From cow to truck to bottler to you the making of a jug of milk may seem like a pretty simple proposition. But it's a business that has drawn the attention of federal antitrust officials and entangled corporate America, farmers, dairy cooperatives, commodities markets and policymakers.

In East Tennessee, the controversy swirls around the Dairy Farmers of America, the nation's largest dairy cooperative, which has a significant presence in both organizations that help deliver milk to consumers here.

A Justice Department probe into the merger of two dairy manufacturers in Texas has expanded to examine those two groups: the Southern Marketing Agency, an umbrella group of five Southeast cooperatives that represents most of the milk sold in the region, and the Dairy Marketing Service, which manages the independent (non-cooperative) milk supply for Dean Foods, the national dairy giant and owner of Athens-based Mayfield Dairy Farms.

The Dairy Farmers of America is the biggest member of the Southern Marketing Agency.

It also holds milk supply contracts for most Dean Foods plants in the Southeast and contracts with the Dairy Marketing Service to provide independent producers with laboratory, payment and marketing services.

In recent months, co-op producers within the Southern Marketing Agency's purview have seen their milk checks shrink while store prices, which spiked last year, have not, and non-co-op producers just down the road receive thousands more dollars in milk revenues each month.

But at least one DFA producer has found it difficult to leave the co-op for greener pastures, even as milk processors such as Mayfield scramble to retain a local supply.

The current situation, local farmers say, highlights longtime concerns that DFA, in collaboration with Dean Foods, has created a regional monopoly over the supply and pricing of milk, leaving farmers in the Southeast limited options for selling their product.

Bottom line, they say, is that the local dairy industry, already shrinking under the weight of historically low raw milk prices and high land prices, is in danger of disappearing altogether.

"Farmers aren't greedy. Farmers just simply want to make a living," said Kurt Williams, who's working as lead consultant for a newly formed coalition of local dairy farmers known as the Upper South Milk Producers Association. He's also been talking with Department of Justice investigators over the past 20 months regarding market forces that he says have hamstrung farmers in the Southeast.

"You don't have corporate giant farms in Tennessee with investor money," Williams said. "And if you look at disasters like the hurricanes or earthquakes or potential outbreaks of (disease) I think it's imperative that they have regional milk supplies in this country."

The Southeast Marketing agency and its biggest member, Dairy Farmers of America, on the other hand, say the situation faced by dairy farmers in the Southeast can be pegged to increased fuel prices and a 30 percent reduction in dairy production in one of nation's fastest-growing markets.

"Milk production in the Southeast continues to decline, and more and more milk has to be brought in to supply that deficit," said Jeffrey Sims of the Southern Marketing Agency. "Those costs have increased in (the) recent past. Certainly the cost of hauling (milk) has gone through the roof."

$5,500 more a month Dairy farmer Randy Davis said he knows the cost of fuel has skyrocketed, but he blames the co-ops' poor planning, management and ill-devised contracts for supplemental milk for the ever-greater chunks of change disappearing from his monthly milk check.

Davis, who's farm straddles the Loudon and Monroe county line, supplied milk to Mayfield as a member of the Maryland & Virginia Milk Producers Cooperative Association until August, when he left the co-op to become an independent producer for Mayfield. Maryland & Virginia is also a member of the Southeastern Marketing Agency.

In his first month as an independent Mayfield producer, Davis made $5,500 more for milk from his 460-cow dairy than he had the month before.

Davis, who served on the Maryland & Virginia co-op's board until his departure, said Dairy Farmers of America's desire to control the milk market has short-changed the farmers the co-op is supposed to represent.

Following the 2001 merger between Dean Foods and Suiza, a company in which Dairy Farmers of America held ownership, DFA took over management of all milk supply contracts for Dean Foods plants in the Southeast, Davis said.

However, he said, DFA did not represent all the milk needed for those contracts, so the co-op proposed forming the Southeast Marketing Agency with other co-ops that could supply the milk. This new co-op was made up of five co-ops from Arkansas, Missouri and Texas, in addition to Maryland and Virginia and DFA.

They believe they had no choice but to join the agency, Davis said, because DFA held contracts with most plants in the Southeast, and DFA promised the arrangement would create efficiency and save money because milk could be coordinated over the entire region and costs could be shared.

Instead, Davis said, producers have seen escalating charges to their milk checks for hauling, operations and balancing — bringing in outside milk during times of shortage. Before Maryland & Virginia co-op joined SMA, Davis said, a typical charge for those expenses might be 54 cents per hundredweight, or 11.63 gallons. Under the Southern Marketing Agency, that discount could be $1.74 per hundredweight.

Davis said the problem is Dairy Farmers of America struck deals with dairies in Indiana, Michigan and New Mexico that allow the outside farms to bring unlimited amounts of milk into the Southeast for premium prices and receive transportation reimbursement, the cost of which is divided up among Southeastern Marketing Agency producers.

The outside milk also hurts farmers' milk prices because, according to federal regulation, each farmer is paid based on how milk coming into the entire region is used, a practice known as pooling. The highest price is paid for Class 1 milk, which consumers drink, and lower prices are paid for products such as butter, cheese and milk powder.

When milk exceeding the amount needed for drinking enters the region from outside markets and must be made into less valuable products, it dilutes the price local farmers get, Davis said.

Instead of receiving what has historically been a premium price for locally produced milk, farmers are seeing that money go to producers outside the region, he said.

Sims agreed that an increasing volume of outside milk is flowing into the region.

But, he said, it's necessary to get those outside contracts to make up for growing local deficits, and large outside farms hesitate to sign contracts for an as-needed-only basis.

"It's harder to bring milk only when we need it. The Southeast needs milk a lot of the year," Sims said. "If that milk has to go to manufacturing part of the year, who should share in that cost when the Southeast doesn't need it? How should you share that? It's a real challenge."

Independent producers aren't immune to the costs of outside milk production. Pooling affects their pay price as well, but the federal government mandates these producers receive a certain price for their milk, announced monthly, a requirement from which cooperatives are exempt.

And independent producers' milk is still managed through the Southern Marketing Agency and Dairy Marketing Service, which took over the independent contracts shortly after the Dean/Suiza merger.

Dairy Marketing Service, in turn, contracts with Dairy Farmers of America to provide services for the independents' milk.

Monroe County dairy farmer John Harrison was an independent producer for Mayfield whose contract was turned over to Dairy Marketing Service in 2002.

"As we evolved, we realized we really weren't independent plant producers anymore," he said. "We're DFA."

Controlled access The Dairy Farmers of America-Dairy Marketing Service relationship produced a problem for Rod Carmichael, who operates a 120-cow dairy in McMinn County, just eight miles down the road from Mayfield, where he delivers half of his milk. The other half goes to Golden Gallon in Chattanooga.

A Dairy Farmers of America member, Carmichael, like Davis, has been troubled by the growing difference between his paycheck and that of independent Mayfield producers.

"I figure for July it cost me $5,000 to be a member of a co-op here," he said. "Over a year's time, $5,000 a month stacks up. It could be the difference between making it and barely getting by or going under."

In August, as his DFA contract was set to expire, Carmichael called Dairy Marketing Service to see if he could sign on as an independent producer.

He was told, he said, that, yes, the organization needed his milk, and he could sign up as an independent.

Two weeks later, the same representative with Dairy Marketing Service called back.

"I was told that my milk was not needed at DMS," Carmichael said. According to DMS, "They were told by DFA that they couldn't have me, that's what it amounted to. I was told that DMS was designed for independent producers, and they couldn't take any co-op members."

DMS, however, had just taken on Davis and another local DFA producer, Whitey Dougherty, as independents. Dougherty declined comment.

Jim Hahn, chief operating officer for Dairy Farmers of America's Southeast Region, said because DFA is charged with management of Dairy Marketing Service's milk supply, there isn't always room for a DFA producer to join DMS because the supply channel may be full.

"At that time I talked with Rod, we didn't have any additional room in the DMS system," he said. He said that Carmichael did have the option of joining a variety of other co-ops throughout the Southeast.

But Hahn added that since Carmichael's original request, "we have some additional opportunity for some additional milk" to be managed through DMS and "would take (Carmichael's milk) now because we have lost some DMS members."

Hahn said he had not informed Carmichael of the recent turn of events but thought others within the co-op had. Carmichael said as of Wednesday afternoon he had not heard from Hahn.

Dairy Marketing Service regional manager Ron Rider, who manages independent contracts in Kentucky, Tennessee and Georgia, did not return calls seeking comment.

Carmichael said the situation demonstrates how close relationships among Dean Foods, Dairy Farmers of America, the Dairy Marketing Service and the Southern Marketing Agency have dried up local competition for buying and selling milk.

"We need more options to market our milk," Carmichael said. "It seems like we don't really have an option in the Southeast.

Bottling their own Dairy business in the Southeast has caught the attention of the Department of Justice, said Williams, who's been talking with investigators over the past 20 months.

Although the investigation reportedly regarded a merger of New England dairy processor H.P. Hood and National Dairy Holdings, which Dairy Farmers of America has ownership in, Williams said: "I was never asked one question about Hood. The conversation would quickly move to (Dairy Farmers of America) and then (Southern Marketing Agency.)"

"In general," he said, investigators questioned him regarding "the competitiveness of the milk pricing arrangement in the Southeast and how that has deteriorated through the merger of Dean (and) Suiza."

DFA's Hahn and SMA's Sims said they were both aware of the Department of Justice probe and had supplied documents at investigators' request, but they said they had not been personally questioned regarding their organizations' activities.

The Department of Justice would not answer questions regarding the investigation.

Local dairy farmers are beginning to take matters into their own hands.

A newly-formed organization of about 130 farmers in Tennessee, Virginia and North Carolina — known as the Upper South Milk Producers Association — has called on the Department of Justice as well as the U.S. Department of Agriculture regarding their plight.

The group also is working to educate local dairy producers on how the market works and, at some point, Williams said, U.S. Milk may look at taking on a marketing role of its own.

The key to reversing the decline of local dairies is to bring control back to the farm, said Harrison, who serves as president of Upper South Milk Producers.

"The biggest problem we still have is getting farmers educated," he said. "They'd rather just take their check and go on."

In addition to education, Harrison and a "handful" of other local dairy farmers, along with Florida cooperative Southeast Milk Inc. and Maryland-based Flagship Dairies, this summer bought a Parmalat milk bottling plant in Atlanta. The group is also eyeing other investments in an effort to provide local farmers alternative markets for their milk.

The move brings the dairy business full circle, when cooperatives like Dairy Farmers of America and Maryland & Virginia formed to represent the interests of their producer members.

That, coupled with changes in regulation by the federal government, is needed to turn things around for local dairies, Williams said.

"Here's the message," he said. "If the farmers of the Southeast are ever going to challenge these things, they have to have the means with which to do so. We have to change the playing field."

Business writer Larisa Brass may be reached at 865-342-6318.