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RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Dairy Consolidation and Monopoly Money

Jul 02, 2010

By Jim Dickrell, Dairy Today editor


The USDA/Department of Justice hearing on market concentration and consolidation June 25 attracted Wisconsin politicians to the University of Wisconsin’s Union Theater stage like moths to a porch light. Unlike so many such politics-for-the-six-o’clock-news events, however, Wisconsin’s Senators (both Democrats) were asking the pertinent questions.


Sen. Russ Feingold: “When dairy farmers were losing $100 per cow per month in 2009, when there was no change in retail prices and when processors were posting record profits, you have to ask: ‘Where is the money going?’”


Sen. Herb Kohl: “I’m worried about consolidation in agriculture. Is competition healthy enough to protect farmers, and if not, what do we do about it?”


Fluid markets are of particular concern—primarily in the Northeast and Mid-South—where just a handful of co-ops and processors often compete for milk. But the recent purchase of two bottling plants by Dean Foods in Wisconsin also was front and center at the Madison hearing.


Economists use the Herfindahl-Hirschman Index (HHI) to measure market concentration. An HHI below 1,000 is viewed as very low concentration; anything above 1,800 is very concentrated.  In 1987, the HHI index for national fluid milk was 195. In 2002, it had climbed to 1,060.


“It went from being extremely low to moderately concentrated in just six years,” says Brian Gould, a University of Wisconsin dairy economist.


What really matters, though, is competitiveness in local markets. In Wisconsin, Foremost Farms USA recently sold two fluid bottling plants to Dean Foods. Here, in the already highly concentrated Green Bay market, the HHI went from 3,049 prior to the sale to 4,777 after. In the Upper Peninsula of Michigan, HHI went off the charts, exceeding 7,500.


So why aren’t co-ops doing a better job of protecting farmer interests? The quick answer is that even though the likes of Dairy Farmers of America and Land O’Lakes are now national, mega-cooperatives, they’re still bait fish in a pond teaming with 60” muskies. The total revenue of all dairy co-ops is less than $40 billion.


“Any co-op alone doesn’t have the market power to affect prices,” says Bob Cropp, an ag economist with the University of Wisconsin.


Compare that to Wal-Mart with 2009 sales topping $400 billion, half of which comes from grocery sales. The market power and retail demands of the big-box retailers are driving consolidation lower down the food chain. Not only do firms want a dairy supplier to fill all their fluid needs for all of their stores, they want that supplier to provide every product in the dairy case—cheese, butter, blends, yogurt, you-name-it, they want it. Smaller, regional co-ops simply don’t have the scale and range of product mix to meet that need.


The Capper-Volstead Act allows co-ops to come together to bargain for higher prices. These marketing-agencies-in-common were alive, if not totally well, in 2009. Mailbox prices averaged 38¢/cwt. higher than Federal Order minimums prices last year. In the Midwest, those premiums brought $1.25/cwt.; in New England, 60¢/cwt. more. Florida and West Texas were the only areas where mailbox prices were actually lower than federal minimums.


So the next argument is that Federal Order minimums, which are based on formulas largely driven by prices on the Chicago Mercantile Exchange (CME), are too low. And the reason they’re too low, the argument goes, is that there is collusion at the CME to keep them low.


There is no question that the CME is thinly traded. Between Jan. 1, 1999 and Feb. 2, 2007, the two largest buyers of block cheddar made 74% of the purchases on the CME.


“This is a thinly traded market and this concerns me,” says Stephen Obie, acting director of the Division of Enforcement for the U.S. Commodity Futures Trading Commission. “It only takes a little bit of nefarious conduct for manipulation to occur.” 


But even though there were 44 reports of possible collusion and nine special reviews done in response to specific complaints in recent years, no civil or criminal charges were ever made.


There are efforts to come up with a new price discovery system that is both more timely and reflective of market conditions. The first is the National Milk Producer Federation’s Foundation for the Future idea to survey cheese prices paid by proprietary firms. The second is a revamped and vastly expanded version of the old Minnesota-Wisconsin price series, this time surveying prices paid on about 50% of U.S. milk production. Whether either approach results in higher milk prices remains to be seen.


“What’s creating the real challenge is the pie isn’t getting any bigger,” says Calvin Covington, former CEO of Southeast Milk. “We’re basically selling the same amount of fluid milk as we were in the 1970s.”


So that brings me full circle to Sen. Kohl’s question: “Is competition healthy enough to protect farmers, and if not, what do we do about it?”

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COMMENTS (87 Comments)

Bill in Wisconsin
She was the first cow I ever used Posilac on. The Monsanto rep didn't recommend it, saying it was too late in lactation to be effective. He was wrong and she held at 75 pounds per day for a very long time. There is no legal manner in which you should use this product as far as timing, just recommendations.
1:12 PM Jul 13th
That's legal. What are you talkinga about 7:16?

The cost is $6 something I think.
12:09 PM Jul 13th
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