GUEBERT: Creaming the co-op
Sometimes it takes a newspaper's ink-stained thumb to right the scale of justice, and no newspaper has a bigger, inkier thumb than the New York Times.
On Oct. 28, the Times published a 2,900-word tribute to the greedy good-old-boyism that seems to have been the only business plan of America's biggest dairy cooperative, Dairy Farmers of America, upon its creation in 1998.
According to Times business writer Andrew Martin, court documents in two antitrust suits by dairy farmers against their own co-op, DFA, and its biggest milk customer, Dean Foods, allege a decade of cronyism and insider dealing that left the bosses in buttermilk and the dairymen-co-op owners in dust.
The DFA-Dean saga began when four regional milk marketing cooperatives merged to form DFA in 1998. Gary Hanman, boss of one of the four, took command. The new co-op claimed to represent nearly 30 percent of all fluid milk in America.
That big bucket caught the attention of Gregg Engles who, as the 1990s were drawing to a close, was building Dean Foods into a dairy powerhouse. Engles had a thirst for milk and Hanman had the milk. Soon they were talking.
"By normal rhythms of the industry," writes Martin, the two milk titans "would be financial adversaries... because bottlers try to buy raw milk as cheaply as possible (while) ... farmers joined cooperatives (to)... leverage their numbers for higher prices."
But the deal Engles and Hanman cut "went against normal economics."
Engles promised Hanman that DFA "would be the exclusive supplier to Deans' milk plants" and DFA, "in turn, promised a reliable supply of... raw milk, at the lowest prices, plus rebates and credit so Dean could acquire more milk plants, the suit says."
Why would Hanman commit his farmers' milk to Engles so cheaply?
According to the Times, a Hanman trademark was to go "against time-honored practices... For instance, instead of squabbling with bottling companies over price, he sought joint ventures with them" because, he once noted, the JVs "gave members 'greater market security and an opportunity to capture income from the retail market.'"
DFA members, however, weren't in the milk-retailing business; they were in the milk-making business. Hanman's job was to build member profit by selling DFA milk to processors; not secure processor equity, as the suits allege, by selling DFA milk cheap.
Court documents in the civil suits (one is referred to as "Southeast," the other "Northeast") draw a deeply tangled web of business deals, buyouts and payouts by Dean, DFA and numerous other dairy entities over most of the eastern US. The resulting picture, allege the plaintiff-farmers, is a Dean-DFA deal that milked cooperative members to enrich dairy executives.
Neither suit has gone to trial so that key allegation remains unaddressed. What is more certain, according to the Times, is the amount of cash whipped up and pocketed by Dean and DFA allies and pals as the partnership flourished.
"One business partner of Mr. Hanman was paid $100 million by Deans' predecessor and the DFA for his stake in milk plants, the partner had paid $6.9 million for it two years earlier. A business partner of Mr. Engles was paid more than $80 million for his investment in milk plants; that partner had paid little more than $5 million.
"Mr. Hanman was paid $31.6 million during his seven-year tenure as chief executive... As for Mr. Engles, his compensation over the last decade comes to $156 million..."
Dairy observers, though, reckon one-third of the dairy operations in states covered in the two lawsuits went out of business during the same period.
Dean Foods remains. In July it bought its way out of the Southeast suit for $140 million. A year earlier it settled the Northeast lawsuit for $30 million.
"In both cases," writes Martin, "it admitted no wrongdoing."
DFA, however, is hanging tough against its own members; the Southeast suit goes to trial in January. Its judge has ordered mediation talks but no one on either side predicts a pre-trial deal. If DFA loses at trial, estimated penalties could top $1.2 billion under current antitrust laws.
That tab, too, will fall on DFA's members who will lose even if they win.
And the milk-marketing minds behind it all?
Hanman retired in 2006 and Engles, the Times reports, will relinquish Dean's top spot by the end of 2012, one year after "Forbes ranked him among it Worst Bosses for the Buck" in 2011.