LATON, Calif. — When Melvin Medeiros, son of first-generation dairy farmers, was 9, a bull killed his dad. His parents, immigrants from the Portuguese Azores Islands, had saved for a decade to buy a small herd of cows. Medeiros’ mom, determined not to let the dream die, too, bought 38 acres in dusty Laton, Calif.
When Medeiros turned 18, he recalls his mom handing him the dairy, saying, “You are now the next in line. Make it work.”
And he did.
After about 20 years as an independent, Medeiros joined a small cooperative — a member-owned organization that helped farmers market their milk.
Then an opportunity arose to join Dairy Farmers of America, the nation’s largest dairy cooperative.
After switching, Medeiros heard rumors DFA didn’t look out for its producer-members.
“I lay awake many nights and thought, ‘I made the worst mistake of my life,’” said Medeiros.
But gradually, the organization won him over. DFA representatives were always available, he said. Milk checks were bigger. DFA’s transparency, he said, disarmed him. And he felt as though he had a voice.
Around 2010, Medeiros became a board member of DFA’s Western Council. He now sits on the corporate board of directors and continues farming.
Now, Medeiros says he’s in favor of DFA’s biggest move yet: buying most of the assets of bankrupt Dean Foods Co., the nation’s No. 1 milk bottler, in the largest acquisition in American dairy history.
In April, DFA made a bid of $433 million to acquire most of Dean Foods’ assets and assume some of its liabilities. Dean Foods spokesperson Anne Divjak said the transactions should wrap up early this month.
But not everyone thinks the merger is a good idea.
Proponents say the deal will secure the milk market for farmers and consumers. Critics fear the takeover will reduce competition and depress the price of raw milk, hurting farmers.
Although the marriage of Goliaths is moving forward, DFA still must reckon with ongoing lawsuits from farmers, an antitrust investigation by the Department of Justice and an alternative deal proposed by Dean’s bondholders that would unite Dean Foods and Borden Dairy Co., another bankrupt business, instead.
DFA is the fourth-largest dairy cooperative on earth based on sales, with 14,500 dairy farmer-members operating 8,500 dairy farms in 48 states. DFA also has a processing arm with 6,000 employees and 47 processing plants.
Dean Foods, America’s biggest dairy processor, has more than 15,000 employees operating 56 plants in 29 states and processing 2.2 billion gallons of milk annually.
According to Dean, about 60% of its milk comes from DFA. Dean sells dairy products under labels including TruMoo, Tuscan and Land O’Lakes.
In March, DFA successfully bid for 44 of Dean’s facilities, though that number may shrink if the Justice Department requires DFA to shed some of its newly acquired facilities to prevent both a monopoly, which means it would control the market, and a monopsony, which means it would control the milk prices paid to farmers.
Divjak said Dean Foods is working to transition its employees to DFA.
Experts estimate that with Dean Foods’ assets and workers, DFA will nearly double in size and control 60-70% of the nation’s raw milk supply: a dairy colossus.
The new DFA would become the nation’s largest dairy company, pulling ahead of Swiss-based Nestlé on the North American front, where Nestlé currently operates 68 manufacturing facilities and employs 36,000 people. But DFA would still be a drop in the milk bucket next to Nestlé’s global operations: 447 factories with 339,000 employees in 189 countries.
Attorneys say the DFA-Dean merger could violate section 7 of the Clayton Act, an antitrust law aimed at preventing anticompetitive behaviors such as mergers and acquisitions that create monopolies.
Dean Foods filed for protection under Chapter 11 of the federal bankruptcy law to reorganize its debts in November 2019. The events leading to the bankruptcy, outlined in court documents, included declining consumption of fluid milk, raw milk price increases, failed investments and unfunded pension obligations.
But the bankruptcy still surprised investors.
“We were blindsided,” Susan Poole, a Dean Foods shareholder, told the Capital Press. “All the shareholders I’ve spoken with were shocked.”
Dean Foods, many shareholders argue, was solvent — able to pay its debts because its assets exceeded its liabilities. Financial records show that as of Sept. 30, Dean had assets of $2.3 billion and liabilities of $2.2 billion.
In recent testimonies, DFA and Dean Foods executives said they had been engaged in ongoing talks about a merger.
Shareholders say they were never told this.
“Dean and DFA never disclosed that anywhere,” said Poole. “There was no transparency.”
Some investors suspect DFA, by manipulating prices and agreements, pushed Dean into bankruptcy so it could buy Dean. Others suspect that they may have worked together, saying executives stand to gain bonuses if the deal goes through. Legal experts say nothing in the bankruptcy case definitively proves or disproves these suspicions.
Bidding documents show Dean had other bidders besides DFA, signaling that it wasn’t a pre-ordained deal.
But in a March 30 letter to the Justice Department, Zippy Duvall, president of the American Farm Bureau Federation, wrote that advance discussions between DFA and Dean Foods gave DFA a competitive advantage over other bidders, who only had “a few days” to scramble together bids.
Dean Foods bondholders are now teaming up with Borden to propose an alternative merger, or “Plan B,” to block DFA. On April 23, Dean’s investors proposed Dean Foods become a subsidiary of Borden instead. This is pending review.
Dennis Rodenbaugh, DFA’s executive vice president and president of council operations, said DFA is buying Dean Foods to secure markets for its farmers and ensure milk continues reaching consumers.
“If Dean Foods did not exist, it would impact the entire industry,” said Rodenbaugh.
He characterized DFA as a reluctant hero, willing but not eager to buy Dean Foods and seeing no good alternative.
Some DFA farmers have expressed support of the merger in public statements but declined interviews. Others, however, disbelieve DFA’s narrative.
Some farmers fear the deal will give the co-op enormous power to manipulate markets and prices. The co-op has heavily invested in processing in recent years, meaning it buys raw milk its marketing branch sells. Critics say that creates a conflict of interest, because processors benefit from lower milk prices, while farmers benefit from higher ones.
Rodenbaugh, the co-op’s executive vice president, calls this a misunderstanding.
“We’re a farmer-owned cooperative,” said Rodenbaugh. “The confusion some people have, saying we’d drive down prices for farmers, is irrational.”
DFA’s board consists of farmers who want the highest possible milk prices, said Rodenbaugh.
And more profits for DFA, he said, through producing or processing, mean bigger milk checks.
“It’s left pocket, right pocket,” he said.
Board members, Rodenbaugh added, receive the same payments as other farmers and don’t get special benefits.
“The only check I get is my milk check,” said Medeiros, the California farmer and board member.
Gary Genske, a certified public accountant for the dairy industry, New Mexico DFA dairy farmer and former board member, said he has seen how producers become mesmerized by DFA once they’re on the board. Hotels, dinners, VIP events and a sense of influence — Genske said DFA executives court board members with special treatment, leading members to “take off their producer hats and put on their board hats.”
Medeiros retorted that farmers who are frustrated with DFA’s decisions have “blinders on,” and encouraged them to participate more.
“I say: get involved, producers,” he said. “Ask questions. Don’t be afraid to go to meetings. Those who don’t go to meetings are usually the first ones to throw a stone.”
Many DFA critics say top executives are the ones not looking out for producers.
According to Peter Carstensen, antitrust law professor at the University of Wisconsin-Madison, the Securities Exchange Act of 1934, created to ensure financial transparency, exempts cooperatives. Because of this, he said, DFA is not required to disclose all of its financials.
But limited financial reports show the co-op has a history of making big profits while producers have struggled to subsist.
In 2014, financial reports show DFA paid members an annual average $24.17 per hundredweight of milk, while corporate profits were $43.1 million. In 2015, corporate profits mounted to $94.1 million, but the pay price to farmers was reduced to $17.18 per cwt. And in 2016, pay price was $16.22 per cwt while corporate profit soared to $131.18 million. That year, DFA paid 20% of its net profits to members.
But farmers really get more than 20%. According to those familiar with DFA’s financials, about 25% of DFA’s earnings stay in the company as equity later paid out as dividends to farmers. The catch is this benefit isn’t paid out immediately; farmers receive it more than a decade after retiring or leaving DFA.
In 2017, many farmers criticized DFA for building a $31 million headquarters in Kansas City, Kan., with bocce courts, a milk bar and a 25-foot milk-themed sculpture.
Monica Massey, DFA executive vice president, said the goal was to be an employer of choice, adding that company revenues also pay more than 6,000 employees in its processing arm.
Some legal experts say the distaste many farmers have for DFA is, at its heart, class warfare: those at the bottom resent the luxury of those at the top.
Others say the bigger issue at stake is the creation of a monopoly, or “milk empire.”
Tangled in court
The pending merger with Dean Foods is not the first time DFA has faced allegations of anticompetitive behavior.
Thousands of farmers have banded together to bring class-action antitrust lawsuits against DFA. One of these suits ended in 2013 when DFA agreed to a $140 million settlement. Another lawsuit in 2016 led to a $50 million settlement, or $4,000 per farmer.
A group of 115 DFA farmers opted out of that settlement and is suing the cooperative in a case called Sitts v. Dairy Farmers of America.
The suit alleges DFA is responsible for sharing milk pricing information with rivals to depress farmers’ payments, making deals with other co-ops not to solicit each other’s members and signing restrictive supply agreements with processors.
DFA denies the allegations.
Some farmers allege DFA makes it nearly impossible for them to leave by making strong-arm deals with other cooperatives not to work with each other’s members.
Jonathan Haar, who runs a small dairy with his family on sprawling green pastures in Brookfield, N.Y., suspects this happened to him. Several years ago, Haar said, he attempted to leave DFA for another co-op, Agri-Mark. But Agri-Mark suddenly went silent, and Haar, along with his legal counsel, believes DFA likely blocked the deal.
“We didn’t sign up for this treatment,” said Haar. “We just wanted to be dairy farmers.”
In September, at a federal district court in Vermont, the judge denied DFA’s request for summary judgment — a decision without a full trial.
Those familiar with the case said it should go to trial July 1.
For months, the DOJ has been investigating the Dean Foods-DFA merger and appears close to a settlement.
The investigation’s purpose is to determine whether the merger would violate antitrust law.
The Capper-Volstead Act of 1922 exempted cooperatives from antitrust prosecution under certain conditions, and critics say DFA is using the exemption to shield itself.
The Act, Duvall of the American Farm Bureau said, also exempts cooperatives from the USDA’s Federal Milk Marketing Order, meaning DFA doesn’t have to pay the marketing order’s minimum milk prices to farmers.
Duvall urges the DOJ to consider how the merger may quash competition and hurt producers’ pay prices.
“At a time when many dairy farmers are struggling to survive,” he wrote in a letter to U.S. Attorney General William Barr, “it would be shortsighted to ignore the impact on milk prices and farm families of this potential consolidation of power.”
The Justice Department declined to comment. But in a letter to Dean investors March 11, DOJ’s assistant attorney general Makan Delrahim wrote that “an acquisition of Dean by DFA appears to pose a serious risk of anticompetitive harm.”
Now, Justice Department officials are nearing a settlement that would allow DFA to buy the majority of Dean Foods’ plants. Those familiar with the case say DFA will likely be required to relinquish three Dean plants in Green Bay, Wis., Franklin, Mass., and Chicago.
Massey of DFA declined to comment on specifics but told the Capital Press April 24 the cooperative is working with DOJ to finalize the transaction.
Carstensen, an antitrust lawyer, said he is concerned the Justice Department will let DFA get away with little more than a slap on the wrist.
“We don’t want one entity to control a big portion of the food system,” said Carstensen. “But not everyone agrees; there are a lot of farmers who like DFA and are committed to it.”
‘Twists and turns’
Medeiros said he’s thankful to be part of cooperative that pays him better milk checks, answers questions and seeks input.
“You hear the rumors that there’s this giant out there,” he said. “Any time you’re big, you’ve got a target on your back. But I keep turning over stones and just being impressed. Is DFA perfect? No. But they’ve won me over. And to do that, you’ve got to check a lot of boxes.”
Transactions continue; lawsuits and investigations are ongoing; farmers wait for answers; and cows, with no idea what’s going on, still get milked seven days a week to feed America.
“This thing has more twists and turns than a cornfield maze,” said Pete Hardin, DFA critic and editor of the Milkweed, a dairy industry publication. “How it’ll all turn out, I don’t know. But I’ll be watching the show.”