The Implications of Concentration in the Dairy Industry

1. The Implications of Concentration in the Dairy Industry Chris Hardee Attorney Litigation 1 Section Antitrust Division United States Department of Justice (The views expressed herein are not purported to reflect those of the U.S. Department of Justice)

2. Introduction An Overview of Antitrust Analysis Three Milk Matters Suiza/Dean Southern Belle NDH/Hood

3. Antitrust analysis • Merger Analysis Under The Clayton Act • Clayton Act prohibits mergers where the effect “may lead to a substantial lessening of competition” • The touchstone is creation or enhancement of buyer or seller “market power”

4. “Market power” • The ability of one or more firms to maintain prices above competitive levels for a significant period of time • Can also be power to keep prices of inputs such as raw milk below competitive levels

5. Is “market power” enhanced? • Define relevant product and geographic markets to determine who competes • Relevant markets are defined by whether a monopolist seller in those markets could profitably impose a small but significant non-transitory increase in price (“SSNIP”) • Assess the change in concentration and potential competitive effects in those markets

6. Competitive effects • “Unilateral effects” • Mergers to monopoly/monopsony • Elimination of closest competitors • “Coordinated effects” • Mergers that facilitate cooperation among remaining firms in the market • History of bid-rigging in concentrated school milk markets makes this a potential concern

7. The Sherman Act • Section 1 • Prohibits agreements in restraint of trade • “Per se” illegal agreements are prosecuted criminally (price-fixing, market allocations) • “Rule of reason” analysis looks to effects in a relevant market • Section 2 • Prohibits monopolization or attempted monopolization in a relevant market

8. Suiza/Dean • 2001 merger of nation’s largest dairy processors • Concerns in fluid milk processing, school milk and soy milk • Approved by DOJ subject to the divestiture of 11 processing plants in 9 states • Plants divested to National Dairy Holdings, 50% owned by DFA • Subject to modifications in DFA/Suiza milk supply agreements in divestiture markets to satisfy concerns about DFA relationships facilitating coordination between Dean and NDH

9. Suiza/Dean fluid milk markets • Fluid milk a distinct product market • Consumers will not switch to other products to defeat a 5% price increase (low “elasticity”) • Geographic markets defined as metropolitan areas • Sellers can charge different prices to groups of customers in different regions • Unilateral anticompetitive effects in 22 markets • Suiza and Dean closest competitors • Vertically integrated supermarkets not a sufficient constraint • Post-merger shares of 43% to 100%

10. Suiza/Dean school milk markets • School milk a distinct product market • Frequent delivery of milk in half-pints • USDA requirements that schools serve milk • School districts are geographic markets • Suppliers bid separately for contracts and bids reflect differences in competition and costs in each district • Unilateral and coordinated effects • Mergers to monopoly and elimination of next-closest competitors • History of bid-rigging in concentrated school milk markets makes coordinated interaction a serious concern

11. Suiza/Dean soy milk market • Post-merger market share of 90% • No challenge due to • Rapid growth of the market • Recent large-scale entry • Lack of evidence of the post-merger firm’s ability to raise price

12. Southern Belle • 2002 acquisition by DFA of 50% of Southern Belle dairy in KY along with Robert Allen (the other 50% owner) • Southern Belle and DFA’s 50%-owned NDH are the only competitors for many school districts in KY and TN (nearly 100 2-to-1’s and 3-to-2’s) • Markets with a history of bid-rigging, including between Southern Belle and NDH’s Flav-O-Rich dairy under prior ownership • Judgment in favor of DFA in August 2004. On appeal.

13. Southern Belle allegations • Combining Southern Belle and NDN would be a clear-cut Clayton Act violation • Mergers to monopoly or duopoly in nearly 100 school districts • DFA’s 50% overlapping ownership reduces incentives of affiliate dairies to compete • Reduced competition will increase profits • DFA does not benefit from one affiliate stealing another affiliate’s customers and lowering market prices • DFA relationships with its partners and affiliates makes it likely that its affiliates will act to maximize DFA profits

14. NDH/Hood • 2002 merger of NDH and Hood • DFA would have obtained raw milk supply to Hood and control over milk procurement • DOJ and states expressed raw milk concerns • Deal restructured in 2002 to eliminate DFA supply rights, control over supply, and limited to sale of NDH Crowley and Marigold plants

15. NDH/Hood raw milk concerns • Hood the main customer for the last large non-DFA-affiliated coop in New England • DFA control over Hood’s supply could have forced the coop to join DFA or a DFA-controlled marketing agency to maintain Class I access • Potential monopolization of the sale and purchase of raw milk in New England

16. Raw milk concentration • Why is DOJ concerned given Capper-Volstead immunity for producers? • Producer-processor agreements that affect the raw milk market are not immune • Foreclosure of Class I access may lead to increased coop concentration that otherwise would not occur • Why would processors participate in agreements that facilitate raw milk cartelization? • Competitive raw milk supply is important to • Competition in the sale of raw milk • Competition in the purchase of raw milk • Competition among processors