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Wed February 27, 2013
Dairy settlement doesn't deliver reform
When a group of small farmers in the southeastern U.S. banded together to sue a powerful dairy cooperative a few years ago, many hoped that the case would bring big changes to the milk industry.
But the recent settlement of the case involving Kansas City-based Dairy Farmers of America Inc., resulted in little long-term reform, even as the farmers received some monetary damages.
On Jan. 22, DFA announced it had settled the class-action lawsuit for $158.6 million, just a day before the case was to start in federal court in Tennessee. DFA is the country’s largest milk marketer, controlling a third of the U.S. raw milk supply.
Although the payout will only go to farmers in the Southeast, the case was being watched as an indicator of the national industry, which has faced dramatic changes as it has become more industrialized and family farmers have been squeezed out.
“It’s better than my worst fears. It’s not as good as I had hoped. It doesn’t address some of what I see as the longer term institutional needs in the dairy industry,” said Peter Carstensen, a University of Wisconsin law professor.
“The most important issue, in my view, is to restore the marketplace for milk so that it is workably competitive and farmers can have an opportunity to get a fair price for their milk in the future.”
Farmers filed suit in 2007, alleging that DFA conspired with Dean Foods Co., the large milk processor based in Dallas, to monopolize the Southeast milk market, making exclusive deals and suppressing the price of milk.
Even as farmers were going broke, executives were handsomely rewarded. DFA's former CEO, Gary Hanman, who was named in the suit, was paid $31.6 million during his seven years as head of the cooperative. Dean's former CEO, Gregg Engles, was paid $156 million, according to published reports.
Dean settled its case last summer for $145 million.
Rick Smith, DFA’s president and CEO, said the cooperative admitted no wrong-doing as part of the settlement and that some business practices had already been changed. DFA settled because it risked more than $1 billion in damages if it went to trial, he said.
“Even if you feel the odds are in your favor, that’s a big risk to take and so we just made the business decision,” he said. “I will say that our farmer leaders are glad this will be in our rear-view mirror.”
Many farmers are not happy with the settlement. Veterinarian Sam Galphin, who has worked in Raleigh, N.C., for 30 years, said farmers will see very little money and will get no relief from a bad market that makes it impossible to make any money. He called the DFA-Dean deal a "cartel" and bristled at describing it as an industry consolidation.
“When I started in North Carolina there were 1,200 dairies. Today, there are less than 300. In South Carolina there were 800 dairies. Today, there are less than 100,” Galphin said. “That’s not just consolidation. The Southeast has lost dairymen faster than any part of the country because of this cartel focusing on the Southeast.”
Carstensen said he had hoped the industry would become better regulated after the U.S. Justice Department investigation, done during the George W. Bush administration. But no charges were filed, so the farmers remaining hopes for reform were tied up in the class-action lawsuit.
The settlement for Southeast farmers has several good things, he said. For instance, it placed limits on exclusive contracts, offered some possible transparency on executive pay and requires that farmers get more details with their milk checks from DFA, listing expenses and deductions, which hadn’t been included in the past.
But those changes will only be temporary, as the settlement holds DFA to the reforms for just two years, Carstensen said.
“As I went through this, on the copy I printed out, I’ve got ‘two years’ written on the front end with a big exclamation mark,” he said. “That’s the problem. Because I don’t think two years is enough time.”
DFA still faces one more class-action lawsuit, which was filed by farmers in the Northeast states.
This story originally aired as part of Business Beat, a weekly program about business and economics in mid-Missouri.