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The Monopolization of Milk

Earlier this year, both The New York Times and National Public Radio reported that Chinese retaliatory tariffs in Trump’s trade war were accelerating the loss of U.S. dairy farms. In the first half of 2019, dairy exports to China were down 54 percent from the previous year, at a time when dairy farmers rely on exports to market a surplus of milk that’s driven milk prices below most farmers’ break-even point for nearly four years.

Meanwhile, Trump’s Secretary of Agriculture has told dairy farmers that the only way to stay afloat in these tough times is to get big, or get out, while promising new markets for U.S. dairy products in the yet-to-be-ratified U.S.-Mexico-Canada agreement.

These declarations reflect a powerful conventional wisdom about the plight of America’s farmers, namely, that agricultural consolidation is inevitable, and that American farmers must export their way to profitability. But that conventional wisdom, which is shared even by some leading voices in the Democratic Party, is seriously out of focus. Although trariffs and technology play a role, they are hardly the main factors in the dairy crisis.

One critical reason dairy farms feel pressure to consolidate is because milk retailers, buyers, and, processors have spent years consolidating around them—and neither the Trump nor previous administrations have done much to stop it. Now, a merger between major milk monopolists threatens to deal another blow to ailing dairy farmers, and its not clear if federal enforcers will do anything to stop it.

Last week, America’s largest dairy processor, Dean Foods, filed for Chapter 11 bankruptcy and announced that it was in advanced talks to sell to America’s largest cooperative, Dairy Farmers of America (DFA). These two goliaths are a case study in how unchecked mergers beget abusive monopolies that harm both farmers and consumers. But because Dean has filed for bankruptcy, this otherwise questionable union could avoid antitrust scrutiny under the failing firm defense, which allows for mergers when one firm would otherwise go out of business. In other words, two monopolists may soon join forces to create an even bigger monopoly.

DFA is the amalgamate of a three-way cooperative merger in late 1997 and Dean Foods rose to prominence by buying up regional milk brands since the 1980s. Today, DFA has a near monopoly in many regional markets, and controlsroughly 30 percent of all raw milk in the U.S., handling more than two and a half times as much milk as the next largest co-op. At the same time, Dean sells 12 percent of all fluid milk and claimed to be five times larger than its next competitor in 2013.

As detailed by Leah Douglas in the Washington Monthly last year, these giants have been accused of colluding against the interest of dairy farmers and consumers for years. Two groups of farmers have settled multi-million-dollar antitrust claims with DFA, and another has spun-off a case to seek more damages in court. On the consumer end, Dean Foods reached an antitrust settlement with grocery chain Food Lion in 2017 over allegations that the firm avoided competing with DFA-owned National Dairy Holdings to raise retail milk prices.

A Dean Foods-DFA merger would make this otherwise illegal collusion perfectly legal, since our antitrust laws permit collusion once it occurs within a single corporation. “The more DFA expands downstream into fluid milk processing the greater the leverage it’s going to have in a variety of ways,” Peter Carstensen, a Professor Emeritus at the University of Wisconsin Law School and former Department of Justice antitrust attorney, told me. So-called “‘tacit’coordination becomes much more possible because … that will be an internal corporate [decision].”

The merger means that dairy farmers have even fewer processors competing to buy their milk. As a producer, I’m concerned about DFA making this large a purchase,” said Charles Untz, a farmer and former DFA board member. “It puts a lot of the control of the fluid market in the hands of one co-op. That sends a little fear as far as the milk price goes, because they can literally dictate what they pay for milk.”

What’s more, the deal would exacerbate DFA’s conflict of interest between its processing operations and its members, since processing operations reap higher profits the less they pay farmers for milk. Proponents argue that investing in processing ultimately helps DFA farmers by guaranteeing markets and eliminating the middleman, but Carstensen argues that a fair share of processing profits “never seems to make it to the farmers.”

To make matters worse, DFA takes further cuts from farmers’ milk checks to pay for its processing business under the justification that these investments help farmers in the long-run. A recent report by the Government Accountability Office found that these investment withholdings lower farmers short-term earnings.

As a former DFA board member, Untz stands behind some of the group’s processing investments, but worries that this deal with Dean could put farmers at financial risk given its substantial size. “It’s easy to buy something when it’s going broke, it’s [harder] when you got to pay for it,” he said. “It would have to be paid for by the farmers and that’s a pretty scary situation after making a lot of other purchases.”

If DFA operated the way co-ops are supposed to, its farmer owners would be able to decide if a major deal like acquiring Dean Foods was worth the risk. But because of its vast size and entrenched management, farmers have little control—an issue highlighted in the GAO’s recent report. Ironically, a third of Dean’s bondhodlers who have hired an attorney to advocate for alternative bankruptcy solutions may have a better chance at blocking the sale.

Should a Dean and DFA deal go forward, the fate of farmers will ultimately be left to the Justice Department, which may or may not embrace the faulty logic of the failing firm defense.

Carstensen, for his part, argues that there are other ways to restructure Dean’s business without selling wholesale to DFA. “My preference would be to break Dean up, seperate out more facilities, and sell to separate operators,” he told me. In fact, Carstensen sees Dean’s relentless efforts to expand as part of the reason for its bankruptcy, calling into question the very notion that bigger is better.

Because, it turns out, the consolidation of American agriculture is not a universally efficient or inevitable result of market forces. It is the product of policies that permit and reward monopoly power, regardless of the risks to producers, consumers, and even, ironically, to monopolists themselves.


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