In Dairy Industry Consolidation, Lush Paydays

The following is an excerpt from an article in:


The New York Times
Sunday, October 28, 2012

In Dairy Industry Consolidation, Lush Paydays

By ANDREW MARTIN

THERE was a time not long ago when Gregg L. Engles was considered a genius in the dairy industry, a shrewd C.E.O. who had cobbled together a string of local businesses to create the nation’s largest milk bottler, Dean Foods.

Dean’s Web site described Mr. Engles as the primary architect of dairy consolidation, the often painful and perhaps inevitable shift to fewer, larger farms and bottling plants. His company’s soaring share price made him a Wall Street star.

In fawning profiles in the business press, dairy clichés flew: Mr. Engles was “cream of the crop,” “head of the herd” and “milkman to the nation.”

These days, however, as he prepares to step aside as chief executive of Dean Foods, Mr. Engles, 55, is perhaps better known for his paychecks, which continued to be hugely generous even as his company’s fortunes tumbled.

The Motley Fool noted in March that he had averaged $20.4 million in compensation over the previous six years, while Dean’s stock fell 11 percent a year, on average. Forbes ranked him among its Worst Bosses for the Buck in 2011.

Wall Street soured on the nation’s milkman.

A long-running antitrust lawsuit in a federal courthouse in Greeneville, Tenn., offered one possible explanation for his early success, by contending he engaged in a conspiracy more than a decade ago that helped expedite dairy industry consolidation and make himself a bundle.

Filed by a group of dairy farmers in 2007, the lawsuit said Mr. Engles cut a deal with the head of the nation’s largest dairy cooperative, the Dairy Farmers of America, to eliminate competition in the Southeast. Another lawsuit was filed in Vermont in 2009, involving allegations of a similar scheme in the Northeast. Dean Foods, whose brands include Garelick Farms, Land O Lakes and Horizon Organic, has settled both lawsuits, without admitting wrongdoing; the suits continue against the D.F.A.

By normal rhythms of the industry, Mr. Engles and Gary Hanman, 78, a former chief executive of the D.F.A., would be financial adversaries. That’s because bottlers try to buy raw milk as cheaply as possible. Many farmers joined cooperatives in the hope they could leverage their numbers for higher prices.

But according to the lawsuit, the deal that Mr. Engles made with Mr. Hanman went against normal economics. Mr. Engles promised that the D.F.A. would be the exclusive supplier to Dean’s milk plants. The D.F.A., in turn, promised a reliable supply of Dean’s main ingredient, raw milk, at the lowest prices, plus rebates and credits so Dean could acquire more milk plants, the suit says.

It all resulted in a small group of men making enormous sums of money, according to files in the Southeast lawsuit that recently became public. One business partner of Mr. Hanman was paid $100 million by Dean’s predecessor and the D.F.A. 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, including bonuses for increasing the cooperative’s market share, according to court records.

As for Mr. Engles, his compensation over the last decade comes to $156 million, according to Equilar, a firm that tracks executive pay.

Dairy farmers say they didn’t share in the riches. Instead, they say that they were paid suppressed prices for raw milk, and that the fallout continues. They are seeking more than $1 billion, including penalties, in the Southeast; the damage estimate for Northeast farmers remains under seal.

Dr. Sam Galphin, a North Carolina dairy farmer and veterinarian, said the Dean-D.F.A. pact was devastating to dairy farmers in the Southeast, cutting into incomes and ultimately forcing some out of the business.  He said he continues to get suppressed prices for raw milk because there are few if any options for farmers, and he expects to lose $100,000 on his dairy farm this year.

“Even today there is no competition in this market,” he said. “Half of the people who were in business when the lawsuit was filed are now out of business.”

Through a Dean spokeswoman, Mr. Engles declined to comment for this article. Dean settled the suit with the Southeast farmers for $140 million in July, and settled with the Northeast farmers a year earlier, for $30 million, In both cases, it admitted no wrongdoing.

“We continue to be confident that we operated appropriately in our raw milk procurement,” a Dean Foods statement said. “We settled these cases to avoid the expense, uncertainty and distraction of litigation and the possibility of a lengthy appeals process.”

Mr. Engles is stepping down as C.E.O. in coming weeks, though he will remain chairman. On Friday, Dean had an initial public offering of its WhiteWave-Alpro unit, which includes the Silk and Horizon Organic brands; Mr. Engles will be C.E.O. of the new company.

Mr. Hanman referred questions to his lawyer, who declined to comment. A trial in the Southeast case against the D.F.A. is scheduled to begin in January; the Northeast case against the cooperative has not reached a trial stage.

Richard P. Smith, the D.F.A.’s current president and chief executive, disputed the notion that the pact between Dean and the D.F.A. was a conspiracy that suppressed prices for farmers. Instead, he characterized it as a business decision that didn’t always work out the way the cooperative had hoped.

He maintained that the D.F.A. was able to charge Dean and other processors higher prices in the Southeast, but that this was often offset by the costs of bringing in additional milk from elsewhere to meet bottlers’ demands.

But Mr. Smith, who succeeded Mr. Hanman in 2006, said the D.F.A. had been “hung up on big rather than best.”

As for the payments to its former business partners, he said: “The premise of a lot of these partnerships was D.F.A. would bring the milk and largely the investments and the partners would bring the expertise and know-how. And if all things worked out, it would be a win-win.

“Obviously when you look at some of the facts, some of it looks skewed, there is no doubt.”

The Justice Department conducted a 26-month antitrust investigation into the dairy industry during President George W. Bush’s second term and recommended that enforcement action be taken against Dean Foods and the D.F.A., but no charges were filed, according to state and federal officials.

For more, visit www.nytimes.com.