March 23, 2017

Cooperatives Created to Sell Dairy Products are Accused of Pocketing Millions of Dollars in an Elaborate Accounting Scheme

As far as staples go, dairy is pretty central to the American diet. After all, knowing the cost of a gallon of milk remains a campaign-trail test for whether a politician is out of touch. Dairy farmers, though, have fallen on hard times, as milk sales continue to decline.

But now, industry insiders in a long-running class action claim those farmers haven’t been getting their fair share in this multi-billion dollar industry. The litigation, filed by dairy farmers in 2009, names DairyAmerica and its affiliate California Dairies as defendants. The plaintiffs allege that DairyAmerica and its members, cooperatives like California Dairies which acquire dairy products from farmers and sell them in bulk, have been actively misleading U.S. regulators about the price they charge for nonfat dry milk, which goes into everything from infant formula to candy bars. In doing so, the farmers claim, the cooperatives sought to boost profits at their expense—by millions of dollars.

The defendants deny the allegations, claiming honest mistakes were made in a complex calculus driven by century old laws. Indeed, the dairy market operates very differently from other segments of the U.S. economy. Statutes with names like the 1922 Capper-Volstead Act, which allows farmers to form cooperatives, and the 1937 Agricultural Marketing Agreement Act, authorizing pricing rules to keep milk prices stable, continue to hold sway. Cooperatives are required by these laws to report prices to the U.S. Department of Agriculture and state regulators, which use the data to decide how much money goes to back to the farmers.

That’s where things got sticky, the farmers contend.

“I don’t think there’s another industry in the U.S. economy that is as heavily price regulated,” explained Andrew Novakovic, a professor at Cornell University’s Charles H. Dyson School of Applied Economics & Management. “Part of that arrangement is a level of trust that the USDA, which is largely responsible for that price regulation, will make sure that everything is on the up and up.”

Level Playing Fields

While the dairy industry’s structure is unique, allegations of collusion in American agribusiness are not. In September, a series of class actions alleged companies producing 90 percent of the country’s poultry, including Tyson Foods Inc. and Pilgrim’s Pride Corp., were conspiring to restrict production and drive up prices. (They denied any wrongdoing.) Meanwhile, contract farmers who raise the birds are waiting to see if the Trump administration finalizes Obama-era rules that would create a more level playing field between poultry farmers and the companies that manage their production.

The circumstances facing poultry farmers and dairy farmers differ in many ways, but in both industries, profits seem to elude the people actually producing the food. Dairy farmers contend milk co-ops have sacrificed the interests of the farmers who created them. That’s because the large dairy cooperatives that created and run DairyAmerica, which is really a marketing company, have competing interests. On the one hand, they sell milk on behalf of farmers and should therefore look for high prices. On the other, they process that milk into finished products and stand to benefit from a low price on their primary ingredient.

Novakovic cautions that, even if prices were misreported, “there’s a plausible scenario that the board simply messed up and wasn’t trying to do something wrong, but was just inept,” he said. This is an overly forgiving view of a multinational business, though, argued George Farah, a partner at Cohen Milstein Sellers & Toll PLLC, who represents the farmers. “The notion that these large, for-profit corporations that have processing interests are merely democratic structures that are always attending to the interests of farmer members is naive,” Farah said. “The reality is they have an interest in lower-priced raw milk because raw milk is often the largest cost input in making a finished dairy product.”

The full Bloomberg article can be read here.