Dairy Industry Under Justice Department Investigation for Alleged Price Fixing

The U.S. government’s Commodity Futures Trading Commission (CFTC) is investigating whether the dairy industry has engaged in price fixing to illegally increase its profits, according to a report by the Wall Street Journal.

The main target of the probe is the Dairy Farmers of America (DFA), which controls one-third of the dairy supply for the United States. This cooperative purchases milk from more than 11,000 farms operated by more than 19,000 member-owner farmers, and prepares it for bottling or for further processing into dairy products such as butter and cheese. Some of the milk is bottled or made into other products at DFA-owned plants, while much of it is also sold to other companies.

In addition to processing dairy, DFA also manufactures certain dairy-related ingredients.

According to the Journal report, the CFTC is investigating whether DFA drove up the prices of milk and cheese futures through strategic trading of cheese contracts on the Chicago Mercantile Exchange. Because DFA purchases milk from farmers based in part on the prices of dairy futures, this would amount to an illegal maneuver to increase the price of milk.

Investigators are also looking at the legality of an unreported $1 million payment made by the cooperative to its then-chief executive Gary Hanman in 2001.

DFA says that it is cooperating with authorities in this investigation, and denies that the cooperative’s board knew about the “unauthorized transfer of money” until recently. It acknowledged the CFTC’s price-fixing investigation as well, but has downplayed its significance and denied any wrongdoing.

“As a large, national and international business, DFA receives a great deal of scrutiny, and is involved in various legal matters in the normal course of business,” cooperative President Rick Smith said. “These legal matters include inquiries conducted by the Department of Justice and the CFTC.”

“We do not believe we have violated any laws, and we have and will continue to cooperate,” he said.

According to DFA spokesperson Monica Coleman, the investigation actually began in 2004, when the alleged price fixing took place.

DFA is also facing a number of lawsuits from farmers and retailers in the Southeast who allege that the cooperative cheated them both in order to increase its profits. The plaintiffs accuse DFA of artificially deflating the prices it paid to farmers while at the same time artificially increasing the prices it charged supermarkets and other retailers.

Some of these lawsuits also accuse the world’s largest dairy processor and distributor, Dean Foods. Dean is the single largest seller of milk in the United States.

The CFTC refused to comment on its probe, saying only that “the CFTC does not confirm nor deny the existence of any investigation/s or investigative activity.” It refused to answer questions as to whether other parts of the dairy industry could find themselves under investigation.

The news of the investigation comes at a time when dairy farmers in the United States and Europe are reporting record profits, drawing increasing scrutiny to the large government subsidies that they receive. To many, these record profits look especially bad with food prices at record levels around the world and millions of people without enough to eat.

Dairy prices in the United States have increased 13.5 percent in the past year alone.

A number of dairy companies have also come under investigation for price fixing in Europe in recent years. Most recently, in December 2007 the government of Greece fined a number of dairy processors, including Nestle and Vivartia, a total of €48 million ($75 million) for sharing price information with each other in order to artificially increase Greek dairy prices.

In September 2007, the United Kingdom’s Office of Fair Trading (OFT) concluded that a group of dairy processors and supermarkets in that country had shared information to fix prices and artificially increase their profits by £270 million ($530 million).

The companies cited included Arla Foods, Asda, Dairy Crest and Tesco.

Sources for this story include: www.foodnavigator-usa.com, money.cnn.com.