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Obama administration looks at competition in the dairy industry

PD Editor Karen Lee Published on 20 July 2010

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In response to the Obama administration’s request to look into antitrust enforcement issues, the U.S. Department of Justice (DOJ), Antitrust Division and the U.S. Department of Agriculture (USDA) are holding a series of joint public workshops to explore competition issues affecting the agricultural sector in the 21st century.

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The dairy workshop, held on June 25 in Madison, Wisconsin, was the third of five scheduled workshops. Other topics include agronomy, poultry, livestock and margins.

Capper-Volstead Act
In his opening remarks, USDA Secretary Tom Vilsack assured that these workshops are not meant as a means to do away with the Capper-Volstead Act, which provides limited antitrust immunity to cooperatives. “We recognize the important role cooperatives play in giving fairness and balance to marketplace,” he said.

U.S. Assistant Attorney General for Antitrust, Christine Varney added, “We are very supportive of the mission of co-ops and Capper-Volstead. We have a pro-farmer agenda and will take that wherever it leads us.

“We expect that what we learn today will help us immeasurably as we consider the ways in which government can help to ensure efficiency and competition in dairy markets, with low prices to consumers – from school children to family pizza shops – and with fair returns to those running our dairy farms,” Varney said.

“We have already taken some important steps to protect consumers from undue consolidation. In January, the Department of Justice filed a lawsuit against Dean Foods alleging that it violated the antitrust laws in its acquisition of Foremost Farms,” she said, adding later, “We are keeping a watchful eye on this industry.”

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After the Foremost Farms acquisition, Dean Foods owns 57 percent of fluid market in the Upper Midwest, reported Congresswoman Tammy Baldwin (D-Wisconsin). “While Dean Foods’ bottom line grows, dairy farmers struggle to not hit rock bottom. Until recently I don’t think enough attention has been paid to this important issue,” she said.

Wisconsin Secretary of Agriculture Rod Nilsestuen pointed out that cooperatives now market more than 80 percent of milk in the nation, yet even the largest of the marketing co-ops are small business compared to the retail giants. “The big box retailer can exert incredible leverage and they seldom want the inconvenience of dealing with multiple small suppliers,” he said.

Bob Cropp, emeritus professor of agricultural and applied economics at the University of Wisconsin – Madison, agreed that cooperatives are not at the heart of the issue. “The thing is the concentration of the food industry has been much greater beyond the farm and cooperative level. [Cooperatives] don’t dominate any real aspect of the dairy industry. If you compare a dairy co-op to their customer or customer’s customer, they’re really small business.”

The top three dairy cooperatives – Dairy Farmers of America (DFA), California Dairies, and Land O’Lakes – only control 20, 13 and 7 percent of the market, respectively, said Cropp. “Any one doesn’t have enough market share to have market power,” he added.

Land O’Lakes Cooperative Board Chairman Pete Kappelman agreed the problem is further up the chain. Wal-Mart is 100 times larger than Land O’Lakes and Kroger is 20 times larger. “They are tying to bring down the price of food while we are wrangling to get the best price possible,” he said.

“Cooperatives are one of the last vestiges of hope left for dairy farmers,” Kappelman added.

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DFA Senior Vice President John Wilson said DFA was formed by four small cooperatives that voluntarily came together to compete in a world of consolidating retailers and processors. Not only did that merger help with marketing opportunities, it also helped eliminate inefficiencies and enabled them to offer health insurance, risk management options and farm supply purchase programs. “Our members firmly believe that size does matter and it can work to our benefit,” he said.

Price differential
Senator Herb Kohl (D-Wisconsin), who is the chairman of agriculture and judiciary subcommittees, brought about one point that was echoed throughout the day.

“While farm milk prices plummeted [in recent years], the price consumers paid for dairy products saw only a modest price decline. This discrepancy in price changes forces us to ask whether or not consolidation in the industry is leading to excess market power by some firms. We have to ask if our farmers are getting a fair shake,” he said.

Senator Russ Feingold agreed, saying, “There is a growing concern of the widening gap between what consumers pay for milk and cheese at the market and the lower prices farmers receive. Someone between the farm and consumer is taking a bigger slice than they should.”

Jamie Bledsoe, a California dairy producer, put a number to that, stating the farm price he receives is now roughly 30 percent what consumers pay in a retail store.

Market transparency
Kohl also called for transparency in dairy pricing. “In 1997 the spot market for cheese was moved from Green Bay, Wisconsin, due to concerns that it was thinly traded with only a small number of buyers and sellers who could potentially manipulate the market,” he recalled.

“The spot cheese market is now housed at the Chicago Mercantile Exchange (CME), but the concerns about potential market manipulation persist. The Commodity Futures Trading Commission (CFTC) has reported that the volume of cheese traded in Chicago generally represents less than 1 percent of all cheese produced in the U.S. The spot market sets the price – directly or indirectly – for almost all the cheese and milk in the country.

“This is a situation where the tail, controlled by a few traders in Chicago, can wag the dog of the market for milk across the country. I call on CFTC and the CME to strongly monitor the spot cheese market. We must have market transparency that ensures a fair price for farmers,” said Kohl.

Robert Yonkers, vice president and chief economist for the International Dairy Foods Association (IDFA), explained that most purchasers of cheese types today want it to specifications that may be a little different than what’s available on CME. In addition, there are not that many sellers on CME because many of them are producing for their regular customers. “It may be that all the buyers and sellers that could participate in that market are,” he said.

Former Pennsylvania Secretary of Agriculture Dennis Wolff, who is now a partner with Versant Strategies and serves as government relations consultant for the Dairy Policy Action Coalition (DPAC), said, “We need to dilute the influence of the CME through daily electronic reporting, and this needs to cover more products with auditing that also extends to inventory reporting.” This will provide accountability into the pricing system in several ways, including accuracy and timeliness.

Darin Von Ruden, a Wisconsin dairy producer, said reporting could be instantaneous with the use of SKU numbers at retail outlets.

Bledsoe would like to go a step further and implement forward pricing to give signals to dairy producers as to what prices will be coming, rather than looking back.

Task force
Varney summed it up best by stating, “There are as many views over the problems as there are over the solutions.”

Based on what has been shared at previous antitrust workshops, she announced the USDA and DOJ have formed a task force to examine how the departments can better work together to promote healthy competition in agriculture. One focus thus far is to review enforcement of the Packers and Stockyards Act, one of the nation’s essential and historic competition laws. PD

PHOTO : The U.S. Department of Justice (DOJ), Antitrust Division and the U.S. Department of Agriculture (USDA) are holding a series of joint public workshops to explore competition issues affecting the agricultural sector in the 21st century. Photo by PD staff.

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