By Jesse Marx
By Chris Parker
By Jake Rossen
By Jesse Marx
By Michelle LeBow
By Alleen Brown
By Maggie LaMaack
By CP Staff
As the federal government attempted to solve the overproduction problem, the dairy industry became increasingly concentrated in the hands of a few huge cooperatives. Farmer-owned co-ops, originally created as a way for dozens of farmers to negotiate with wealthy buyers in Chicago and New York, had grown into nationwide consortiums representing thousands of farmers.
One of the fastest-growing was Land O'Lakes, which carried out an aggressive strategy of mergers and acquisitions throughout the 1990s. After scooping up smaller dairy outlets in the Northeast and the South, Land O'Lakes looked west. When company scouts approached Jack Prince, CEO of Dairymen's Cooperative of California, to propose a merger in 1998, the attraction was obvious.
"They were aware of the fact that California was growing by leaps and bounds," says Prince, who went on to serve as a vice president at Land O'Lakes. "They felt that in the long term, they wouldn't be able to compete without a presence in California."
With the merger, Land O'Lakes solidified itself as a national player in the dairy industry, joining its fellow behemoths like Dairy Farmers of America. "It's the way of the business world," says Corey Corey Geiger, an editor at renowned industry magazine Hoard's Dairyman. "Co-ops consolidate so they have greater marketing strength, because ultimately they've got to be able to negotiate with the Walmarts of the world."
Cooperatives have consistently used this claim as a reason for their need to dominate the market, but there is reason for skepticism, says University of Wisconsin Law School professor Peter Carstensen, who points to Land O'Lakes' recent acquisition of a butter plant in Madison.
"Within a year and a half they shut the plant down, depriving dairy farmers of an outlet for their milk," Carstensen says. "You could look at it and say, 'Hmm, Land O'Lakes has a very large butter operation, this is another competitor, and now they're closed down.'"
Even with their bargaining strength, big co-ops were still at the whim of the market. Since the reduction of government price supports in the 1980s, milk prices had become ever more volatile.
"It seems like we'd have a good year, then a decent year, and then the year from hell," Luneman says.
In 2002, milk prices plummeted and stayed down. In May 2003, the all-milk price—which includes Grade A milk sold for drinking and Grade B milk used in butter and cheese—was at its lowest point since 1978.
Just a month later, Cooperatives Working Together launched its website, asking co-ops and individual dairy farmers to join. The consortium plainly stated that its goal was to increase the price of milk, and trumpeted the singular power it had over the dairy market. By the time it enacted herd retirement, the organization had signed enough co-ops and independent producers to account for more than 70 percent of the country's milk production.
"The 70 percent number is very interesting," says University of Connecticut economist Ronald Cotterill. "Generally it's thought that when you get up to 70 percent or more, you definitely have a dominant position in that market."
The need for farmers to leverage their numbers against wholesalers is obvious to Roger Allbee, former secretary of agriculture in Vermont. But consolidation in the production and retail side of the dairy industry doesn't help everyone.
"Where does the consumer benefit?" Allbee asks. "That's the real question."
On the fall morning when the visitor arrived, David Gilbertson was already outside waiting. Gilbertson entertained small talk as he showed the man to his barn, but he knew the task at hand was anything but pleasant.
The stranger had come to Farwell, a farming village an hour east of the South Dakota border, on behalf of Cooperatives Working Together. Once the man got into the barn, he produced a series of purple tags to clip onto the ears of the 45 cows, marking them for death.
"It was hard, emotionally," Gilbertson recalls. "If it's young cows that have a lot of promise as a milk cow, that's hard."
After Cooperatives Working Together accepted Gilbertson's bid, he arranged for the cows to be taken to Belgrade Meat Center, a slaughterhouse in a nearby town. Per the terms of the herd buyout agreement, the cows had to be slaughtered within 15 days, which would be confirmed by the visit of a second auditor.
"I don't know what they did with 'em," Gilbertson says. "I've often wondered that."
After being slaughtered at Belgrade, the cows were likely ground into meat and sold off a dollar menu. The meat from a dairy cow is of a lower quality than beef cattle raised and fattened its whole life, so the meat is often used as hamburger at fast-food restaurants.
By the time Gilbertson's herd was slaughtered in fall 2005, the consortium was finishing up its third round of herd retirement. Collectively, about 147,000 cows from more than 1,000 farms across the country had been slaughtered.
"We are pleased with the size program we were able to execute," announced Jerry Kozak, president and CEO of National Milk Producers Federation, the Virginia-based industry lobbying group that organized and ran Cooperatives Working Together. "This is our biggest retirement to date."