After Dean announced it had filed for bankruptcy, Dairy Farmers of America said it was in “advanced discussions” on an acquisition. A merger would all but guarantee lower income for struggling farmers.
One of America’s biggest dairy companies, Dean Foods, filed for Chapter 11 bankruptcy on Tuesday, leaving the future uncertain for its milk suppliers, some of whom don’t know whether they can stay in business if their major buyer goes belly up.
It’s no secret that the timing is terrible. Federally established milk prices remain low, dairy exports are down thanks to the trade war, and domestic milk consumption has fallen steadily since 1970. But one of the most pressing issues posed by Dean Foods’s bankruptcy is the possibility that farmers won’t be able to find anywhere else to sell their product.
Companies like Dean Foods buy fluid milk from dairy farms, which they then process and distribute to retailers across the country. Farmers can sell directly to processors, or they can sell to dairy cooperatives, which in turn, negotiate with processors and retailers on members’ behalf. However, rapid consolidation among dairy co-ops limits the number of options for farmers.
In addition to representing more than 13,000 dairy farmers, DFA controls 30 percent of milk production in the U.S.
“We really have not had any significant options to sell our milk in the last 10 years,” says Ernie Jones, who runs a 300-cow dairy farm in Tennessee with his daughter. Jones has sold directly to Dean Foods for the past two decades.
In its announcement, Dean Foods said that it was “engaged in advanced discussions” with Dairy Farmers of America (DFA), the country’s biggest dairy co-op, regarding a possible acquisition. For one antitrust expert, however, that raises concerns about anti-competitive activity.
Though it’s supposed to advocate for dairy farmers, DFA’s involvement in processing also means it has an incentive to keep prices of inputs (read: milk) as low as possible.
“The problem with DFA is the conflict of interest that will result from [trying] to lower prices to farmers in order to increase their revenue as a milk processor,” says Peter C. Carstensen, a professor emeritus at the University of Wisconsin Law School and a former attorney for the antitrust division of the United States Department of Justice (DOJ).
Carstensen isn’t the only one concerned. Some farmers have accused the co-op of conspiring to suppress milk prices in order to maximize its own profits. And a recent government watchdog report found that competing interests within co-ops can impact farmers’ earnings.
Though it’s supposed to advocate for dairy farmers, DFA also has an incentive to keep milk prices as low as possible.
In addition to representing more than 13,000 dairy farmers, DFA controls 30 percent of milk production in the U.S. Carstensen warns that a DFA buyout of Dean Foods could give it monopoly-like power over the milk market. “What you’re going to see is increased risk of tacit collusion on the consumer side, raising the price of milk for consumers,” he says.
In 2007, dairy farmers in the southeast U.S. filed a class-action lawsuit against Dean Foods and DFA, claiming that the two had conspired to keep milk prices low. According to the complaint, Dean Foods agreed to make DFA its sole dairy supplier in exchange for a guarantee of low milk prices. The lawsuit was later split, with Dean Foods settling for $140 million in 2011, DFA settling for $168 million in 2013, and neither company admitting to wrongdoing. In 2009, farmers in the northeast filed a separate class action on similar grounds, which Dean Foods settled for $30 million in 2011 and DFA for $50 million in 2014.
Farmers I spoke with for this story had another reason for feeling pessimistic about a DFA buyout: Unlike Dean Foods, cooperatives aren’t required to pay farmers federally set minimum milk prices.
“We could very well be in for quite a bit of a substantial decrease in our price for milk,” Jones says. “And we’re already teeter-tottering on low prices.”
Jones adds that he wouldn’t be able to afford lower milk prices at this point: “I’ve about had all I can stand.”
“It was one of those things we knew could likely happen but were hoping wouldn’t.”
In the 24 hours since Dean Foods filed for bankruptcy, news outlets—including CNN, Fast Company, Associated Press, and Barron’s—have been quick to blame the company’s downfall on decades of decline in American milk consumption and consumer interest in plant-based alternatives.
But Andrew Novakovic, professor of agricultural economics at Cornell University, says the narrative here is more complicated than that.
“The decline in beverage milk sales is not the same story as the failure of this company,” Novakovic says, listing off the names of countless other milk processors that haven’t filed for bankruptcy. “I don’t think you can lay all the blame for their problems on the fact that they’re heavily invested in a declining sector.” But, he says, “it sure as hell didn’t help them.”
Last year, some farmers caught a preview of what it would mean to sever ties with Dean Foods, after the company terminated 100 dairy contracts in eight states in a purported effort to balance its supply with retail demand. Among current suppliers, Tuesday’s news wasn’t particularly a surprise. Speculation that Dean Foods would file for bankruptcy had been circulating for months.
“It was one of those things we knew could likely happen but were hoping wouldn’t,” says Milton Beard, another Tennessee-based dairy farmer. “There’s not a whole lot we can do about it at this point. We just hope we’re able to get paid.”
Source: newfoodeconomy.org
