Although American demand for dairy has risen steadily for almost 40 years, some farmers tried to limit the supply of milk by killing off their own cows.
No, you read that correctly. This mysterious state of affairs was revealed in a nationwide class-action lawsuit against dairy cooperatives, groups of farmers who pool their supplies but, as a whole, serve as middlemen between the farmers and dairy processors. In this case, lawyers from one of the premier U.S. plaintiffs’ firms alleged on behalf of American consumers that the cooperatives paid farmers to prematurely turn hundreds of thousands of cows into burgers in a sprawling scheme to prop up dairy prices.
The defendants settled this week for $52 million, a drop in the bucket for such a big industry. But the antitrust case pulls the curtain back on a highly complex sector of the U.S. agricultural economy—one where some of the laws of macroeconomics don’t always seem to apply.
Riding the herd
The “herd retirement program,” as it was called, was led by Cooperatives Working Together, run by the lobbying group National Milk Producers Federation, and supported by farms producing almost 70 percent of America’s milk. Individual cooperatives sued included Dairy Farmers of America Inc., Land O’Lakes, Dairylea Cooperative Inc., and Agri-Mark Inc.
The consumers claimed that between 2003 and 2010 the cooperatives paid above-market prices for dairy cows owned by member farmers, and sent them to be slaughtered before they would have otherwise. Cut the supply, the price will rise, right? But things get weird when you look at the industry’s performance. Since 1975, the U.S. government says overall American dairy consumption has gone from 539 pounds per person per year in 1975, to 627 pounds in 2015 (though fluid milk sales have dropped precipitously). So why does anyone need to boost prices when people can’t seem to get enough non-fat Greek yogurt?
Those defendant cooperatives, as we mentioned, are made up of dairy farmers both large and small. The farmers sell their milk through the cooperatives to huge dairy processors (the folks who make your favorite yogurt), who then sell to retailers (your local supermarket). Gary Genske, treasurer of the National Dairy Producers Organization, says the processors often demand more milk from the cooperatives than is actually needed, creating a glut and driving the overall price of dairy down (which of course benefits the processors and hurts the farmers). “We have far too much product for what the market wants,” Genske said.
So—according to the complaint filed five years ago in San Francisco federal court—the cooperatives came up with a way to fight the glut and boost prices. Kill hundreds of thousands of cows. This bovine execution initiative seemed to achieve its goal: From 2004 to 2008, producer prices rose 66¢ per hundredweight of milk, according to an analysis by Dr. Scott Brown of the University of Missouri-Columbia for cooperatives group.
The defendant cooperatives didn’t admit or deny wrongdoing as part of the settlement. But their lobby, the National Milk Producers Federation, called the accord “the most sensible and responsible course of action.” (Dairy Farmers of America, Dairylea Cooperative, and Agri-Mark didn't respond to a request for comment. Land O’Lakes referred questions to the NMPF.)
The accord notwithstanding, the structural problems that led to this bizarre program within a $35.5 billion industry remain.
The path that leads to killing perfectly good dairy cows begins with a 1922 law, the Capper-Volstead Act. The statute was designed to protect both dairy farmers and consumers from profiteering middlemen by allowing them to organize and consolidate their bargaining power.
“What it did not allow was the farmers to get together to sell their milk to decide how much they were going to produce,” said Jeff Friedman, a partner at the law firm that filed the suit, Hagens Berman Sobol Shapiro LLP. The cooperatives regularly updated members about the success of the program, often including analyses of its effectiveness in maintaining dairy price levels, according to the complaint.
The initial research that identified potential price-fixing in the industry was conducted by Compassion Over Killing, an animal welfare group. Erica Meier, executive director of the nonprofit, claimed the dairy lobby program constituted collusion in an effort “to line the pockets of agribusiness.”
Genske notes, however, that the farmers who took advantage of the option of selling cows for slaughter were often doing so out of desperation, not greed.
“No [dairy farmers] got rich on that program,” said Genske, an accountant and farmer in New Mexico with 2,000 cows of his own. “It was those who were financially strapped and found that as a great exit strategy.” Friedman, the attorney for the consumer class, however, says that some farmers made use of the program just for cash and not out of necessity.
The program, Genske said, helped farmers but didn’t solve the ultimate problem: bad supply management. “It was a short-term band-aid on a hemorrhage caused by lack of adequate marketing by our cooperatives. What they’ll do is convince farmers, ‘yes we need another plant, because we have all this other milk to utilize in the market.’ But what they don’t tell us is that product can only make a profit two out of 10 years.” That’s because oversupply of raw milk gets turned into longer-lasting products such as cheese and powder, which send less money back to the farmer (a fact made worse by the decreased appetite for milk among Americans).
Farmers already get less than a third of the retail price of a gallon of milk, with the rest going to processors and retailers. When it comes to milk used for other products, Genske said, “It can get sold below the farmers’ cost to produce milk.”
An effort that backfired
“These dairy farmers are up against a terrible reality,” says Nate Wilson, a former dairy farmer from Chautauqua County, N.Y. “They don’t have any way to throttle the production of milk other than to eliminate cows. And when the price of milk goes down to ruinous levels, it’s basically the only way out.”
“Yes, dairy farmers needed more money,” says Pete Hardin, editor and publisher of the Milkweed, a publication about the dairy industry. “But finding questionable … means to achieve that appears to have ultimately backfired.“ This is just the latest legal black eye for the dairy industry, which has faced a long list of antitrust cases, including one settled in June for $50 million and another in 2013 for $158.6 million.
“The real story here is the long and repeated and expensive list of antitrust settlements entered into by dairy co-ops,” Hardin said. “Somewhere along the way their attorneys misread what was legal and illegal under federal antitrust statutes.” Because farmers finance the co-ops, they end up footing the legal bills, too. Consumers who paid artificially high dairy prices will get their tiny piece of the settlement, but dairy farmers may not see a solution to the supply problem that sparked the “retirement” program in the first place. In fact, they may lose even more.
Originally Posted: bloomberg.com