May 18, 2008
Yes, It's a Cooperative. But for Whom?
By ANDREW MARTIN
THE traditional idea of agricultural cooperatives is that farmers have more muscle to negotiate prices when they band together.
At the nation's largest dairy cooperative, the Dairy Farmers of America, it hasn't always worked that way. The group's executives have often seemed more concerned about pleasing dairy executives than their members, this during a time of brutal consolidation in the industry.
The cooperative, created in 1998 from the merger of four others, generates $11 billion in sales. Because it is so big, some dairy farmers have felt compelled to join, only to find that they were paid less than before for their raw milk.
D.F.A. executives didn't suffer such hardships, traveling the country in a corporate jet and making deals that appeared to benefit a few in the industry; some members complained that they were largely left in the dark about how the money from the deals was spent.
Wait, aren't the farmers supposed to own the cooperative?
Now, we come to hear that the Dairy Farmers' former chief executive, a larger-than-life figure named Gary E. Hanman, transferred $1 million in 2001 to the board chairman at the time, Herman Brubaker, for reasons that remain a mystery.
The payment was disclosed by the current president and chief executive, Richard P. Smith, during a recent press conference with dairy trade publications. Mr. Smith described the payment as "an improper transaction" that had been concealed.
The cooperative has since recovered the money with interest, said Mr. Smith, who in 2006 replaced Mr. Hanman, who retired. Mr. Smith said he believed that both Mr. Brubaker and Mr. Hanman had chipped in to cover the payment. "It was a breach of trust," Mr. Smith said in an interview. "I do believe it was an aberration."
Asked what the payment was for, Mr. Smith said: "We don't know. I'd rather not speculate. Certainly there is no valid reason."
Neither Mr. Hanman nor Mr. Brubaker, who retired in 2003, were available for comment.
This might seem like a dispute that would be confined to states like California and Wisconsin, where there are plenty of dairy farms. But it has implications well beyond dairy states.
Mr. Hanman was among the most powerful people in the dairy industry at a time of monumental change.
In the last decade, the number of dairy farmers has declined sharply — from about 99,000 in 1997 to about 59,000 last year, according to the Agriculture Department. At the same time, there has been a major shift in where milk is produced.
Small dairy farmers east of the Mississippi River and in the Upper Midwest are increasingly being replaced by huge dairy farms in the West, in places like New Mexico and western Texas. Few dairy farms are even left in the Southeast.
These days, more milk is trucked halfway across the country because the local dairy farmer and milk bottler are out of business. All of this change was done in the name of efficiency — and may have made sense when gasoline was $2.50 a gallon. But if you have bought milk any time in the last year, you know that consumers aren't benefiting from the new dairy landscape.
Mr. Hanman was in an ideal position to help dairy farmers deal with the shifting winds. But if anything, he seemed to have made the situation worse.
A large man with thinning red hair who favored bright red suspenders, Mr. Hanman aggressively expanded his cooperative and his influence by outmaneuvering competitors, rewarding his allies and giving campaign contributions to politicians who were in a position to help him.
To expand the cooperative, Mr. Hanman used a strategy that gave dairy farmers little choice but to join and, in the process, helped push competing cooperatives out of business. (In some instances, they merged with the Dairy Farmers of America.)
The D.F.A. would sign exclusive supply agreements with milk bottlers or buy the bottling plants outright, often in areas where it had few if any members.
The dairy farmers who supplied the plant could then either join the cooperative or find somewhere else to sell milk. In a time of rapid consolidation, there often weren't any other plants within a reasonable distance.
In some parts of the country, including the Northeast and areas of the South, three out of four dairy farmers now sell their milk through the Dairy Farmers of America or one of its affiliates. Some farmers have complained that the money they were paid for their milk declined when they started selling it through the D.F.A. or its subsidiaries.
Questions about where farmers' money was going intensified when court documents filed by the Justice Department a few years ago revealed that some of the Dairy Farmers' business partners were making extraordinary profits.
For instance, Robert Allen, a dairy executive, participated in a joint venture in the Northeast and made $21.7 million profit on a $1 million investment. Another dairy executive, Allen Meyer, had a joint venture with the D.F.A. in Kentucky and Tennessee: he turned an investment of several hundred thousand dollars into a gain of $70 million.
Neither Mr. Allen nor Mr. Meyer could be located for comment.
D.F.A. officials say the cooperative made the same return on those investments as Mr. Allen and Mr. Meyer.
But Peter Hardin, editor and publisher of The Milkweed, a newsletter that has long been critical of Mr. Hanman, remains skeptical. "Outside business partners seemed to walk away with sweet deals, and the farmers were left with the crumbs," he said. "The money went anywhere but to the farmer."
MR. SMITH said that "some combination of lack of transparency and arrogance" existed in the old days at the D.F.A., and he has vowed to change the culture. For one thing, he got rid of the corporate jet.
He has also promised a thorough and transparent investigation of the cooperative's finances to ensure that there weren't any other unexplained payments. The farmers who lost their dairies during the last decade deserve at least that much.
Better yet, perhaps the Justice Department, which began an investigation of the Dairy Farmers of America about four years ago, will finally let them know if it found anything more than an aberration.
A Justice Department spokeswoman declined to comment.