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Get out of the whey: Federal regs kill Wisconsin dairy, 113 jobs

By   /   January 10, 2013  /   2 Comments

By Ryan Ekvall | Wisconsin Reporter

MADISON – The Dairy State has lost an 83-year-old dairy and its 113 jobs, but we’ve gotten a lesson in the unintended consequences of anti-trust regulations.

Golden Guernsey, a Waukesha-based dairy processor known for its cream puffs at the Wisconsin State Fair, filed for Chapter 7 bankruptcy in Delaware court Tuesday. OpenGate Capital, the California-based venture capital firm that took over Golden Guernsey from Dean Foods, cited “legacy costs” in union labor contracts and poor market conditions as reasons for the bankruptcy.

But the potential insolvency of one of the most modern fluid bottling plants in the upper Midwest can be traced back to an anti-trust ruling driven by Wisconsin’s attorney general, the U.S. attorney general and a former Wisconsin senator. Their legal action required Dean Foods to sell off the plant it acquired barely two years before.

“This was entirely driven by the federal Department of Justice and Attorney Generals from Wisconsin, Illinois, and Michigan theorizing that there may be some price collusion in milk for schools,” said Chris Olsen, chief executive officer of ECO, Inc., an Elkhorn-based specialized transportation and distribution company, which also has a dairy division.

‘Train wreck’

At the time of the lawsuit, the U.S. Department of Justice approached Olsen for consultation because of his expertise in the dairy industry. What Olsen, a 40-year veteran of the dairy trade, told Justice in June 2011 appears prophetic now.

“You may as well have an auction and let the place go along with the 150 jobs, numerous distributors, bulk haulers and support personnel,” he wrote to the Department of Justice June 28, 2011. “I cannot believe that this type of a train wreck is occurring under your auspices.”

Waukesha’s longstanding Golden Guernsey shuts down, and some say the U.S. and state attorneys general and their anti-trust lawsuit are in part to blame. A state official says it’s not their fault: “We rely on economists, people with advanced degrees who study these things.”

Olsen went on to suggest the DOJ work out an operating agreement with Dean Foods to ease regulators’ fear of collusion.

Work out a deal with Dean, Olsen said, and “you would have competent dairy people running a plant with adequate funding. Without a player operating the facility … or Dean Foods, it will be a slaughter of that plant. It should be obvious to you NO ONE wants the plant based on the oncoming slaughter simply by reviewing the interest in purchase presented,” he wrote.

The DOJ ignored Olsen’s advice. Instead, officials gave Dean Foods 90 days to sell off the plant, along with its customers and machinery used in bottling milk. Dean also had to promise to report any plan to purchase a bottling plant for $3 million or more in Wisconsin or within 150 miles of the state border.

‘Hypothetical monopolist’

The competitive impact statement filed by state plaintiffs characterized Dean Foods as a “hypothetical monopolist,” especially in the school-lunch business, after Dean’s $35 million acquisition of Golden Guernsey (along with a De Pere plant) from Foremost Farms.

“Ninety-two percent of the population of the relevant fluid milk geographic market is located within 150 miles of the Waukesha plant, and 80 percent of public school children in Wisconsin and the UP (Upper Peninsula, Michigan) are enrolled in school districts within 150 miles of the Waukesha plant,” the complaint reads.

The trust busters expressed concern that Dean Foods, having increased its market share from 45 percent to 57 percent with the acquisition of Golden Guernsey, would be able to facilitate “coordinated interaction” (price-fixing), with its few remaining competitors.

“A hypothetical monopolist of school milk could identify and individually target vulnerable school districts in Wisconsin and the UP as school districts solicit school milk contract bids directly from processors,” the complaint reads.

Public schools must purchase cartons of milk to receive reimbursement for school lunches under the USDA National School Lunch Program. Milk only travels 150 miles from processor to retailer, due to spoiling.

After the Waukesha plant’s closing, area schools looking for another supplier will likely pay more for their milk due to increased transportation fees. Taxpayers will continue to reimburse the schools.

‘Not a liquidation investor’

OpenGate purchased the business, ostensibly to turn a profit.

“As we transitioned away from Dean Foods, sales improved 20 percent,” Alanna Chaffin, OpenGate Capital spokeswoman told Wisconsin Reporter. “Market pressures being what they are, our revenue was squeezed by lower prices. Despite our best efforts to increase sales, there were several attempts made over the course of months with suppliers and union groups to negotiate their costs to make the business sustainable or at least break even.”

Chaffin said the venture capital firm is “not a liquidation investor by any stretch.”

“Cash from our side was never taken out of business,” she said. “We never pulled a management fee. We believed in sustaining business and trying to grow it.”

But times are tough in the dairy business. Milk sales in the United States are at their lowest point in 30 years and profits in the industry are paper thin. A union official, however, rebuked OpenGate’s characterization that labor costs hamstrung the company.

“OpenGate has never placed any formal demand upon this local union to sit down and open contracts with purposes for renegotiation. Never,” said Gene Gowey, recording secretary of Teamsters Local Union 695, which operated at Golden Guernsey. “I can tell you the only meeting I’ve had with OpenGate was some months back where they requested to change the health plan to a much larger deductible plan.”

Gowey said the union found another insurance company to work with, which he said would have saved OpenGate $180,000 annually in premium costs. He said OpenGate wasn’t interested.

Bankruptcy filings show Golden Guernsey had between $10 and $50 million in both assets and liabilities. Further financial disclosures, including the company’s creditors, are due to the court by Jan. 16.

No ice cream for you

The larger problem, according to Gowey and Olsen, was contained in the terms of the antitrust settlement.

“When DOJ allowed Dean Foods to remove ice cream production from the facility, it put the plant in an uncompromising financial dilemma,” Gowey said. “Local management made it clear it would be difficult to keep the plant going without ice cream. I don’t know what DOJ was thinking when they allowed it. You’re not going to stand alone with school districts serving school milk.”

Because the lawsuit focused on the monopoly of “fluid milk,” Dean’s was allowed to remove its ice-cream processing equipment from the Waukesha plant. Dean’s used the cream left over from milk production to make ice-cream, a product with higher profit margins than milk.

In removing the proverbial cash cow from Golden Guernsey,  critics argue the trust busters essentially hamstrung the purchaser, now left with nearly the same fixed operating costs, but fewer products to sell. Milk processors typically have other plants within 150 miles to supplement the fluid milk business with butter, sour cream or yogurt production.

OpenGate purchased Golden Guernsey as a stand-alone plant, meaning the company had to sell its cream to buyers who could process it. That led to trouble, according to one employee.

Lives on the line

Robert Storm, Jr., who worked 19 years at the plant, filed a complaint with the state Department of Workforce Development alleging OpenGate had shut down the plant and laid off the 113 workers illegally. State law requires employers give 60 days’ notice for layoffs greater than 50 people.

“I’m right at that road. I really don’t want to retire. I might have to. I don’t know,” Storm said. “As long as I have good health, I want to work. This is such a kick in the head for the workers for them to just come in and close the place.”

He said his union, Teamsters Local 695, has been a disappointment as well.

“We were hoping they would have a meeting right away to give us some direction. We really had nothing to go on. The union really fell down here. They’re absent. We were all looking for guidance. Nobody has said one word,” he said.

Storm said there’s enough blame to go around, noting Van Hollen’s prosecution of the suit and the involvement of former U.S. Sen. Russ Feingold, D-Wisconsin.

In May 2009, Feingold flagged the possible acquisition for the Justice Department’s Antitrust division, including concerns about how the acquisition could affect school lunch programs in Wisconsin.

“This consolidation would be terrible for Wisconsin consumers and school districts, as well as Wisconsin farmers,” Feingold said after the feds decided to intervene. “After years of inaction by the DOJ Antitrust Division despite growing concern about unfair competition in many agriculture markets, this is a welcome change.”

At the time of the anti-trust decision, Wisconsin Attorney General J.B. Van Hollen wrote, “Selling the Waukesha plant will introduce another competitor capable of serving grocery stores, convenience stores, schools, and other milk retailers throughout Wisconsin.”

The Wisconsin Attorney General’s office defended its decision to get involved in the anti-trust suit.

“We knew the U.S. DOJ was going to sue. We thought, ‘There’s going to be a lawsuit, it’s going to affect state of Wisconsin, (and) nobody is going to be there to protect Wisconsin if we don’t join the lawsuit,’” said Steven Means, assistant attorney general. “We wanted to make sure someone was at the table and talk about what’s going to be good or not good for the state.”

Not surprisingly, Means rejected the notion the anti-trust suit led to the shutdown in Waukesha.

“There are so many variables out there. To suggest but for the anti-trust lawsuit everything would be great, everybody would have a job, is a stretch,” he said. “If three years ago we could project the plant was going to close and people were going to lose jobs, obviously we might have thought of doing something differently. We rely on economists, people with advanced degrees who study these things.”

An audience member at the Wisconsin Economic Forecast luncheon on Thursday asked Gov. Scott Walker about the anti-trust suit. Walker blamed Washington and the U.S. Justice Department.

“My belief is we’ve got a great free-enterprise system, let it work. To me, we’ve got a competitive marketplace when it comes to the dairy industry in this state. There’s no reason the federal government needs to step in and get involved in that.”

The competition Van Hollen and the DOJ tried to promote by removing an industry leader from operating in Waukesha was short lived.

“It’s really a sad thing,” Olsen said. “Everybody up there was like a family. People went to work there and they never left. A guy worked there and his kid worked there, too.”

“The pathetic part is this had nothing to do with the plant. It had everything to do with government intervention. They were worried about collusion. Now you don’t have a competitor. You have milk being hauled in from 150 miles away.”

Contact Ekvall at rekvall@wisconsinreporter.com

Edited by wswaim@watchdog.org.

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  • 6crazycats

    Amazing factual article. Ryan took the time to write an article that gave all the facts that led to the closure of Golden Guernsey Dairy. It wasn’t about wages or sales.. its about “greed”! About what heppens when government interviens in a prosperous business and demans they sell their business becuase they are doing something right…and then require it be sold to a INVESTMENT firm that has NO idea where milk comes from let alone how it ti gets in a bottle. I blame DOJ for the closing and the displaced 113 employees of Golden Guernsey Dairy. Walker made the statement “they are not responsible” well would you expect him to say when he has to save the face of his office? Sad Sad day when the cow gets sold off to the highest bidder! I think we should start a save the cow fund and make the highest bid, then put it on the footsteps of the Capital building, thus reminding every Senator like Feingold, or Attorney General like JB of the ramifications of over stepping their bounds! Amen!

  • LuAnn Zieman

    However, what exactly is the price of milk? Without farm subsidies would we even be able to afford it? Tax payers are paying for milk and then repaying for it each time they go to the store. There is something wrong with this system.