Sassy Cow Creamery just celebrated its second anniversary. Last year, looking to get its name out there, the dairy landed a contract to supply milk to a high-profile Madison event. All went smoothly and the dairy was looking forward to a repeat performance this year. But this spring the family-owned, Sun Prairie-based dairy was outbid by Dean Foods, a $12 billion company that now controls 57 percent of Wisconsin’s milk market.
This David-versus-Goliath struggle for market visibility is indicative of what is occurring across the state.
“Dean has the market cornered,” says Kara Kasten-Olson, sales manager for Sassy Cow Creamery. “There are only a few companies left that can compete against them.”
A federal antitrust suit filed in January by the U.S. Department of Justice, in conjunction with Wisconsin, Illinois and Michigan, alleges the same.
Expected to be heard in the U.S. District Court for the Eastern District of Wisconsin in Milwaukee next year, the suit aims to force Dean Foods to sell the two milk bottling plants it purchased last year from Foremost Farms U.S.A.
The suit alleges that because of the acquisitions, Dean, a Dallas-based company with some 27,000 employees, now has too much control over milk pricing and supply, a position that squashes market competition.
This alleged control over pricing and supply comes as dairy farmers are coming off a year of low milk prices and years of consolidation at every level of production. As a result, consumers could pay more for milk, with fewer options to choose from, as small family farmers and dairy processors continue to feel the squeeze from Dean’s looming presence in the Dairy State.
“We certainly are experiencing antitrust violations and limited competition at the expense of our farm families,” says U.S. Rep. Tammy Baldwin, D-Wisconsin, who joined other state and federal officials in Madison on June 25 at a federal agriculture-antitrust workshop. That event was the third of five federal agriculture-antitrust workshops being held around the country, a sign of the federal government’s new interest in food industry consolidation issues. “As Dean grows, farmers struggle not to hit rock bottom,” Baldwin says.
Dean counters that it has conducted its business “in full compliance with all antitrust laws,” and a “full review of the facts will reveal competition is alive and flourishing in the dairy industry,” according to a statement prepared in response to questions from The Capital Times.
Yet Dean executives appear to be aware of the power the company wields. In one instance cited in the suit, Dean declined to bid aggressively on a major supermarket account held by Kemps, a competitor, because doing so, according to a Dean executive, would have put a Kemps plant “out of business or to its knees ... and we’re not going to do that right now. You pick your fights.”
The fact the federal government is now trying to put the brakes on Dean’s two latest purchases is another sign to some that the Obama administration is serious about antitrust issues in agriculture, dairy in particular.
“The suit is the first novel action the U.S. Department of Justice’s Antitrust Division has taken in the dairy industry, period,” says Pete Hardin, the editor and publisher of The Milkweed, an industry newsletter published in Wisconsin. “During the Clinton and Bush years, Dean ran wild with acquisitions.”
Dairy farmers have limited options when it comes to selling their raw, unpasteurized milk. In Wisconsin 90 percent of the raw milk sold is used to make cheese and 10 percent is bottled and sold as milk.
A shrinking number of dairy farmers, including the family that started Sassy Cow, decide to go out on their own, doing everything from owning and raising the cows, to operating the bottling plant, to marketing and selling the dairy products.
Others sell to private bottlers or join farmer-owned dairy cooperatives. Cooperatives began in the 1920s as a way to pool the resources of their farming members and share profits. The cooperative retains some profit (the amount varies depending on the co-op) for marketing and other expenses.
There are now 150 dairy cooperatives in the country, the largest being Dairy Farmers of America, with 18,000 members. The ten largest cooperatives supply more than half of the country’s milk.
In the eyes of some farmers, the large cooperatives have gotten as powerful as the large corporations, a fact many small dairy farmers in Wisconsin do not view favorably.
In April 2009, one of these larger cooperatives, Baraboo-based Foremost Farms with 2,300 members located in seven states, sold its last two milk processing plants to Dean Foods for $35 million.
Because federal guidelines do not require companies to report acquisitions of less than $65.2 million, Dean’s purchase legally occurred under the federal reporting radar.
UW-Madison law professor Peter Carstensen, an expert in antitrust law, read about it in a local newspaper. He then tipped off the feds.
“Dean has made it a practice of buying up small fluid-milk processors all over the country,” Carstensen says. “If I was a farmer and not happy with what Dean or Dairy Farmers of America was getting for me, I could go to Foremost. With the merger, there are now fewer options.”
The suit aims to force Dean to sell the two plants it purchased last year. The plants, located in DePere and Waukesha, mostly bottle Morning Glory and Golden Guernsey milk. The acquisition added those brands to other regional Dean subsidiaries that include Silk soy milk and Land O’ Lakes. Despite the suit, Dean continues to bottle milk at the plants. As it does with its other regional brands, Dean will continue to label the milk as Morning Glory and Golden Guernsey, not Dean’s, according to Liliana Esposito, a spokesperson for Dean Foods.
“For our business to be viable, we must have a reliable supply of high-quality, fresh milk,” said Dean in its statement. “We must be able to buy raw (unpasteurized) milk at reasonable prices that allow us to supply fresh drinking milk to our customers at prices that consumers can afford.”
Robert Cropp, a UW-Madison professor emeritus and an agricultural economist, says the consolidation of mom-and-pop grocers into large retailers has put pressure on dairies like Dean to get bigger to meet market demands.
“Dean Foods is a big company, but they are small in comparison to the big grocers like Walmart,” Cropp says. “Everything is bigger.”
Begun in 1925 as an evaporated milk processing facility in Illinois, Dean continued to grow over the years, expanding its presence into milk, cottage cheese and ice cream.
Since 1996, Dean has added more than 100 dairy processing plants to its company roster. In Wisconsin, it now owns four of the state’s 17 fluid-milk processing plants. Dean’s real power, though, doesn’t come from its number of state plants, but from the percentage of milk it processes and the limited number of companies it bids against for milk contracts. In some cases, Dean only has one or two competitors for school district milk contracts, according to the suit.
Dean’s market share is now 57 percent across Wisconsin. It peaks at 85 percent in Michigan’s Upper Peninsula and hovers around 60 percent in the cities of Green Bay and Chicago. Dean’s closest competitors are Kemps and Prairie Farms Dairy, with 17 and 15 percent of the market share, respectively.
By taking Foremost, a company whose bidding practices Dean referred to in company memos as “dangerous” and “irrational,” out of the milk bottling market, Dean now controls 50 percent of the school district milk contracts in Wisconsin, in Michigan’s Upper Peninsula and in northern Illinois.
Joan Behr, a Foremost spokesperson, says it became clear to the cooperative members and its board that, to remain profitable, it would have to expand its presence in the milk bottling industry, enter a joint venture with another company, or sell its two milk bottling plants.
The company chose to sell.
“The bottling landscape is changing,” says David Ward, a former state representative from Fort Atkinson and now a lobbyist and dairy director for the Cooperative Network, an organization that includes 600 member cooperatives (not just dairy) in Minnesota and Wisconsin. “The co-ops’ influence in bottling milk was greatly reduced when Foremost sold its bottling plants to Dean.”
As recently as a decade ago, there were seven milk processing plants within a 20-mile drive of Bruce Drinkman’s farm. A few remain, but only as product transfer points, says the third-generation dairy farmer from Glenwood City, east of Hudson. There is one cheese processing plant, but no more milk bottlers.
His bottler of five years, Organic Choice of Mondovi, located about an hour from his farm, closed in May.
Looking for a buyer, and fed up with dairy co-ops, which he says have gotten too large, Drinkman now sells his milk to Colorado-based Horizon Organic. The organic milk processor is a subsidiary of Dean.
“There is consolidation all across the agriculture industry,” he says. “Milk is the same way. It is down to two or three outlets for all of it. We have limited choices.”
As for the federal antitrust case pending against the owner of his processor, Drinkman stays neutral.
“There is a fine line between hard-nosed business practices and a company that has too much power over the market,” he says. “We are all in this to make money.”
Citing recent profit performance reports, Dean spokesperson Esposito says the market has been “tough on everyone.”
According to Dean financial reports, the company’s profits were down 49 percent for the first quarter of 2010 versus the first quarter of 2009. Dean’s adjusted net income for the first quarter of 2010 was down by nearly a half, dropping from $83 million during the first quarter of 2009 to $42 million.
Dean’s sales were up, though, but only slightly: $2.97 billion in the first quarter of this year compared to $2.7 billion in 2009.
A statement from the company attributed the sales increase to “pass-through of higher overall dairy commodity costs,” meaning Dean paid more for milk, but passed the cost along to consumers via retailers.
Just as Dean’s numbers are down, so are Drinkman’s.
Drinkman traces his troubles to lower milk sales, a result, he says, of the consolidation of processors and an arcane dairy pricing system.
Three days before Christmas, Drinkman was handed foreclosure papers on his farm, cows, machinery and land. “They want to take the whole works,” Drinkman says.
To keep afloat, Drinkman recently filed for Chapter 12, a category of the federal Bankruptcy Code that only applies to farmers. Filing for Chapter 12 will allow him to reorganize the family farm business, working his way out of foreclosure by working with creditors on a five-year repayment plan.
With the interest rate yet to be set, Drinkman will pay the bank at least $6,300 a month for the next five years to get his farm out of debt.
“Some days I feel like I’m 67,” the 47-year-old jokes. “Good, bad or indifferent, I’m a dairy farmer. I am going to continue to farm and move ahead as if nothing else matters.”
In what many describe as an outdated dairy pricing system, the price of milk is based on the trading price of block cheddar cheese and butter at the Chicago Mercantile Exchange.
To further complicate the equation, the federal government also sets a price for milk through the federal milk marketing order (FMMO).
Dairy farmers, regardless of whether they sell their milk to a bottler or a cheese maker, at a minimum have to be paid the base amount set by the FMMO.
“They both live under the same milk marketing order,” says Brian Rice, the owner of Rice Dairy LLC, a dairy brokerage firm in Chicago. “The (base) price on their milk check is the same.”
Farmers who belong to a cooperative are an exception. Under federal tax laws, the cooperative can withhold up to 20 percent of the group’s collective profits to reinvest in the cooperative for product marketing and other expenses. This means farmers in a cooperative can receive less than farmers who sell to private companies.
While Dean’s Esposito says Dean does not control prices at the retail level, some industry analysts and Dean’s company memos cited in the suit contend the company does have the ability to affect price and its competition.
According to the lawsuit, Dean in 2008 announced an upcoming fuel surcharge price increase and one of its competitors followed suit. In reporting this news to his boss, the group vice president for the area wrote that “the strategy paid off.” The boss then responded that it is a good practice “to signal your intentions early and often.”
This ability for a large company like Dean to allegedly control the market is the reason for the suit, says Carstensen, the UW-Madison law professor.
“It becomes increasingly possible for a dominant seller to raise prices to consumers as it faces less and less competition,” Carstensen says. “The overall claim (in the suit) is that Dean’s increased dominance was likely to result in higher prices for milk at both the whole(sale) and retail level.”
Dairy farmers Sally and Brad Saunders of Brodhead recently have experienced the impact of price instability on the cheese industry.
First-generation farmers who sell the milk from their roughly 60-cow herd to an Illinois cheese maker, the Saunders have seen the price they receive for milk drop in recent years.
After averaging around $70,000 a year in profits, the Saunders dipped $30,000 in the red last year.
Aiming to get back in the black, they cut the amount of protein fed to their herd, began using a bull to breed the cows (instead of artificial insemination), cashed in two IRAs and borrowed again from the bank.
Sally Saunders’ frustration grows when she goes to the store and sees a $4 to $5 difference between the price of cheese and what she was paid for the milk to make the cheese.
“It comes back to the milk price, and Dean is controlling that (in Wisconsin),” Saunders says. “I equate it to a sweatshop. The people producing the milk product are bleeding out here.”
Saunders has accepted a part-time teaching position at Blackhawk Technical College for the fall.
“There is a lot of pain out there,” says Cropp, the UW professor emeritus. “Farmers blame their cooperatives or they pick on Dean Foods because it’s the largest bottler of milk.”
U.S. Sen. Russ Feingold, who is pushing for antitrust reform in the dairy industry, says farmers need to not only believe they have a future in the business, but that they can make a profit.
“People expect farmers to be happy when they’re not even getting the cost of production included in the price they receive for milk,” said Feingold during the federal antitrust workshop in Madison.
While some see the federal case against Dean as a historic shift in the government’s willingness to go after big dairy, others doubt it will amount to much.
Robert Wills, owner of Cedar Grove Cheese in Plain, says he doesn’t think the suit is for show, but questions how much can really be accomplished. “I’m not sure that anyone or any judge will have the guts to come up with a solution that will be meaningful,” Wills says. “I don’t think anybody is going to break up Dean.”