Washington Monthly: Milking Profits: The Dairy Monopolies That Are Hurting Farmers
Milking Profits: The Dairy Monopolies That Are Hurting Farmers
Born of a noble idea, dairy cooperatives let farmers join forces to get a good price for their milk and stand up to powerful interests. Now the coops are powerful, huge, and squeezing the farmers that ostensibly own them.
September 14, 2020
Oregon Dairy Cows. Photo courtesy of Oregon State University. Licensed with CC BY-SA 2.0.
Earlier this summer, the Justice Department filed a legal brief to support Northeastern dairy farmers. More than 115 farmers are suing mammoth milk processor Dairy Farmers of America (DFA) for conspiring to hold down milk prices. The farmers argue that DFA violated antitrust laws by colluding with other milk buyers and striking exclusive deals with processors. The sad irony is that many of these farmers are owners of DFA, which isn’t a publicly traded agribusiness giant but rather a cooperative.
And there’s the problem. Cooperatives are meant to be a democratic and producer-owned alternative to corporations. Farmers have long used cooperatives to join forces and bargain with dominant agribusiness. Instead of selling their milk solo to Big Butter, Inc. farmers can form a cooperative that helps market their products to larger buyers or even build a farmer-owned butter factory.
The problem is some cooperatives have started to resemble the giant agricultural businesses they were meant to reign in. Under pressure to get big or get out, co-ops such as DFA have developed perverse incentives to squeeze their own members. Growing business hierarchies make cooperative managers less accountable to farmer-owners.
The dairy showdown has lessons for us all no matter where we work. The struggles of family farmers to build power together against giant agribusinesses parallel the struggles of Uber drivers and third-party vendors on Amazon to organize and bargain collectively. Ensuring healthy cooperative governance is critical for all independent contractors, workers, and small business owners who need rights to cooperate with one another in increasingly monopolized markets. Together, greater antitrust enforcement and healthy cooperative enterprise have massive potential to lessen structural inequalities and build an economy based on more than just short-term profits for investors.
A recent report by the Open Markets Institute, an anti-monopoly think tank where I work, argues that proper antitrust enforcement is critical to both level the playing field for cooperatives and to rein in cooperatives that no longer serve their members. By arguing that DFA’s exclusionary conduct and buyer power over dairy farmers could violate antitrust laws, the DOJ’s recent brief marks a step in the right direction.
But bolder action is needed. To truly rebalance power in agricultural markets and ensure that co-ops serve their members’ interests lawmakers and antitrust enforcers need to break up dominant agribusinesses and institute stronger guidelines ensuring healthy, democratic cooperative governance.
Cooperatives were a cornerstone of early anti-monopoly movements in the late 19th century. At the same time that farmers in the Populist and Progressive eras pushed hard for anti-monopoly laws to break up the power of railroad, granary, and meatpacker cartels, they also promoted cooperatives to build power among farmers. Unions and farmers organizations such as the Knights of Labor and the Farmers Alliance promoted farmer-and worker-owned cooperatives as a democratic alternative to replace exploitative financier-run firms.
Much to their dismay, the very antitrust legislation that reformers helped pass initially hindered this burgeoning co-op movement. Rather than take on big business, early enforcers used the Sherman Antitrust Act of 1890 to break up labor unions and farmer co-ops. In 1895, for example, Chicago-area milk distributors successfully sued a local dairy co-op by arguing that the co-op’s insistence on an exclusive contract was an illegal restraint of trade under state antitrust law.
In response, farmers helped push through the 1922 Capper-Volstead Act to protect economic coordination within agricultural cooperatives. The law largely protects cooperatives from antitrust scrutiny. Unfortunately, farmers and lawmakers did not foresee cooperatives growing to mimic monopolists.
The number of agriculture cooperatives grew through the 1960s until policy changes began to consolidate the agricultural economy around them. Free-market ideology overtook antitrust enforcement in the 1970s and ‘80s, and a flurry of agricultural mergers prompted consolidation among cooperatives as well. As DFA states in its official business history, “as milk processors and grocers grew larger and more national in scope, it was clear that the regional structure of the traditional cooperative couldn’t keep up.” The number of cooperatives dropped from 6,445 in 1979 to only 2,186 in 2014, largely due to mergers and buyouts.
DFA, for instance, merged with regional co-ops to become a dominant raw milk buyer – and sometimes the only buyer – in many local markets. The co-op also moved beyond just negotiating better milk trucking terms or selling milk to major dairy processors, such as Kraft or Chobani, by investing in their own milk trucks and processing plants to ship and bottle their own milk or make their own cheese. As dairy processing became a larger part of their business, DFA managers developed a perverse incentive to pay less for members’ milk in order to maximize processing profits. DFA does not share these profits with farmers and instead pads its managers’ and executives’ pockets while dairy farms go out of business at a historic clip.
As the nominal owners of DFA, farmers should be able to have a voice in the direction of their cooperative by electing board members or voting on major business decisions. But DFA members complain that the co-op is not sufficiently transparent in its decision-making and that board members, each elected by different regions, hold too much decision-making power compared to farmer members.
As a result, some DFA members felt they had no other recourse but to sue their own cooperative for conspiracies to fix prices, resulting in two multi-million-dollar settlements. The most recent case, a spinoff from farmers who opted out of one of these settlements, is set for a federal district court jury trial in September. The plaintiff farmers allege that DFA and other cooperatives agreed to not poach each other’s members and shared how much they were paying farmers for their milk, limiting competition and holding down prices. They also allege that DFA entered into exclusive supply agreements with major processors such as Dean Foods and Chobani that guaranteed low milk prices for processors and forced farmers to work with DFA in order to access these major markets.
The DOJ weighed in on the side of farmers and critically argued that the antitrust exemptions of Capper-Volstead do not function as a “shield insulating monopsonies from the antitrust laws.” In order to maintain its Capper-Volstead protections, the DOJ says that DFA must prove that its collusion and exclusionary conduct benefited farmers.
While this brief is a step in the right direction, it may not make up for the fact that this same DOJ recently approved DFA’s acquisition of dominant dairy processor Dean Foods, which sells 12% of all fluid milk in the U.S. Unsurprisingly, DFA also struck exclusive deals to become the only milk supplier for Dean Foods in exchange for locking in low milk prices for Dean, harming farmer members. Rolling Dean’s plants into DFA makes these illegal arrangements perfectly legal as internal business coordination.
Truly reforming cooperatives requires a broader anti-monopoly approach, as the Open Markets Institute’s report argues. First, we need renewed antitrust enforcement to break up big processors and retailers that pressure cooperatives to expand into similar monopolies. Second, we need greater scrutiny of cooperative mergers, to avoid dangerous concentrations of buying power in cooperatives. This includes skepticism of deals that allow dominant co-ops to vertically integrate into processing. And any cooperative that does not demonstrably benefit its members should not receive Capper-Volstead protection from antitrust action.
Most critically, we need to restore the democratic promise of cooperatives so that farmers once again have a say in co-op decision-making. This includes promoting federated cooperative structures where some national scale is necessary; mandating one-member, one-vote systems; regular board elections; and limiting cooperative membership to bonafide farmers directly involved in food production (some cooperatives take on non-patron investor members or board members to raise capital). Management must also share more information with farmer members, and the largest co-ops should be held to the same information reporting standards as publicly held corporations are, including executive compensation disclosure.
Finally, Congress and the USDA need to rebuild federal cooperative research, education, and technical assistance programs. At its peak in the 1960s, the USDA had more than 100 employees supporting the cooperative movement through training and technical assistance that helped farmers form and manage cooperatives. This assistance can help co-ops get off the ground and empower coop members to develop healthy governance structures that prevent a managerial takeover. But as of this writing, the USDA Rural Business-Cooperative Service directory lists only four staff members dedicated to cooperative services, and a 2018 letter from the agriculture secretary proposes transfers that would further shrink federal cooperatives services.
Congress should also appropriate more public financing opportunities, modeled after the National Rural Electric Cooperative Finance Corporation, to provide capital for the creation of new co-ops and to help established co-ops stay afloat in economic crises such as the ongoing pandemic. Limited access to financing pushes cooperatives to take on investor members and resemble true corporations.
In the 19th Century, the Knights of Labor’s vision to replace short-term profit-oriented corporations with farmer- or worker-owned cooperatives was transformative. In the 21st Century, we need bold federal policy that ensures cooperatives live up to their democratic ideals.