Carole Knight
The Demise of Rinky Dink Dairy: A Cautionary Tale of how Monopolies React to Criticism

        (Carole Knight lives near Franklinton, Louisiana. Following is her speech on the dangers of concentration in dairy. Knight details what happened when the nation’s largest dairy coop took over their local co-op in the mid-1990s. Local dairy farmers protested unexplained deductions from their milk checks and elected neighbors (including Knight) to the regional board. But the co-op’s management and directors kicked Carole Knight out of the co-op and terminated the market of her family’s dairy farm. Since there were no other places in Louisiana to sell their milk, the Knights were forced to sell their dairy herd on short notice. They sued the co-op for damages and eventually won a big claim. But their milking herd … and dairy dreams … were gone. Here’s Carol’s first ever telling of her family’s story.)
           

            In late 1993, the Southeastern Milk Order #7 stretched across the Gulf Coast states from Georgia to the Red River between Louisiana and Texas, reaching to Kentucky and Tennessee but omitting Florida. This order was unique in that its total focus was on the delivery of fluid milk, with a Class 1 utilization often in excess of 80%.

            Milk marketing in the Southeast Order is volatile because milk production varies widely between the few winter months when it was very high to the extreme lows of the summer months when the heat takes its toll on both animals and forage quality.  Milk production is geared to meeting the fluid needs of the marketplace on a year-round basis, resulting in the need to provide an additional market for the excess production in the winter months.  This is the “balancing” problem that faces milk production in the South, and which has in the past been solved by dairy farmers and their co-ops building cheese plants to process, store and sell this surplus production.

            In 1993 the largest milkshed in the Southeast Order – and probably one of the largest fluid milksheds in the nation at the time – was located in southeast Louisiana and southwest Mississippi in essentially three or four counties or parishes.  With over 1,000 dairy farms producing for the fluid milk market, this concentration of dairy farms served the rapidly growing urban populations of southern Louisiana and the Gulf Coast area of Mississippi with bottled milk and class 2 products.  It was generally referred to as the New Orleans MilkShed.

            All those dairymen were represented by a number of milk cooperatives along with a few handlers supporting networks of independent producers.  At the time, there were five cooperatives and at least three independent groups.  The cooperatives were Dairymen, Incorporated; Gulf Dairy Association; North Louisiana Pure Milk Cooperative, Gulf Coast Dairymen and Southern Milk Sales.   The independent networks supplied Bordens and Kleinpeter Milk in Louisiana and Dairy Fresh in central and northern Mississippi.

Milk pricing was highly competitive.   Dairymen in coops gathered at local feed stores and country stores on the afternoon of the 15^th to compare, brag and complain about their respective milk prices and the spread between cooperative pay prices.  With enough of a spread, farmers would often leave one coop for another at their anniversary dates, the only time such changes could occur.

            Dairymen, Inc -- DI in the local parlance – was the largest of the cooperatives, having membership throughout the Southeastern Order and being the result of the merger of eight small cooperatives in the region in the late 60’s.  It was, however, in decline because it was almost always on the bottom of the pricing ladder each month.

            Gulf Dairy Association was a cooperative centered on the area due north of New Orleans with about 700 dairy farms.  It was a spin-off of DI that occurred in the late 70’s over essentially the same issues that resulted in the demise of Rinky Dink Dairy:  refusal to provide information, price establishment without director or farmer input, attempts to terminate local leadership for demands for inclusion.  DI targeted 12 members (including several directors) for termination and during the lawsuit that followed, Gulf Dairy Association was formed by those farmers who were permitted to leave with their equity.

            In 1993, Gulf Dairy had been a separate organization for over 20 years with the same general manager for most of those years, and the same attorney for its entire existence.

            Gulf Dairy Association, in keeping with its roots and size, was a very open dairy cooperative.  Annual reports detailed the exact expenses and incomes of the venture and dairy farmers who served as directors were regularly involved in the monthly price setting.  The directors knew what the cooperative was doing because they were in fact “directing” the activities of the cooperative.  In today’s financial vernacular, the operations of Gulf Dairy were “transparent” and known to all who wished to know.          

Rinky Dink Dairy was owned and operated by Dinky, Carole and James Knight and had been a member of Gulf Dairy for 12 years.  The third generation dairy was originally a member of one of the small cooperatives organized in the 60’s which merged to become DI; Leon Knight who started the farm, had been a corporate director of DI for many years before his sons took over the farm as the means to get him off the DI board.

            The dairy became an award-winning herd was mostly Holsteins (registered and grade) with a few registered Jerseys from James’ 4-H days, milking 60 head in a parlor-style barn.  The rolling herd average was 17,500 with 3.8% fat for the Holstein herd, putting it in the upper tier for production in the Gulf South.  Rinky Dink Dairy was a member of Gulf Dairy Association.

            All that changed in 1994.  Gulf Dairy became the test run for a takeover technique that MidAmerica Dairymen eventually used on every single dairy cooperative and independent outlet in the New Orleans milkshed and most of the Southeastern Order.

            In late 1993, longtime general manager Bob Wallace told the Gulf Dairy board of directors that MidAmerica Dairymen had cornered almost all of Gulf Dairy’s customers and was threatening to take those supply contracts to Missouri for fulfillment if Gulf Dairy did not agree to become a part of MidAm.  The board was shocked and stunned. 

Heads up, the milk prices would favor Missouri producers but the milk still had to be shipped to Louisiana.  Hauling made the playing field at least even.  Initially most directors puzzled over the situation looking for solutions that would keep the cooperative in place.          

Wallace had been working with MidAm over the last two years on a cheese agreement and there had been no whisper of any problems with either quality or service from Gulf Dairy’s customers.  What Wallace and MidAm did not share was the fact that Wallace had been offered a job as vice president with MidAm.  This fact was revealed two weeks prior to the merger vote at a membership meeting when Wallace also said he would accept the position upon completion of the merger.

            Wallace was placed in charge of the “due diligence” for the merger and told the board of directors that he saw no way out.  There was no hope of remaining as a cooperative, he said to directors and members.  Wallace added that prices with MidAm would go up because of “economies of scale” and urged the membership to approve, based on promises that Gulf Dairy would continue to operate as a separate unit, with few changes.  The merger was approved with plenty of votes to spare.  Front and center in the matter was long-time Gulf Dairy attorney Dick Knight – who also went to work for MidAm!

            But there were directors and members who were unhappy with the process and result.  Questions posed to MidAm officials went unanswered during informational meetings, a process that was to continue in the ensuing years.

            The first month under MidAm, Gulf Dairy members’ checks went up 12 cents… but never again.  Premiums in the market disappeared, prices were set without any input from Gulf Dairy members or directors, expenses went unrevealed or explained.

            Directors soon began to report to their members that there was conflicting information being provided and in many instances denial of information was more often the case.  It was troubling but not dire for the first several months.  The fact that the division headquarters and its meetings were conducted in Washington Parish was comforting and helpful in submitting requests for information.

            But MidAm was “expanding its footprint” in a march to take over all the cooperatives in the area.  One by one beginning in late summer 1994 the coops fell:  Gulf Coast Cattlemen, then Dairymen Inc., then North Louisiana Pure Milk and finally Southern Milk Sales.  All were folded into MidAm – some at high values, some at low values.  Then Borden independent producers received their notices that MidAm would be their buyer. Over 97 percent of dairy farmers in Louisiana were under the MidAm umbrella.  All that remained outside of MidAm by spring 1995 were the handful of colored breed producers who were shipping as independents to Kleinpeter Dairy, a small Baton Rouge handler.

            And the news grew worse as the shipping costs, reblends and loss of premiums gutted milk prices.  There was shipping in the summer because of shortages and shipping in the winter because there were surpluses.  One action MidAm took following its merger mania was to dismantle almost all of the balancing plants, forcing milk onto the road.  Balancing costs skyrocketed.

            Members began demanding information from directors and attempted to attend board meetings.  Information was denied, even to directors.  Attendance at board meetings was denied to members; executive sessions were the rule not the exception.  Access to minutes of the meetings was restricted; copies could not be made.  No laptop computers or recorders were permitted in the portion of the board meetings that remained open.

            Milk pricing and essentially all other decisions were made by management and presented to the board of directors as fact.  Contrary to the governance outlined in its organizational documents, MidAm’s management was making all the decisions.

            The tail was wagging the dog.

            The judge in our case saw this and wrote that MidAm “is an association which is owned and operated by the producers, the dairy farmers, in order to market their milk to the public.  The elected officials are ultimately responsible to the milk producers.  It is a democratic form of government.  The officers and CEO of the cooperative are hired employees.  They draw a salary and the parties agreed that these officers are hired by the corporate board.  They ultimately work for the producers, just as directors of a corporation work for the stockholders.”

            But MidAm’s management was responsible only to itself.  MidAm CEO Gary Hanman said he hired and he fired.  End of story.

            As complaints rose, members were told to “work within the system” and elect directors if they were not happy about the governance system in place.  The Louisiana Milk Producers Association was formed which included those interested farmers from the milkshed who were in Mississippi and membership quickly grew to over 500. 

A monthly newsletter provided information to members about the milk business of the area.  It provided the operating expenses that could be determined from other sources; it explained the “spread” between the federal order and the pay prices; it reported on the plans of management learned from others. The newsletter pointed out the reblends, subsidies and premiums that were being paid by local farmers to other dairymen in other parts of the Southeast and the country.  There were satirical industry cartoons.  And there was farmer outrage as milk prices plummeted.  Management was furious at the disclosures.

One element of farmer outrage was that there was not a single other outlet to which disgruntled farmers could move.  The sense of being trapped and helpless to find other options for selling milk caused farmer frustration.

            In the mid 90’s were hard for dairying all over the country.  Feed and equipment prices were rising and overall prices for milk were falling.  There was a steady drumbeat of farmers leaving the industry.

            By the time fall elections for the board of directors were scheduled, the farmers in our area were prepared and organized and were successful in placing 8 directors on the board of 27.  Almost all these directors were former Gulf Dairy Association members.  They were dairy farmers who felt that it was time for a return to the situation where farmers controlled their cooperative board and were entitled to information about milk pricing, co-op expenses and income.

            This board was the regional board that was supposed to be in charge of operating the region that included the southeast U. S.  In turn it elected corporate board directors who served on the corporate board of MidAm, later and currently Dairy Farmers of America.

            One of the new directors was Carole Knight – that is me.  I was a journalist with two decades of experience in reporting and served as editor of the group’s newsletter, drawing on my years of experience in dairying and organizations connected with the dairy industry.  My district of 54 dairy farmers asked me to serve and I agreed to join the other like minded directors in an attempt to discover where the money was going and try to get those funds returned to farmer milk checks.  With my husband and son, we operated Rinky Dink Dairy, the family farm.  My husband is an attorney and my son was a college student at the time.  They knew that we loved dairy farming and were committed to working for the best interests of dairy farmer – even as they were aware that dairying was not our only financial support.

            After my election in December 1995 and before attending my first board meeting in Georgia, I was “invited” to meet with the district’s two managers.  They informed me that as a director I would only be entitled to information that they thought I should have or that the board voted was appropriate to be given to me.  I disagreed with them and asked them to produce their restriction in writing and the supporting authority for such a restriction. They indicated that they didn’t have to do any such thing.  They made it clear that they worked for Gary Hanman. It seemed we were at an impasse and the issue was not raised again.

            In an interesting turn of events, the first meeting in January 1996 had as-yet-unseated directors presented with a Loyalty Oath to sign.  As a pre-requisite for a director to join the board, the oath required would-be directors to put ALL else before MidAm:  the phrase was “undivided loyalty”.  No exceptions for God, country or conscience.  Most of the new New Orleans milkshed directors signed the oath under protest and were seated, including me.

            During the 5-day civil trial that addressed the question of the wrongful destruction of our farm by MidAm, I told the Court that I took my responsibilities to the farmers in my district and to my cooperative very seriously.  It was my view that questions about where the money was going and why the farmers’ checks were decreasing were worthy of answers.  The judge quoted me extensively in her ruling. 

She wrote that “It seems to this Court that this is exactly the way a good director, or even a good members, of a cooperative should conduct him or herself.  The job of the directors is to ask questions in order to inform the membership which elected them.  Mrs. Knight’s manner possibly was abrasive, especially after answers were not given to repeated questions, but style should not stop management from answering a member’s questions about her own cooperative.  The cooperative is owned by the farmers.  However, management and many of the directors who testified seem to think they need not tell the farmers anything they wished not to tell.  Their testimony was that corporate ‘secrets’ were for the good of the association.  But the association IS the members, not the hired management.  The members needed to be informed fully of the workings of its management.  Instead it is clear that the members of the co-op were deliberately kept ignorant of facts.  The farmers were expected to produce mil, accept whatever mailbox price was given them and not question management.”

The January meeting where the directors were seated was typical, with management review figures on overheads too small to read, no copies for directors, no time for questions or discussion.  I am sure that “abrasive” was sometimes an appropriate description, especially when the same question was posed for the fourth or fifth time.  I found a copy of the overhead on the manager’s desk at one point and walked off to make a copy of it.  He stopped just short of grabbing and shaking me.  The figures had been described as routine operational summaries but were not in fact the figures that had been presented.

It was apparent to me that most directors just wanted to go home and the judge made the same observation.  She observed that “it was clear that (the board members) wanted to get the meeting over and get back to work as quickly as possible, so they discouraged discussion of issues with the encouragement of management.  That was the way they were used to conducting the business of the boards, and the directors clearly did not want a woman asking questions.”  This position was supported by management even when others asked questions.

At one memorable meeting I attended as a member, I posed a question to the board and was told it would not be answered.  The board then moved on to the next member for his question.  His question was:  “I want you to answer her question.”  He didn’t get an answer either.  It was almost laughable except that it was so serious.

My first two regular meetings followed the same pattern:  lots of discussion about non-essential topics like the plans the PAC committee was making, the effort to get dairy day events coordinated, presentations on the international and national outlooks, diesel and fuel costs.  But just about zero about pricing, premiums, expenses, salary levels, lab fees and services, hauling outlook and balancing issues.

            Then up popped a surprise. 

            About two weeks after the March meeting, an anonymous piece of mail was delivered to my house.  It had a stamp, a Knoxville postmark and no return address.

            Inside the envelope was a copy of correspondence between MidAm’s house counsel and the president of the division board, Buckey Jones.  In it, the attorney advised Mr. Jones on how the motion should be worded to terminate the membership of Carole and Dinky Knight and Rinky Dink Dairy at the upcoming April meeting.  

            No note, no letter.

            Knoxville was the new headquarters for the Southeast division and the office of John Collins, management head of the division.

            At first we thought it might be a joke and Dinky called the attorney to inquire if it was a letter he had written.

            There was absolute silence on the other end of the phone.

            Later, MidAm confirmed the authenticity of the letter.

            We were stunned.

            And they proceeded to do just that, quoting the exact language in the warning letter at the April meeting to recommend the termination to the corporate board.  One of the directors, unable to attend, sent his duly authorized backup representative but the board refused him the right to vote.  The vote was 7 to 26.

            The motion was to recommend termination “for cause or action injurious to the association” and a hearing of a special committee of the corporate board was scheduled and held.

            My husband and I asked MidAm’s attorney – the same attorney who drafted the mystery letter – for copies of the information the cooperative had compiled on us, our child and our farm.  MidAm forwarded almost 3 pounds of documents which contained nothing on Dinky or James and only a little on the farm.

            But there was another stunning document in the pile.

            In the middle of all the junk was another piece of correspondence from MidAm’s house counsel to Mr. Jones.  Again it was about the Knights.

            The letter was dated almost 4 months prior to the district election date and its topic was the “Carole Knight situation”.  The Judge described the document:  “the letter outlines the plans management plotted to terminate the Knights’ membership.  (The attorney) favored allowing the current one-year term to expire on January 19, 1997, without renewing it.  The reason (he) gave for favoring this option is Mrs. Knight’s various demands for information and the fact that these demands may not survive the notice of termination of the membership.”

            But then came my election to a two year term. 

            The Judge continues:  “Therefore the 3^rd option was followed in April 1996, to terminate the contract for cause or action injurious to the Association.  The attorney predicted, correctly, in his letter that this option would be vigorously contested.”

            At the meeting of the investigating committee, my husband Dinky outlined the circumstances of the Gulf Dairy/DI split for the members, pointing out the similarities between the two sets of circumstances.  Monopoly markets, unhappy membership, threats to terminate directors. 

            He asked the committee to identify anything – anything at all – that he had done.  Or likewise, that our son had done.  There was nothing forthcoming.  None was cited during the trial.  In fact the division board voted to offer a contract to Dinky and James but somehow that vote didn’t make it to the minutes.

            I asked what damage I had caused.  What losses.  Nothing was forthcoming.

            At the end of the investigating meeting, one of the board members asked why local dairy farmers needed to know how their milk prices were computed.  I asked him if he calculated his milk prices independently of management and he said he didn’t know how and it wasn’t important.

            We knew then it was hopeless.

            Our fate was probably sealed when we chose to send out a letter to members of my district about the proceedings and outlook.  It was clear from the meeting that that such communication was the central issue in the proposed termination.

            During the trial, directors were closely questioned, the Judge noted. “What damage (had) they perceived as resulting from Mrs. Knight’s questions and/or publication of information.  Not one of them could give an example of damage.  None knew of any members lost.  None knew of any money lost.  None knew of any damage they could specifically illustrate from Mrs. Knight’s actions.”

            But on June 5, 1996, the corporate board “terminated by expulsion” the membership of us and our dairy.  The reason was injury to the cooperative. 

            We had no place to go.  It was MidAm or the ditch. 

            The state agriculture department and the state legislature passed a statute making it illegal to terminate a Louisiana dairy farmer without an alternate market without express permission of the state.  But it’s effective date was several months after the fact even as it was a comfort to others.

            On June 28 our dairy cattle were sold at auction after three days notice.  We weren’t even sure that MidAm would accept the last pickup from the last milking until we pulled up at the barn.  They wouldn’t even return our equity.

            It was wrenching. 

I had hutch raised – and named – virtually every animal on the farm.  Dinky had mated and AI bred them all.  We knew their personalities, peculiarities and life histories and family connections. 

            And they were all gone.

            MidAm has plotted carefully and the message went out – far, wide and loud.  “We did it to them.  We can do it to you.”

            It was quite a chill and accomplished what you might except.  The others who were asking questions worried about an identical outcome.  We had other ways to make a living.  Most of them did not.

            After five years, almost to the date of the vote to recommend our expulsion, the legal case was over and we were paid over $450,000 before attorney fees and taxes.  The Court found that MidAm had had other options: executive sessions for confidential information, removal of me as a director, termination of my membership but not the rest of the family’s membership

            In the ways of these things, though, returning to dairying was not possible.  The farm was growing up in trees and after paying taxes and attorney fees, enough did not remain to return to dairying.  Besides, our girls were gone and it couldn’t be the same.  We gave up that dream.

            We treasure our continued relationships with the wonderful men and women in the dairy industry… just as we ache for the loss of profitability and the hopes and dreams of some short of financial reward for their hard work.

There are two footnotes to the entire matter:

            The new DFA organizational documents provide for termination for no reason at all.  It could be called the “Carole Knight clause”.  And

            We never discovered who sent us the anonymous warning about the proposed termination by the division board.  Without that warning, the “ambush” would have been a complete surprise. We sent spring flowers to the Knoxville office at the end with a thank you note.  We continue to be thankful to that person of conscience.

            The final question is “Why?”  In hindsight, MidAm was marching toward more and more mergers and questions about missing money from farmer checks and from the corporate bottom line had to stop.  We think that management wanted the questions to stop immediately and set plans into place that they executed against us.  And the questions stopped.