| [January 03, 2006] |
CO-OPTED: Are dairy co-ops hurting small farms?
(Watertown Daily Times (NY) (KRT) Via Thomson Dialog NewsEdge) Jan. 1--ADAMS -- Every summer, the cornfields around Louann Parish's dairy farm seem to stretch for miles. But they might as well be walls.Ms. Parish owns 88 cows, and that's all she owns on her farm. Everything else -- the red gambrel-roofed barn, the hand-held milking machines and a small pasture -- she rents from a retired farmer. She buys her herd's feed from neighbors.
A single mother of three, she makes all the repairs herself and took one trip out of the area last summer, to a farm show in Seneca Falls to check out new tractors and milking equipment.
"To be honest," Ms. Parish said, "I'm not sure how much longer I want to go on by myself."
Small farmers like Ms. Parish have long been the backbone of Northern New York's biggest business, the dairy industry. Farms, cheese plants and related businesses employ 6,000 people in the region and generate more than $300 million a year in milk sales, according to Cornell Cooperative Extension estimates.
Small farms have struggled for years with sluggish milk prices and rising costs. But the newest threat to north country farmers isn't fading federal subsidies or high taxes: It comes from the farmers' own bargaining cooperatives.
The nation's biggest dairy cooperative, Dairy Farmers of America, has gained control over a majority of the region's milk, including Ms. Parish's, by combining with other co-ops and forging what critics say are unusually close business relationships with plants that buy milk. And that, critics say, threatens one of the strengths of the region's industry: the competition among small and medium-size dairy cooperatives that bargain with milk plants on behalf of farmers.
DFA's growth may be quietly turning Northern New York's countryside into the equivalent of a one-company town, where the local economy rides on the fortunes of a single corporation that makes its most important decisions in an office 1,200 miles away in Kansas City, Mo. -- some of which work to the advantage of farmers in other parts of the country, where DFA handles more milk.
Depending on one cooperative to sell milk would be worrisome at any time, say farmers who remember the last financial collapse of a big cooperative, the Northeast Dairy Cooperative Association, in 1985. That organization owed north country farmers more than $6 million when it went bankrupt. Now, DFA's spending, debt and close ties to milk processors are raising questions in the industry, and state and federal anti-trust investigators are weighing whether its aggressive marketing warrants a corporate breakup.
"That's what's crushing the dairy industry not only in Northern New York but across the nation," said New York state Assemblyman Darrel J. Aubertine, D-Cape Vincent, a dairy farmer.
While Ms. Parish was looking after her cows this summer, DFA's 51-member board of directors was planning for the future at a five-day conference at the posh Samoset Resort Hotel near Rockport, Maine, home of "championship golf, four-diamond dining, luxurious guest rooms and first-class amenities," according to its Web site.
The Milkweed, a dairy newspaper in Wisconsin with a history of anti-DFA editorials, dubbed the event a "lobsterfest."
The contrast between Ms. Parish's labors and DFA's "lobsterfest" illustrates how dairy cooperatives have changed over the years. In the old days, farmers sold milk through local, member-run collectives that saw themselves as agricultural cooperatives first, corporate entities second. But like the national and multinational food companies that buy their milk, farmer-owned cooperatives are shrinking in number, growing in size and, critics say, losing touch with the priorities of the farmer.
Greg I. Wickham, chief operating officer for DFA's Northeast region, spelled out the co-op's reasoning this way in a telephone interview with the Watertown Daily Times: "DFA is a $6 billion-in-sales company that happens to be an agricultural cooperative. That was their corporate board. You're not going to have a meeting in a high school cafeteria for that group, probably."
Dairy Farmers of America is owned by farmers. But it is a farm organization unlike any the dairy industry has seen. With 21,946 members, it is the biggest dairy cooperative in the nation by far. DFA handled 33 percent of the nation's milk in 2003, but in Northern New York, a partnership with Dairylea Cooperative Inc., Syracuse, has helped it gain control of at least 60 percent of the market, said Mark W. Stephenson, a dairy economist at Cornell University, Ithaca.
DFA is just seven years old. But its growth caps a trend that has been going on for decades.
Numbers tell part of the story. The dairy industry has more cooperatives than other types of farming, but that is changing. The U.S. Department of Agriculture reported that the number of dairy cooperatives in the United States plummeted from 2,300 in the 1940s to 196 in 2002, and those that remained handled an ever-growing percentage of the nation's milk. Cooperatives controlled 89 percent of the nation's milk in 2004, up from 48 percent in the 1930s.
In the north country, farmers have three major cooperatives to choose from when marketing their milk: DFA, Agri-Mark Inc. of Massachusetts and the local Allied Federated Cooperatives of Canton. Agri-Mark already handles much of Allied's milk through a contract, and an outright merger of those two cooperatives is not out of the question, an Agri-Mark official said.
Another cooperative, Dairylea of Syracuse, has forged such close ties with DFA that they essentially share the same milk supply. DFA arrived in Northern New York in 1999, when it formed a partnership with Dairylea; the companies share officers and created a new milk marketing entity called Dairy Marketing Services Inc.
A few smaller cooperatives cling to their independence, such as the Oneida-Lewis Dairy Cooperative in Boonville, with about two dozen members. But most other small co-ops sell milk through the bigger ones because the plants they deal with buy milk only through Dairylea and DFA.
Farmers who join bigger co-ops cannot always count on more money for milk. Last summer, Dairylea and DFA paid some of their farmers in New York and Pennsylvania less than they would have made if they did not belong to any cooperative at all. That is because a farmer who sells milk directly to a plant must be paid at least the federal minimum price for that month; co-ops that sell to the plants on behalf of farmers are not required to pass along that amount to their members.
Farmers in parts of New York and Pennsylvania who sold milk through DFA saw prices around 50 cents less than the federal minimum for a brief period last summer, industry sources said. DFA's communications office declined comment.
Small differences in price add up: A 50-cent gap in the price of 100 pounds of milk means about $1,000 a month on a 200-cow farm.
Managers of a competing cooperative in Pennsylvania, Lanco-Pennland Quality Milk Producers, said cooperatives sometimes attribute such underpayments to transportation costs, which skyrocketed last summer.
Government investigators digging into DFA's mergers might begin with a self-examination. The federal government encourages dairy cooperatives to merge through a 1922 law called the Capper-Volstead Act, which allows farmers to form marketing groups to set prices collectively. The cooperatives, in turn, may combine almost without limitation, as long as their deals are voluntary and do not "unduly enhance" milk prices, courts have ruled. The anti-trust protection weakens only when cooperatives form partnerships with non-cooperatives, such as milk plant owners and trucking companies, say legal experts.
The result in Northern New York is that hundreds of farms have seen control of their milk turned over to Dairy Farmers of America. The biggest players in the region's dairy industry -- Great Lakes Cheese Co., Kraft Foods and Crowley Foods -- have agreed to supply their plants in Adams, Lowville and LaFargeville almost exclusively with milk from DFA and Dairylea, shutting out other co-ops or farmers who would try to sell milk independently.
For farmers who belong to the big cooperatives, those arrangements guarantee a market for their milk and reduce the chance they will have to pay to have milk hauled out of the region. But security comes with a price, critics say: cozy relationships with milk processors whose interest is in paying farmers as little as possible for milk, even if they have to move out of the north country to do it. Critics say DFA loses little by a plant closure in New York, as happened with Kraft Foods in Canton, and may even come out ahead if the owner opens a plant in another state and supplies it with milk from DFA.
Some of DFA's policy positions embrace that very possibility.
Most recently, DFA declined to support milk subsides that are tilted in favor of smaller farms. The program, called the Milk Income Loss Contract, limits payments to about what a 130-cow farm produces annually. But DFA asked the government not to limit payments, which would steer more money to states such as New Mexico and Idaho, where dairy production has been moving in recent years and farms are much larger than in the north country.
Big cooperatives have helped some plants expand in the north country. Great Lakes Cheese, which buys most of its milk from DFA and Dairylea, has expanded operations at its award-winning cheddar cheese plant in Adams and is considering doing so again. But Kraft Foods Inc. has closed or sold two plants in the region in the last few years, despite having an exclusive milk supply agreement with a Dairylea and DFA.
Critics say the cooperatives are more interested in pleasing plant operators than farmers.
"Where their bread is buttered is that they need to make a good deal with and for the processors," said Joe Logan, a former director at DFA and Milk Marketing Inc. who voted against those two cooperatives' merger in 1995 because of his doubts about cooperatives' hunger for growth.
But in DFA's view, tearing down walls with processors -- part of the way -- may be the only way to keep them from crumbling all of the way. The farmers who founded DFA, when milk prices were low, worried that family farmers might go the way of the poultry and pork industries, where processors own virtually all the production, said DFA spokeswoman Agnes Schafer.
"At the end of the day, this is about keeping farmers independent," Ms. Schafer said.
Added Mr. Wickham, "We want to treat people as we'd want to be treated."
Dairylea does not want plant owners to think the cooperative will hold a milk strike over a price dispute, any more than the cooperative wants a customer to suddenly shut down a plant, he said.
"There might be some people in the industry who characterize that as cozy. I wouldn't," Mr. Wickham said. "I'd just call that good business."
"We've just kept pace with the marketplace as it is today," said Lewis Gardner, a dairy farmer in Pennsylvania, director of DFA's Northeast Council and former president of Milk Marketing Inc., one of four cooperatives that combined in 1998 to form DFA: Associated Milk Producers Inc. of Texas; Milk Marketing Inc. of Ohio, Mid-America Dairymen Inc. of Missouri and Western Dairymen Cooperative Inc. of Colorado.
Despite consolidations, Mr. Gardner said, "there's still plenty of competition in Pennsylvania and parts of New York."
Competitors say DFA aims to squelch them, and that it inherited that desire from the companies that merged to create it seven years ago. Robert D. Wellington, vice president for economics at Agri-Mark Inc., a Massachusetts dairy cooperative with farmers in Northern New York, lashed out at its competitor in testimony at Senate Judiciary Committee hearing on competition in the dairy industry in July 2003.
"These constituent groups have a pedigree of antitrust violations dating back over 60 years," said Mr. Wellington, whose co-op feared DFA would push it out of the market for beverage milk, the most profitable part of the milk business.
"Despite being sued repeatedly by the Department of Justice, various state agencies and private parties, and despite being subject to numerous permanent injunctions prohibiting predatory and anti-competitive behavior, DFA has persisted in flouting these injunctions and employing predatory tactics to gain a stranglehold on dairy production and producers throughout the Midwest," Mr. Wellington said. "DFA is probably the most blatant antitrust recidivist in the history of this country."
In an ongoing case, the Justice Department has sued DFA over its interest in Southern Belle Dairy in Kentucky, an acquisition that eliminated the only other bidder for school milk contracts in parts of Kentucky and Tennessee. Had the deal gone through, DFA would have gained 50 percent ownership of both Southern Belle and a competitor, Flav-o-Rich, both of which had a record of bid-rigging on school milk contracts.
To stave off the case, DFA gave up its voting rights in Southern Belle. That satisfied one federal court, but a federal circuit appeals court overruled that finding in October, allowing a trial to go forward.
In Northern New York, Dairylea had already developed a reputation for aggressive marketing when DFA arrived in 1999.
Three years earlier, Dairylea had scored a major customer when Kraft Foods Inc., the biggest food company in the nation, agreed to stop buying milk from independent farmers in Northern New York and to supply its cheese plants in Canton, Lowville and North Lawrence with milk from Dairylea. That also forced the Lowville Producers Dairy Cooperative in Lewis County, which had supplied the cream cheese plant in Lowville for decades, to either work with Dairylea or find another customer. It went with Dairylea.
Even then, more than 1,000 farmers in the Northeast still sold milk directly to plants instead of joining cooperatives. Dairylea and DFA soon found a way to capture their milk, too.
In 1999, Dairylea and DFA joined to create a new venture: Dairy Marketing Services Inc., a partnership that would handle milk not only from the two cooperatives' members but also from independent farmers who would not have to join the cooperative. A total of 2,500 independent producers in the Northeast had signed on by this summer, DMS reported.
The arrangement allows farmers to preserve their independence, or their smaller cooperatives, while ensuring that they will not be stuck if a plant closes -- as nine plants have in the Northeast in the past two years -- Mr. Wickham said. All the plants that closed were supplied by Dairylea or DMS, which were able to move the milk elsewhere.
"Farmers and their organizations haven't had to lie awake and wonder, 'God, what are we going to do?' " Mr. Wickham said.
By signing with Dairylea, about 200 Lewis County farmers held on to Kraft as their customer even though they had to go through another cooperative to do it.
"Basically, we negotiate with Dairylea, and Dairylea does with Kraft," said Tom Gillette, a farmer in Turin who worked out the deal as president of Lowville Producers. "Dairylea's proven to be a fairly good partner, and I don't see how it's hurt us."
By the time Louann Parish was looking for a way to sell her milk a few years ago, DFA was the obvious choice. The cooperative offered her $1.70 more per 100 pounds of milk than she would have received elsewhere, plus a 35-cent-per-hundredweight premium for high-quality milk, and she signed up for pickup every other day.
"I really didn't shop around," said Ms. Parish, who was running a small farm in Cazenovia at the time.
Now, though, Ms. Parish said she does not seem to make much more than other farmers.
Farmers might shop around more if they took a close look at the fine print in their milk checks. Cooperatives sometimes negotiate individual deals with farmers, offering higher premiums based on volume or quality, said Mr. Stephenson, the Cornell economist.
Mr. Stephenson started studying farmers' checks five years ago. Farmers fax their checks to Cornell, and Mr. Stephenson and other experts compare payments from farm to farm within a 10-mile radius. To keep from becoming salesmen, they do not tell farmers which cooperatives pay the highest premiums, but they do look at ways farmers can improve production or marketing to take advantage of premiums.
Mr. Stephenson found that premiums vary by as much as $2 for every 100 pounds of milk, or more than 10 percent of the typical price of milk. The difference is greater in New York than in other regions, he said.
Dairylea has been widely credited with encouraging farms to expand by offering bigger premiums based on production, on the idea that picking up milk from fewer, larger farms costs less. Cooperatives also pay premiums based on quality measures such as high protein, which boosts the amount of cheese a plant can make.
Mr. Stephenson's findings suggest premiums can be an opportunity for farmers, if the conditions are right.
Farmers cannot do anything about market conditions, which ultimately determine the price they are paid for milk, said Molly B. Ames, farm business educator at Cornell Cooperative Extension of Jefferson County. But they can do something about premiums, especially if they can choose among cooperatives.
"Generally, I think there are a lot of producers who aren't looking that closely," said Ms. Ames, who sees premiums as one way farmers can gain negotiating strength within their own cooperative or between competing ones. "I don't think farmers see themselves as being in control."