By Alison Fitzgerald  2010-05-27 03:00:00.0 GMT

May 27 (Bloomberg) — At Harold Howrigans dairy farms in northern Vermont last year, the red ink was flowing almost as fast as the milk. The dairyman was losing nearly $100 per cow each month because the price for 100pounds of milk fell to $11, well under the $18cost of production.

It was bad. People had to borrow money just to make ends meet, says Howrigan. Prices have recovered some, though not enough to pay down the new debt, he says.

These are tough times for Americas 60,000-odd dairy farms, thanks to a decade-long deflationary trend in prices and a particularly severe downturn last year, Bloomberg Businessweek reports in its May 31 issue. Industry sales fell 30percent in 2009, to $24.1billion, from the year-earlier period, according to the Agriculture Department.

Congress, which spent $350million on emergency dairy price supports last year, has taken notice. So has the Justice Department, which is scrutinizing the market power of the biggest dairy cooperatives and food companies to assess the effect on prices.

Along with the USDA, Justice Department officials will hold a June 25 hearing in Madison, Wisconsin, on dairy market concentration. Meanwhile, the Commodity Futures Trading Commission is reviewing complaints of price manipulation in the spot cash market for cheddar cheese, which also affects the price of milk.

Dean Foods Targeted

Two big players, Dallas-based Dean Foods Co. and the Dairy Farmers of America, a cooperative out of Kansas City, Missouri, are the target of pending federal class actions, one filed in 2008, the other in January, in which they are accused of colluding to control market access and suppress milk prices.

Dean Foods, which buys raw milk to bottle or to make cheese, cream and other products, is the nations largest processor. It is best known for brands like Garelick Farms, Land OLakes, and Meadow Gold.

Dairy Farmers is a co-op of 18,000 members that transports milk to food companies. Yet it is more than just a distributor:

The group also owns bottlers, processing plants, and retail brands including Borden Cheese, and is the exclusive supplier of milk to some of Deans plants.

Rival dairy farmers say these two big players benefit from lower milk prices and use their market clout to keep them that way.

We have a nonfunctioning marketplace due to consolidation, says Joaquin Contente, a dairyman in Hanford, California, and president of the California Farmers Union. In all the big metro areas, Dean Foods has 70percent of the market share. Theres no competition anymore.

Without Merit

The Dairy Farmers cooperative says the allegations in the federal suits are without merit and that the interests of the co-op, which represents only 20 percent of U.S. milk volume, are aligned with its members.

We function to get the most out of their milk, and were their true advocate, says John Wilson, a senior vice-president for marketing and industry affairs. Liliana Esposito, a spokeswoman for Dean Foods, said in an e-mail that the company is confident an objective review of the facts in each case will reveal competition is alive and flourishing in the dairy industry.

Senator Bernie Sanders, an independent from Vermont, a big dairy state, has urged the Justice Department to investigate the antitrust allegations outlined in the two cases.

Very Cognizant

Assistant Attorney General Christine Varney, head of the Justice Departments antitrust division, said last year, We are very cognizant of the allegations at issue here.

On May 18, Sanders met with Rick Smith, chief executive officer of the Dairy Farmers co-op, to urge him to conduct his business in farmers interest, not the interests of his companys processing facilities.

Of course theres a conflict, says Sanders. Youre a co-op and youre purchasing your product from farmers, but you make more money if the prices are low.

Regulators also have their eye on the Chicago Mercantile Exchanges cash market for cheddar cheese. This tiny market, where less than 1percent of the cheddar supply is bought and sold, sets the price of most cheddar sold across the country and influences the federal milk price.

The federal government sets a minimum price that a bottler must pay farmers for milk using a formula tied to spot cheddar cheese prices on the Chicago Mercantile Exchange.

The Government Accountability Office in a 2007 report warned that the thinly traded market for cheddar was ripe for manipulation.

Manipulating Prices

In 2008, the Dairy Farmers co-op and its former chief executive officer and chief financial officer agreed to pay $12million to settle accusations by the CFTC that they manipulated the price of cheese to boost the value of futures contracts they had bought.

The co-op and the two officials, who retired before the CFTC case was filed, agreed to pay the fine without admitting or denying guilt. Chicago Merc spokeswoman Mary Haffenberg says the exchange has the regulations and surveillance systems needed to uphold the integrity of its markets.

Another concern is that with prices falling, dairies are trying to make up profit declines by increasing production, which in turn exacerbates price deterioration. Representative Jim Costa, a California Democrat, in mid-May offered a bill that would require dairies that boost production to pay a fee into a fund that would distribute cash to those who dont.

The larger concern of many family dairies is that the industry is a rigged game favoring a few powerful players.

Theres no correlation between the milk price and how many farmers there are, or consumption, says Joel Greeno, a dairy farmer from Kendall, Wisconsin, who is on the executive committee of the National Family Farm Coalition.

For Related News and Information:

Dean Foods earnings: DF US <Equity> TCNI ERN <GO> Stories mentioning food prices: STNI FOODPRICES <GO> Stories on dairy products: NI DAIRY <GO>

–Editors: Jim Rubin,