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Conspiracies are the stuff of political thrillers, Internet manifestos and now–allegedly–the dairy industry. A group of Northeastern dairy farmers filed a class action lawsuit in October 2009 against Dean Foods and industry co-op Dairy Farmers of America (DFA), among others, alleging the parties have monopolized the purchase, processing and distribution of fluid milk in the region.
The complaint in Allen, et al. v. Dairy Farmers of America stems from the shuttering of numerous bottling plants, as well as agreements between the DFA and processors that limit where farmers can sell milk. The defendants then leveraged their market power to depress prices for farmers while reaping an inflated profit, according to the complaint.
Following the lawsuit, Christine Varney, assistant attorney general of the Antitrust Division at the Department of Justice (DOJ), agreed to investigate possible anti-competitive practices in New York’s dairy industry.
But big dairy isn’t the only area of agriculture catching the DOJ’s eye. Also in October, seed giant Monsanto revealed the DOJ sent it questions about potentially anti-competitive practices.
Varney insisted during her confirmation in spring 2009 that agriculture would be a high priority for the Antitrust Division. So far, she appears to be making good on that promise.
The Justice Department and U.S. Department of Agriculture (USDA) recently announced a series of five joint workshops across the U.S. in 2010 addressing competition and regulatory issues in agriculture.
“For the first time ever, farmers, ranchers, consumers groups, agribusinesses and the federal government will openly discuss legal and economic issues associated with competition in the agriculture industry,” Varney said during a September 2009 Senate hearing on the dairy questions.
Antitrust investigations into agriculture are nothing new, according to Andre Barlow, a partner at Doyle, Barlow & Mazard. But he posits that the degree of inquiry lapsed slightly during the Bush administration as it approved two mergers, which allegedly contributed to the present legal actions. “It’s not like they completely dismissed agriculture,” Barlow says. “It’s just they weren’t as aggressive as they could have been.”
In 2001, Dean merged with Suiza, creating a dairy super power that in some states controls 90 percent of the market share for raw milk, according to a report released by Sen. Charles Schumer, D-N.Y., in August 2009.
The DOJ kept close watch throughout the merger, consenting to it with a few stipulations. Suiza contracted DFA as the sole milk supplier to its bottling plants. As one condition of the merger, the DOJ insisted the parties allow non-DFA farmers to supply milk to Dean. Second, the DOJ insisted Dean and Suiza divest 11 bottling plants to a third party that would compete against Dean.
But the Allen complaint, which represents about 9,000 dairy farmers, claims Dean and DFA circumvented those conditions. A loophole in case law allowed DFA to enter into full-service supply agreements of less than one year. DFA signed a one-year contract to exclusively supply Dean with milk under the condition the deal must be renewed every year for 20 years lest Dean pay a multimillion-dollar penalty. Additionally, National Dairy Holdings, a partnership established between DFA and two Dean executives, bought the 11 plants divested in the merger with $400 million supplied by DFA.
The result, according to one example in the complaint, was an almost 26 percent drop in prices paid to New England farmers for skim milk. Meanwhile, the margin paid to processors increased by nearly 18 percent.
“The severity and urgency of this crisis cannot be overstated,” Sen. Patrick Leahy, D-Vt., testified during the September hearing. “Not just here in Vermont, but across the country, our bedrock dairy industry is on the brink of collapse.”
Dean strongly denies all charges.
“We continue to face substantial competition in the purchase of raw milk and the sale of processed milk products and don’t control any market,” said Marguerite Copel, vice president of corporate communications, in a statement.
DFA also refutes the allegations. “Dairy farmers have many choices and markets for their milk in the Northeast,” said Monica Massey, vice president of communications, in a statement. “We just work to provide them with the best choice.”
Monsanto’s controversial acquisition of cottonseed company Delta and Pine Land in 2007 has also returned to the spotlight–though some might say it never went away. Monsanto originally announced the merger in 1998, but it temporarily dropped the plans in 2000 after the DOJ threatened to halt the transaction.
The DOJ questioned the 2007 merger as well, noting it would make Monsanto the largest provider of genetically modified cottonseeds in the U.S. and allow it to dominate 95 percent of the market share in the Mid-South and Southeast. Ultimately, the merger proceeded on the condition that Monsanto divest certain assets and alter its third-party trait licensing policies.
Those trait-licensing practices form the core of Monsanto’s current troubles. Monsanto didn’t allow other companies to stack their traits with traits it engineered–say, creating a single seed that contains a proprietary trait for herbicide resistance while incorporating a competitor’s growth trait.
Anti-stacking provisions can foreclose other companies from being able to compete in the seed market, says Kevin Arquit, a partner at Simpson Thacher and former general counsel of the Federal Trade Commission. For example, if one trait is extremely valuable to farmers and a different but less valuable trait enters the market, he says the new trait may never gain traction if it can’t find its way into seeds with the original trait. It also prevents farmers from buying seeds packed with as many positive traits as possible. The DOJ’s final judgment required Monsanto to stop blocking trait stacking.
In May 2009, Monsanto filed suit against DuPont to stop the biotech company from stacking its Optimum GAT soybean trait with Monsanto’s Roundup Ready trait. “You’re dealing with patented technology, in this case belonging to Monsanto,” says Brian Weinberger, a shareholder at Buchalter Nemer. “And effectively, Monsanto has a lawful monopoly on whatever its patented product may be.”
But DuPont filed a countersuit one month later, alleging Monsanto’s attempt to block stacking violates the 2007 agreement with the DOJ and takes their lawful monopoly too far.
Monsanto said in a statement that the DOJ’s probe mirrors DuPont’s claims. But Monsanto appears to be taking the examination in stride, stating on its Web site, “It is not at all surprising that the DOJ would want to understand how we respond to such allegations. We are confident these allegations are without merit.”
Working it Out
As both of these cases progress, the DOJ and USDA will begin holding workshops in March to discuss competition issues in agriculture. The first will focus on the seed market, while the third, scheduled for June, will examine dairy. Other topics include the price discrepancy between what farmers receive for their goods and what consumers pay at the grocery store.
Ron McFall, a partner at Stoel Rives, is cautiously optimistic about what the workshops will accomplish. “If you have a real discussion with substantive information being exchanged, it can help the administration decide where we really need to invest our enforcement resources,” he says.
Even before the workshops commence, companies should start examining their transactions to make sure they don’t give a false impression of antitrust behavior, says Joel Dahlgren, also a member of Stoel Rives. “We don’t want our clients to be drawn into something they shouldn’t be drawn into.”