U.S. sour on tactics of milk's top co-op; Dairy Farmers of America's lucrative deals for partners are among practices cited in antitrust probe

Chicago Tribune
June 20, 2005
Andrew Martin , Washington Bureau

Allen Meyer and Robert Allen got rich on milk.

In just four years, Meyer parlayed an investment of several hundred thousand dollars in one modest-size dairy company into $70 million in 1998.

Allen contributed his $1 million dairy company as part of a merger in 1997, then sold his interest 18 months later for $22.7million.

Along with jaw-dropping returns, the two men also share the same business partner: the Dairy Farmers of America, the nation's largest dairy cooperative.

DFA is one of the most important partners there is in the milk business, with vast influence that even extends to affecting the price for a gallon of milk.

Its deals with Allen and Meyer surfaced in a lawsuit filed two years ago in Kentucky in which Justice Department lawyers argued that DFA was trying to monopolize the school milk business in eastern Kentucky .

A judge ruled for DFA on other issues and did not address the specifics of the deals with Allen and Meyer. The government has appealed.

But the central facts are not in dispute regarding Meyer's and Allen's previous business dealings with the cooperative. Along with the men's current roles at DFA subsidiaries, the lucrative transactions provide a rare window on how the mammoth, secretive dairy cooperative operates.

During the discovery process, government lawyers charged that the cooperative essentially paid off Meyer and Allen to shield DFA from antitrust allegations, a charge the cooperative's lawyers dismissed.

In fact, DFA executives defend their strategies as seeking the best deals for the cooperative's members--many of them struggling dairy farmers.

While DFA prevailed in the Kentucky case, it has not escaped further scrutiny. The Justice Department has greatly expanded its antitrust investigation into DFA and now is examining allegations that the cooperative has tried to eliminate competition in the raw milk business from Louisiana to New England .

On Monday, Justice Department attorneys in Washington will meet representatives from the Kentucky dairy industry who fear that a local cooperative is being forced out of business by DFA.

Since the Dairy Farmers of America was created from the merger of four cooperatives in 1998, it has grown from controlling 23 percent of the nation's raw milk to 33 percent in 2004--and in some areas, such as New England and Louisiana , an estimated 80 percent.

DFA's primary strategy for growth has been to control access to milk bottling plants, either by buying a stake in the plants or signing agreements that make its members the exclusive suppliers. Because consolidation has reduced the number of milk plants nationwide, farmers and some rival cooperatives often are left with a stark choice: Join DFA or go out of business.

That is happening in Kentucky , where DFA finally acquired a 50 percent stake in a milk-processing plant called Southern Belle Dairy in Somerset after several previous efforts had been rebuffed. A subsidiary of DFA already owned a 50 percent interest in Southern Belle's nearest competitor, the Flav-O-Rich plant in nearby London , Ky.

To deflect antitrust concerns, the government contends, DFA turned to two of its old business partners to run the dairy plants, selecting Allen as its partner in Southern Belle and day-to-day manager of its new acquisition. A year earlier, Meyer had been chosen as a partner and day-to-day manager of one of DFA's largest joint ventures, National Dairy Holdings, a company that owned more than 30 milk plants, including Flav-O-Rich.

Although DFA owned 50 percent of both Southern Belle and Flav-O-Rich, the cooperative insisted the dairy firms were competitors because they were run independently by Meyer and Allen.

But government attorneys alleged that Meyer and Allen essentially were straw men for DFA who had a financial incentive to collude to keep prices high to please the cooperative: It had made them rich, and it promised future deals with greater riches.

"DFA has a long history of friendly and mutually profitable financial dealings between it and the executives that it installed at the head of Southern Belle and [National Dairy Holdings]," the Justice Department charged in court documents. "Given the money that Mr. Allen has made with DFA, he has a substantial incentive to keep DFA happy so that he can continue to receive profitable business opportunities.

"The story is strikingly similar for Allen Meyer," government attorneys wrote. "Indeed, Mr. Meyer has made even more money with DFA than Mr. Allen."

Allen referred calls to his attorney, who declined to comment. Meyer did not return repeated messages for comment. DFA officials also declined to comment, saying it would be inappropriate to discuss the case while it still is being litigated in appellate court.

Transactions not disputed

But in court documents filed in the Kentucky case, DFA's attorneys did not dispute the transactions with Meyer and Allen. They did challenge the government's claim that their history with Meyer and Allen affected the competition between Southern Belle and Flav-O-Rich.

DFA's attorneys argued that the government relied on experts to opine on how the deals might affect Allen's and Meyer's management of the dairies, without providing any concrete evidence.

"Instead of presenting such evidence, the government created an imaginary world where DFA controls the sale of milk to schools by Southern Belle and Flav-O-Rich, but no action by DFA is ever required to effectuate that control," the attorneys wrote. "To support their vivid imagination, the government turns to the opinions of hired experts who adopt the theory unanchored by facts."

The fight over Southern Belle, with $65 million a year in sales, is one small part of DFA's $8 billion-a-year operations.

Given DFA's clout in the raw milk trade, the cooperative plays an outsized role in determining the price of everything from milk to yogurt to cottage cheese at the grocery store. Raw milk is the base ingredient of most dairy products, and Gary Hanman, DFA's chief executive officer, has made no secret that his goal is to push for high prices to benefit the cooperative's members.

Hanman says he has boosted milk prices by urging his members to participate in a program to cull dairy cows, thereby reducing the supply and boosting the price. And, as the Tribune reported in December, Hanman boasted to members that DFA has used its buying power to inflate the price at the Chicago Mercantile Exchange of cheddar cheese, which is used by the dairy industry as the basis for pricing raw milk.

Even if Hanman has been successful in boosting the milk price, some DFA members complain that the cooperative keeps too much of the money instead of including it in the members' monthly milk checks, without fully explaining what happens to the cash.

Unlike public corporations, agricultural cooperatives are not required to report basic financial information to members, although most--including DFA--provide an annual audit of finances. Though DFA members theoretically own the cooperative, they are not told how much their executives are paid, nor are they told that DFA executives are whisked around the country in a private jet, registered under the corporate name Delta Foxtrot Alpha Inc., records show.

In at least one instance, in May 2002, the plane was used to ferry Hanman, two sons-in-law and several business associates to a fishing lodge in Canada, said Joseph Wright, president of Southeast Milk, a Florida cooperative, who was among the trip participants.

Wright now is cooperating with the Justice Department in its investigation of DFA.

"It is an obvious anomaly today that massive co-ops like DFA, Land O' Lakes, etc. are not required to meet the same standards that comparable-sized corporations do," said Peter Carstensen, a University of Wisconsin law professor who specializes in antitrust issues. "It's appalling how little information goes out."

Several DFA members, including a former board member, said they never were told of the deals with Allen and Meyer, which came at a time when many dairy farmers were struggling to make enough money to stay in business.

"You've got to be kidding me," said Larry Daer, an Ohio dairy farmer, when told about the deals with Meyer and Allen. Daer, who quit DFA in 1999, said the cooperative still owes him $35,000. "I think all DFA members should be aware of it. . . . They don't tell you any of this stuff."

Joseph Logan, an Ohio farmer who served on DFA's board from 1998 to 2000 and now is a frequent critic, said he was not told about the deals involving Allen and Meyer.

"The board was not aware of those transactions," he said.

Most of the details of DFA's dealings with Allen and Meyer remain unclear because they are under seal in Kentucky federal court. The Tribune filed a lawsuit late last year to unseal the records. The judge has yet to rule on the request.

Allen's lawyers have attempted to stop the release of details of his financial relationship with DFA, arguing in federal court that "Allen is not a public figure and the public simply has no right to pry into his personal and private financial affairs."

Yet the closeness of Allen and Meyer to DFA is clear.

Hanman has described Allen, who once served as an adviser to the DFA board of directors' Audit Committee, as a friend with whom DFA has had a "perfect relationship through the years," court records say.

A `perfect relationship'

Meyer is chief executive officer of National Dairy Holdings, one of the largest dairy companies in the country. It was founded in 2001 when DFA invested $15 million and three individuals--Meyer, Tracy Noll and Cletes O. "Tex" Beshears--invested $5 million apiece. When Beshears and Noll left the company three years later, DFA bought them out at triple their initial investment, leaving Meyer as DFA's sole partner, according to court records.

In a 1998 transaction, Meyer and DFA sold a combined Land-O-Sun and Flav-O-Rich dairy company, and Meyer made $70 million on an investment of several hundred thousand dollars, the government says.

DFA and Allen acquired Southern Belle for $18.7 million in February 2002. Government attorneys allege that the model for the Southern Belle transaction was Allen's earlier deal with DFA for which he was paid the $22.7 million.

In the case of Southern Belle, Allen's family trust invested $1million and DFA contributed the remaining $17.7 million, though both had 50 percent voting shares. (Allen later was given 100 percent voting rights to allay antitrust concerns.) DFA guaranteed that Allen could recoup his investment after three years, and he obtained the right to 50 percent of the increase in the value of the firm.

In its complaint, the government alleged that the acquisition would result in so little competition for school milk contracts at more than 100 school districts in Kentucky and Tennessee that higher prices were inevitable.

"Like Allen at Southern Belle, Meyer enjoys a share of the profits and potential appreciation that is far out of proportion to his investment in NDH/Flav-O-Rich, thanks to DFA," government lawyers argued. "The prospect of future ventures with DFA affords Meyer a strong incentive to manage Flav-O-Rich in a manner that serves DFA's interests in eliminating competition with Southern Belle."

But there is at least one group that has not benefited from DFA and Robert Allen's takeover of Southern Belle. The Southeastern Graded Milk Producers is a small dairy cooperative that has supplied milk to Southern Belle for 56 years.

In May, Southern Belle told the cooperative that its services no longer would be needed, effective June 30. When Southeastern Graded Milk Producers sought business at the next-closest milk plant, Flav-O-Rich, it initially was told it would get a contract. But Flav-O-Rich changed course a few days later.

"We found out this week that Dairy Farmers of America controls that plant too," said William Sewell, an 81-year-old dairy farmer whose been selling milk to Southern Belle since 1954. "What have you got? You've got a monopoly, don't you?"

ajmartin@tribune.com

Copyright 2005 Chicago Tribune Company
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