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Friday, May 7, 2010

Consolidation and Concentration in the U.S. Dairy Industry

Dennis A. Shields
Specialist in Agricultural Policy

The changing structure of U.S. agriculture has generated concerns about reduced competition in a wide variety of agricultural products markets, including dairy. Two primary areas of concern in the dairy industry are consolidation—the shift to fewer and larger firms—and industry concentration—the extent to which a small number of firms control most of the sales. On August 5, 2009, the Obama Administration announced that the U.S. Department of Agriculture (USDA) and the Department of Justice would hold several public workshops to consider competition issues affecting agriculture and the appropriate role for antitrust and regulatory enforcement. A workshop on the dairy industry is scheduled for June 25, 2010, in Madison, WI. 

Consolidation has been a long-term trend in agriculture. Across the industry, including the dairy sector, rising productivity has led to fewer and larger operations along the production and marketing chain, including farms, cooperatives, processors, and retailers. Larger operations tend to have lower per-unit costs. As firms reduce their costs, they become more competitive and can increase sales and market share at the expense of less profitable firms. As a result, fewer dairy farms are needed to produce the same amount of milk. Firm size is a limiting factor for growth, however, once the gains to economies of scale have been exhausted. 

At the farm level, the number of farms continues to decline, although at a much slower pace during the last decade than in previous periods. Consolidation at the cooperative and processor levels has followed a similar path, in order to offset market power of large downstream entities and to satisfy demands from retailers to serve them more efficiently. 

Concentration has also been increasing in the dairy industry. Nearly all segments of the industry have become more concentrated over time. The primary concern many have with concentration is that it may reduce competition in the marketplace for agricultural and food products and result in market power (i.e., the ability of a firm to influence prices), putting at a disadvantage some segment of the population, such as producers or consumers. However, concentration may also result in efficiency gains, whereby cost savings are passed on to consumers through lower retail prices, which in turn can generate additional demand for commodities and benefit farmers. Another concern is how concentration affects price transparency in markets for dairy products and milk. 

In summarizing research findings for several agricultural industries, including the dairy industry, the Government Accountability Office concluded that most of the studies it reviewed found either no evidence of market power, or efficiency effects that were larger than the market power effects of concentration. However, the agency said experts generally agreed that concentration is likely to increase in the future, potentially raising greater concerns about market power and the manipulation of commodity or food prices. 

U.S. antitrust laws (specifically the Sherman Act and the Clayton Act) are concerned with competition in markets and not the protection of any individual competitor. These laws proscribe unlawful mergers and business practices in general terms, leaving courts to decide which are illegal based on the facts of each case. Two current court cases against Dean Foods, the largest fluid milk processor in the United States, highlight the ongoing concern about consolidation in the U.S. dairy industry. 

Date of Report: April 27, 2010
Number of Pages: 24
Order Number: R41224
Price: $29.95

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