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Milk on trial: Class-action suit against Dean, others involves local dairies

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By Erin L. McCoy

The news that Dean Foods delivered to the approximately 27 dairy farmers and their families gathered at the Bardstown-Nelson County Civic Center Dec. 2 was both a relief and a disappointment for many local dairies: Prices for milk in 2011 were expected to average 30 cents higher than in 2010, reported Brent Bunce, Dean Foods director of business development-producer relations.

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“That’s not good news but I guess it’s not as bad as it could have been,” said Robert Lutz, owner of Lutz Brookview Farms in Cox’s Creek, who attended the Producer Appreciation Dinner, sponsored by Dean Foods.

The price was a relief for any who worried milk prices would echo those in 2009, a year many Nelson County dairy farmers recall as one of the worst in memory.

Now, a class-action anti-trust lawsuit has alleged that the low prices dairies have been paid for milk during the past several years are due to illegal activities on the part of several bottling and marketing companies and individuals. The suit will include every farmer in Nelson County — along with about 7,500 dairy producers in 14 states.

Lawsuit alleges foul play

The suit, to be tried in Tennessee starting June 21, 2011, alleges the low prices dairies were paid for their Class I, Grade A fluid milk — the beverage you buy at the grocery — between 2001 and 2008 and on to the present, is the result of a combination of price-fixing, “flooding” the milk market, restricting milk producers’ access to bottling plants and other illegal activities.

Defendants in the suit include Dean Foods, Dairy Farmers of America Inc., Dairy Marketing Services LLC, and six other companies and individuals operating in Federal Orders 5 and 7 — two of 10 national federal orders in which minimum milk prices are set by the United States Department of Agriculture. The first three are the only companies buying in Nelson County.

The lack of choices is part of the problem, said Paul Sorrell, owner of Bittersweet Dairy in Cox’s Creek.

“The biggest issue really is — and I think that’s why we’re on the roller coaster ride we’re on — is the lack of competition from buyers. There’s been so much consolidation in the dairy industry,” Sorrell said.

Indeed, one allegation of the suit is that defendants bought or closed down fluid Grade A bottling plants “with the purpose and intent of further stifling competition from independent dairy farmers, cooperatives and fluid Grade A milk bottlers in the Southeast.”

Further alleged is that Dean entered into an agreement that it would purchase milk only through DFA, preventing many individual dairies from selling directly to Dean or through other marketing services.

Farmers today in Nelson County can sell directly to Dean, but Sorrell said two years ago they had to sell through DFA or DMS. The suit was filed in 2007.

The allegations of “flooding” the milk market stated that DFA had imported fluid milk from outside the federal orders in order to reduce the amount of fluid milk being bought locally. Fluid milk draws the highest prices for dairies — more than milk for cheese, ice cream or other dairy products.

“Our milk should be near 100 percent in utilization in fluid, but since other milk is coming in, that brings ours down,” Sorrell said.

“Their primary goal [with the suit] is to bring transparency to the market so that one or two players in the market don’t control the price,” said Maury Cox, executive director of the Kentucky Dairy Development Council.

Because these activities allegedly occurred in Federal Orders 5 and 7, Nelson County dairies, which are in Federal Order 5, will be automatically included. Farmers have not yet received notice of their inclusion, but when they do, they will have the option to opt out.

Sorrell emphasized that prices now are fair. In October and November, the price for a hundredweight of Class I milk remained at $19.98. But Sorrell said he’d have to make $17 or $18 a hundredweight to break even, and after deducting fees for marketing and other costs, such as shipping — which Lutz said costs him more than $1,000 per month for 150,000 pounds of milk — Sorrell is making a few dollars’ profit on every hundred pounds of milk.

“I won’t opt out,” he said.

Cox was one of about 50 who attended a meeting informing farmers about the suit in Cave City Nov. 4, in which lead attorney Robert G. Abrams and two other lawyers from Howrey LLP, which is representing the plaintiffs, explained that more than 90 percent of the documents in the case were “classified” or “highly classified.”

Cox emphasized the allegations of the lawsuit “give only one side of the story.”

Although they were given the opportunity to ask questions, no farmers brought up the suit at the Dean Foods dinner. Sorrell said there isn’t much information out there for farmers yet about what the suit involves. One thing is for sure — 2009 was a trying year for Nelson County dairy farmers, and the suit may shed some light on why.

A bad year

“Any savings you had were quickly depleted, and if you didn’t have any savings a lot of people I talked to took on a terrible debt load,” Sorrell recalled of 2009.

Prices for Class I fluid milk in 2009 averaged $14.88 per hundred pounds of milk. Many area farmers estimate they would have to make at least $17 a hundredweight to break even on their milk — more if they aren’t able to grow their own feed.

Lutz said milk prices were at similar levels — around $12 a hundredweight — when he bought his farm in the 1970s.

“The price hasn’t kept up with the cost of living,” he said.

Doyle Cunningham, a field representative for Dean who works with dairies in 10 Kentucky counties and 10 Indiana counties, admitted the prices aren’t viable for many farmers.

“Of course, all the milk companies could and probably should pay more than what they are, but we’ve got stockholders,” Cunningham said.

Nelson County Extension Agent for Agriculture Ron Bowman pointed out that prices for milk have held steady for decades, while the number of dairies in Nelson County has dropped from about 160 when he arrived in 1985 to the low 20s today.

A number of factors have contributed to the decline, Bowman said, not only milk prices.

“Price would be one of the major ones, but probably even more than that is we had very few dairy farmers that had children that wanted to come back and dairy farm,” Bowman said.

Lutz agreed. “Family farm’s a dying breed, I guess, because it’s a lot of work, a lot of time.” Lutz spends about 14 hours a day, seven days a week milking and caring for his cows.

But with milk prices holding steadily at the cost of production or below, Sorrell said he can’t imagine starting a dairy in Nelson County today.

“It’s just almost impossible to buy a farm in Nelson County today and pay for it milking cows,” Bowman confirmed.

Cox said a combination of factors — including a drop-off in dairy exports and the poor economy — contributed to the Federal Order 5 minimum price drop from $19.14 in January 2009 to $14.12 a month later.

Supply and demand

For any given bottle of milk you buy in the store, it’s difficult to know what percentage is actually going to the farm where the milk was produced, Cox said.

“It has nothing much to do with the price the farmers are seeing. … The farmers should get at least some consistent level of what the retail price is,” he said.

“It’s always said, ‘supply and demand,’ but you know, a 2 percent swing in the supply will swing our price by 40 percent, and milk is very perishable, so it’s not like you can hold it and wait for a better price. According to the health department, that milk has to leave my farm every other day,” Sorrell said.

Oversupply was one reason prices dropped in 2009, said Bunce after the meeting.

“Production exceeded consumption,” he said.

But according to a Dean Foods press release dated Feb. 10, 2010, Dean’s net income totaled $240 million in 2009 compared to $184 million the previous year — a 30.4 percent increase.

Price control

Dairy farmers have little to no control over the price at which their milk is sold. In fact, they wait more than a month to find out what they’re being paid for the milk they sell.

“I’ll tell you how I know — on the 15th and on the 1st when I open my check — that’s how I know what I got,” Sorrell said.

“You never know what to predict down the road,” Lutz said. “You can’t do any improvements on your facility because you don’t know what the price is going to be six months from now.”

But when prices drop below production cost, Sorrell said, there’s little the dairy farmer can do.

“You can’t plan on $13 milk. If you know it’s coming, you can’t ready yourself for it, because that’s so far below the cost of production there’s nothing you can do to make it work.”

Bunce said the lawsuit does not affect how Dean Foods interacts with farmers. But Bowman said whether farmers will experience any retaliation — for instance, getting dropped off the milk route — for complaining about the company or for involvement in the suit has yet to be seen.

“I think it could be a very distinct possibility,” Bowman said. “They might have a bad run of quality milk.”

The future of dairy

Cox said a combination of the bad economy, a drop in dairy exports and bad international publicity for dairy with the discovery of melamine in Chinese powdered milk contributed to the low prices in 2009.

“Prices are better right now primarily because we’re back to exporting and we’re more in a balance,” Cox said, but emphasized the prices still aren’t high enough for many farmers.

“In essence what we see is milk prices that are being paid here are not at the level enough to keep dairy farmers in business,” he said, pointing out that with corn and soybean prices rising substantially in the last year, the cost of feed has risen from 45-50 percent of the cost of production to nearly 70 percent.

Cunningham said Dean doesn’t take rising feed costs into account when deciding what to pay producers. Doing so could encourage grain producers to raise their prices further, he said.

He also admitted that it would take farmers several years to recover from the debt they took on in 2009. “You either borrow or you go out of business,” he said.

Cunningham said his best advice to farmers was to increase their efficiency.

“A lot of producers treat this like a lifestyle. They need to treat it like a business,” he said.

The demand for more efficient practices affects every form of agriculture, said Bowman.

“Farmers have had to make their gains by producing more for less, and they’ve been very good at it,” he said.

Lutz said all he can do at 70 years old is keep working his 14-hour shifts and enjoying the work he’s done since he was a child.

“I guess farmers are usually pretty optimistic — you know, you hope things will get better. That’s why you stay in business.”