California Dairies dismissed from DairyAmerica milk pricing class action lawsuit

By Dave Natzke

A California federal judge Wednesday dismissed California Dairies Inc. from a class action lawsuit accusing it and affiliate DairyAmerica Inc. of lowballing nonfat dry milk prices, but found that the plaintiffs adequately argued that DairyAmerica's alleged misreporting affected dairy producers' payments for raw milk.

According to Law360, a legal news service for attorneys, U.S. District Court Judge Anthony W. Ishii dismissed the bulk of the dairy producers' claims against DairyAmerica as well, finding their “negligent interference, unjust enrichment and unfair business practice claims” inadequate. He said, however, DairyAmerica remains on the hook for negligent misrepresentation after it allegedly made false reports regarding weekly prices and volumes of nonfat dry milk (NFDM) to USDA’s National Ag Statistics Service (NASS). 

The dairy producer plaintiffs successfully alleged that those reports can affect how producers are compensated for milk products, Judge Ishii said in his ruling.

The lawsuit (Carlin et al v. DairyAmerica, Inc. et al, 1:09-cv-00430), in the California Eastern District Court, was originally filed in March of 2009.  Subsequent lawsuits filed by other dairy producers were consolidated into the single class action suit. According to court records, Judge Ishii initially dismissed the case, but plaintiffs successfully appealed the lawsuit in the Ninth District Court. DairyAmerica in turn appealed to the U.S. Supreme Court, which declined to take the case.

The lawsuit alleged false reporting of NFDM prices to USDA resulted in depressed milk prices to dairy producers. NFDM price reports submitted to USDA are used to calculate federal order producer minimum milk prices. At that time, NASS obtained weekly price and sales volume information from all plants that annually manufactured 1 million lbs. of dairy products – cheese, butter, nonfat dry milk and dry whey – using those prices to determine minimum producer pay prices through the federal milk marketing order system. 

Following an audit for the period covering April 29, 2006 to April 14, 2007, USDA’s Ag Marketing Service (AMS) found some price reports included fixed forward pricing sales in which the selling price was set 30 days or more before the transaction was completed. Because those prices may not reflect current market conditions, reporting such prices was explicitly prohibited.

After reviewing the reports for the 51-week period, NASS adjusted NFDM prices, with adjustments ranging from -0.8¢/lb. to +8.5¢/lb. In a March 2009 interview with DairyProfit Weekly (DairyBusiness Update's predecessor), Alan Levitt, former editor of the Chicago Mercantile Exchange (CME) Daily Dairy Report, said the height of the problem occurred Nov. 11, 2006 to March 10, 2007, when prices were understated by an average of 4.2¢/lb.

It’s estimated a penny increase in the NFDM price raises producer milk prices about 9¢/cwt. in the federal order blend or “uniform” price.  AMS estimated the errors resulted in a loss of about $50 million to dairy producers, or about 4¢/cwt.

However, per NASS policy, because producer milk prices had already been calculated using the reported prices, and because all federal order revenues had been distributed, NFDM prices used in the formulas were only revised for a three-week period in March 2007. 

Plant information and identity was confidential in the NASS reports, but DairyAmerica marketed the vast majority of milk powder produced in the United States during the period. At the time, DairyAmerica, headquartered in Fresno, Calif., marketed 100% of the milk powder produced by its members: Agri-Mark Inc., California Dairies Inc., Land O’Lakes Inc., Maryland & Virginia Milk Producers Association, O-AT-KA Milk Producers Inc., United Dairymen of Arizona, Dairy Farmers of America and Lone Star Milk Producers. 

Several of the organizations, including Land O’Lakes Inc., Maryland & Virginia Milk Producers Association, Dairy Farmers of America and Lone Star Milk Producers have since ended partnerships with DairyAmerica.