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August 7, 2009

Sen. Schumer Targets Big Milk
In the last week or so, Sen. Chuck Schumer (D-NY) has made himself a nexus of Congressional action on the dairy crisis. He was involved in the recent, if minor, increase the amount the USDA pays for surplus dairy products. Next up, he announced his intention to limit imports of Milk Protein Concentrate, a milk-based food additive used in glue. Oh, and in Kraft "cheese" as well. Many experts consider the flood of foreign MPC to be a major contributing factor to the crash in dairy prices.

And now comes the capper. Schumer has demanded that the Justice Department and, interestingly, the Federal Trade Commission investigate diary pricing nationwide. Schumer noted that while wholesale milk prices have dropped by half, retail prices have stayed relatively stable. He also points out that farmers' share of consumers' milk money is down from $.48 per gallon to $.30 in the span of a year and a half. The technique of squeezing your supplier but then keeping the profit is a hallmark of monopolistic practices -- and a phenomenon exacerbated by, if not caused by, regional retail milk pricing covenants.

As a sidenote, here's a fascinating story about a dairy farmer in California who figured out a loophole in pricing covenants that allowed him to undercut the big boys on retail price. In response, Congress, egged on by Dean Foods -- which controls 40% of fluid milk distribution nationwide and 70-90% in various regions in the Eastern US -- along with large producers, quietly and quickly changed the law to make the farmer's loophole illegal (without holding a single hearing) thus preserving distributors' profits and eliminating competition. It's good to be a dairy king.

Speaking of Dean Foods, they gained special mention in Schumer's announcement as a target of the proposed investigations. However, in what is likely to be small consolation to company executives, Schumer stated "that Dean Foods is just one of his concerns." The Senator's main concern?
[T]hat the source of the disconnect between the prices consumers are paying and prices dairy farmers are receiving needs to be identified immediately and appropriate action needs to be taken to correct it.
There's no question that shining a little light on dairy pricing might make a few folks uncomfortable. Indeed, once you start unraveling that tangled web, it's impossible to ignore the level of collusion that goes on. That's the intriguing aspect of getting the Federal Trade Commission involved -- they will likely look into the distribution agreements between Dean Foods as distributor and the Dairy Farmers of America -- an industrial-scale "coop" that controls 40% of US dairy production -- as producer. Clearly, these guys can act as "market makers" -- and if the fact that the DFA was banned from trading on the Chicago Mercantile Exchange and fined $12 million by the government for price-fixing a few years back is any indication, the FTC probably won't have to dig too deep to find market manipulation.

But I wonder if Schumer or the DOJ or the FTC will follow the money all the way to the big boys -- like, say, to Kraft Foods, which controls a significant chunk of the cheese market. While Dean and the DFA effectively have a stranglehold on milk production in this country, Kraft is almost in the same position with its cheese division. Indeed, Kraft's cheese profits have risen almost as much as Dean's milk profits. And Kraft, as I mentioned, is the main user of imported MPC, which it uses for its "processed cheese food" products. They're hard to ignore -- unless, of course, you're under strict orders to do exactly that.

So, Chuck, how far are you willing to go with this? All the way to the top (or should I say the bottom? or is it the middle?) of the food pyramid? Once you take down Dean Foods is Kraft next? A blogger can dream, can't he?

Photo by jonpetitt used under a CC license

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