Schedule for November 2009

    The suit was filed by Vermont farmers Alice and Laurence Allen, of Wells River, and New York farmers Garrett and Ralph Sitts on behalf of all northeastern dairy farmers.

    The alleged conspiracy involved the purchase and closing of processing facilities in the Northeast as well as forcing farmers to market their milk through DFA or Dairy Marketing Services (DMS).



DFA, processing & profits

    The lawsuit relies on previous transactions and dealings between the plaintiffs to prove its case that Dean, DFA, Hood and DMS have conspired to reduce the price farmers receive for their milk.

    Key to the complaint is the argument that DFA management was more interested in maximizing profits at DFA’s processing facilities and jointly owned processing facilities than it was in maximizing payments to DFA farmers.

    Farmers are paid a minimum price for milk set by the federal milk marketing order. However farmers may negotiate a premium above the marketing order price, known as an over-order premium.

    In 2003, Dean Foods began requiring independent farmers and cooperatives to market any milk sold to Dean through Dairy Marketing Services (DMS), a marketing agency jointly founded by Dairylea and DFA and, plaintiffs allege, controlled by DFA.

    Anti-trust suits filed in the Southeast have charged that as a result DFA was able to monitor the price its competitors were receiving for their milk.

    This suit goes a step further, arguing that through its control of DMS, DFA was able to reduce the premiums received by farmers below what they would have been in a more competitive market.

    Lower premiums meant higher profits for DFA’s processing operations and the profits from those operations were “diverted to benefit DFA management and outside business partners,” the plaintiffs assert.

    DFA was able to invest profits from its processing operations into the acquisition of even more processing capacity and the lower over-order premiums benefitted Dean and Hood, “which, in return, continued to designate DFA and Dean as their exclusive suppliers of milk and thus preserved and strengthened DFA’s monopoly over the supply of fluid Grade A milk throughout the Northeast,” the plaintiffs argue.

    Since 1998, DFA has been investing its members monies and equity in the acquisition of processing facilities, either solely or through joint ventures with other businesses.

    "The success of these investments depended upon DFA management's ability to supply these plants with Grade A fluid milk obtained at the lowest possible price, which is directly contrary to the core responsibility that DFA management owes its members to market their Grade A fluid milk at the highest possible price," the complaint reads.

    Over the past several months the Messenger has asked farmers and dairy experts about this apparent conflict of interest. All have said roughly the same thing, that the profits from the processing operations are eventually distributed to the farmer members of DFA, therefore DFA’s farmers benefit from the profits of the processing facilities.

    Attorneys in the class action suit have alleged that this is not the case, and that DFA management has, in fact, profited from the processing operations at the expense of DFA's membership and other northeastern dairy farmers.

    "A significant portion of the profits from the processing operations and joint ventures were not distributed to DFA's members, but rather diverted to DFA's management and outside business partners," plaintiff's attorneys wrote.

    The USDA does not require distribution of the profits from the processing operations to DFA's farmer members, and "members of DFA are not informed, and cannot obtain information regarding, how profits from DFA's joint ventures and processor investments are distributed," according to the complaint.

    As proof of their allegations regarding profiteering by DFA management and a handful of insiders, the plaintiffs cite several instances of millions of dollars being diverted to DFA management or the management of affiliated companies.

    Citations include advance milk check payments to former DFA director Lewis Gardener who also received milk payments above the market rate, according to documents filed as part of his 2006 bankruptcy, as well as the still unexplained $1 million payment to DFA director Herman Brubaker from National Dairy Holdings (NDH), a company controlled by DFA.

    In addition, investors who have purchased companies in concert with DFA and its predecessor, Mid-American Dairymen, Inc., have subsequently made millions in excess profits by selling their shares in the companies to DFA at above market rates, according to the complaint.

    For example, two investors who joined DFA in creating National Dairy Holdings each invested $5 million, but together they received $41 million when DFA purchased their interest in the company a mere three years later.

    DFA has resisted revealing financial information to its members, according to the suit, which cites the 1996 removal of Carole Knight from the board of DFA predecessor, Mid-American Dairymen, Inc., after she repeatedly raised questions about milk check deductions being made by the co-op. Knight subsequently sued, winning $450,000.

    Plaintiffs are seeking a full independent audit of DFA’s finances.

Buying capacity



    DFA was not the only alleged conspirator who has been purchasing processing capacity in the northeast over the past 12 years.

    In 1997 Dean Foods predecessor Suiza entered the northeast market with its purchase of Garelick Farms. Within three years, Suiza controlled 70 percent of fluid processing capacity in the Northeast, according to the complaint.

    Claiming there was excess capacity in the northeast, Suiza began closing facilities including processing plants in Rutland and Bennington.

    At the time U.S. Sen. Patrick Leahy, D-Vt., expressed concern that Suiza was attempting to suppress competition by buying up processing plants and closing them.

    Plants owned by Suiza were supplied solely by DFA.

    In 2001 Suiza, then the largest processor in the country, merged with Dean Foods, the second largest. Concerned the move would limit competition, the Department of Justice (DOJ) ordered that Dean divest itself of 11 facilities. Those facilities were spun off into National Dairy Holdings, a company controlled and created by DFA.

    DOJ also sought to insure that farmers who were not part of DFA would be able to supply milk to the plants. However, the DOJ’s efforts did not result in Dean buying substantial amounts of milk from sources other than DFA, according to the suit.

    When Dean acquired DFA’s one-third stake in Suiza, Dean gave DFA a promissory note for $40 million that will come due in 2021 in the amount of $96 million. DFA has agreed to forgive the note in exchange for a series of 20 one year full-supply agreements, according to this and other suits filed against Dean and DFA. If the agreements are not renewed, Dean will pay DFA damages in the amount of $47 million.

    DFA also had full supply agreements with the processor it controlled, National Dairy Holdings (NDH).

    In 2003, DFA attempted to merge NDH with H.P. Hood. State attorneys general objected and instead of the merger Hood acquired a 30 percent interest in NDH and DFA acquired a 15 percent interest in Hood. The two companies also swapped chief executive officers. The next year NDH sold its Crowley milk operations to H.P. Hood, making Hood the second largest processor of milk in the northeast.

    DFA remained the exclusive provider of milk to the Crowley plants, according to the complaint.

    DFA’s sole supply agreements with processors, coupled with Dean’s requirement that all farmers and cooperatives selling to the company go through DMS, forced farmers to join either DFA or DMS in order to access processing facilities, the plaintiffs argue.

    In addition to damages, plaintiffs are asking the court to order Dean, DFA and Hood to divest themselves of enough processing facilities and balancing plants to create competition among processors.

    They are also seeking a full, independent audit of DFA’s and DMS’s finances and an end to the anti-trust amnesty DFA enjoys as a dairy cooperative under the 1922 Capper-Volstead. Act.

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