milkmen have been gaming the system for years.

Back in the 1980s, prosecutors in two dozen states got 100 convictions or guilty pleas for milk processors who were charged with bid-rigging on school milk contracts.

Last year, the Commodity Futures Trading Commission fined DFA and two top former executives $12 million for trying to inflate cheddar cheese prices. The scene of the crime: the dairy pit at the Chicago Mercantile Exchange.

The antitrust division of the Justice Department spent two years investigating anti-competitive conduct in the dairy industry. Congressional and legal sources tell NPR that in 2006, investigators recommended charges be filed against Dairy Farmers of America and Dean Foods, among others, for violating the Sherman Antitrust Act.

Under President Bush's Justice Department, the case was shelved. Earlier this month, three senators sent a sharply worded letter asking the new antitrust division to re-energize that investigation.

The call for government oversight comes most urgently from independent farmers like Harrison, the Tennessee dairyman and plaintiff. He says they filed their civil lawsuit against the dairy giants because the Justice Department wouldn't file its case.

"We need to be ensuring that there are functioning markets everywhere. And a functioning market to me means multiple buyers and multiple sellers," Harrison says. "And that's what DOJ is charged with doing. And we don't have that."

Several sources quoted in this story say they're being interviewed by Justice Department lawyers as they collect information and decide whether to reopen the case against Big Milk.