Processers appear to avoid direct competition
ST. ALBANS — While Dean Foods receives a competitive credit from financially strapped area farmers to help it compete against smaller processors, there is one area where Dean and others do not appear to be interested in competing – school milk contracts in northern Vermont.
Dean Foods’ and other processors’ competitive ways have been drawn into the spotlight since a Senate Judiciary Committee field hearing held at St. Albans City Hall in September. In part, it focused on the issue of a lack of competition in the dairy industry and the possibility of an anti-trust probe to prove it.
Competition for school milk contracts has long been considered a measure of competitiveness, according to U.S. Sen. Russ Feingold, D-Wis.
It hasn’t been evident, however, for a major school hot lunch caterer, The Abbey Group. Located in Sheldon, The Abbey Group purchases roughly 40,000 eight-ounce cartons of milk per school day for schools in Vermont and New Hampshire, including all three schools in St. Albans.
Asked about competition for school milk contracts, The Abbey Group’s Scott Choiniere said: “There is none.”
While there appears to be little or no competition for school milk contracts, Dean Foods, the largest milk processor in the country, recently acknowledged that it receives a credit from farmers to protect it from competitive forces. Messenger efforts to determine the actual fee an individual farmer pays have been unsuccessful.
At the Senate Judiciary hearing in St. Albans, Christine Varney, head of the anti-trust division of the Dept. of Justice, stated that her division would be investigating questions of milk pricing to both farmers and consumers and whether farmers and consumers were being harmed by a lack of competition within the milk industry.
The lack of competition for the school lunch market might raise a flag for Justice Dept. investigators.
The Abbey Group, for example, has tried to interest Dean Foods’ New England label Garelick Farms, Oakhurst Dairy from Maine and others in its milk contract. “They won’t come into the schools. We’ve tried,” Choiniere said.
Sam Wolman, of Garelick, said the company has met with the Abbey Group and is interested in supplying milk to schools in northern Vermont. He declined to provide details of those conversations, saying, “It’s really not appropriate for me to talk about a relationship with a customer or potential customer.”
Choiniere, however, sees the situation differently. Speaking of milk processors and talks with them, he said. “Nobody wants to step on anybody’s toes. I think they kind of stay out of each other’s way.”
Choiniere said The Abbey Group was particularly interested in purchasing from Garelick because so much of the milk produced in Franklin County is sold to Garelick. “It’d be nice to have that milk coming back into the schools,” he said.
Bob Clifford, who heads the food service at Essex High School, is the co-chair of the Food Service Directors Association, which includes 130 schools. Every three years the association puts its milk contract out to bid.
The last time the contract went to bid the only bidder was H.P. Hood.
“We rarely get a response from Garelick,” Clifford said.
Liz Greene, a spokesperson for Dean Foods, said the company does sell milk for schools in southern Vermont. “We compete for business opportunities wherever we sell milk,” Greene said.
Clifford said he has wondered why there isn’t more interest in the milk contracts. The association’s milk contract is for roughly $1 million annually.
“Is there protectionism or unspoken relationships?” Clifford asked.
Clifford said the association and Burlington Food Service, which distributes for both the Food Service Directors Association and The Abbey Group, have discussed trying to interest other companies in supplying school milk “to keep Hood honest,” but haven’t had much luck in getting other companies to bid on the contract.
Milk contract prices for school meals are another issue.
The Abbey Group is paying approximately 18 cents for each 8-ounce carton of milk, making the cost of a gallon of milk $2.88, roughly equal to the cost of a gallon of milk in the grocery store, according to Choiniere.
“Prices have gone down, but they haven’t gone down willingly. We had to fight to get our prices lowered,” Choiniere said. “They wouldn’t lower the price until we said, ‘farmers aren’t getting paid for their milk,’” he added.
“Every time their prices go up, they raise prices,” Choiniere said of food suppliers in general, adding that when costs go down food manufacturers lower their prices more slowly than they raised them.
The contract between Hood and the Food Service Directors Association pegs the price paid by schools to the price for milk as it is set by the federal market administrator, Clifford explained, so they have not had to battle Hood to lower the price.
“There usually is not a whole lot of profit in school milk, but the less competition the greater the profit,” one dairy expert told the Messenger.
Asked if companies in an oligopolistic market, one controlled by only a handful of large companies, tend to avoid direct competition, the expert, who wished to remain anonymous, said, “It does occur. I can’t say it’s occurring now. It’s more likely to occur if there’s only a few big guys.”
According to Ronald Cotterill at the University of Connecticut, Garelick controls 70 percent of the fluid milk market in New England and Hood controls 20 percent.