Private Supply Management and Market Power in the U.S. Dairy Industry

1 Introduction

In 2003, the National Milk Producers Federation (NMPF) and Cooperatives Working Together (CWT), a group of dairy cooperatives and individual dairy farmers, developed and began implementing a private supply management program (Cooperatives Working Together 2023). The objective of CWT program is to balance milk supply and milk demand and to stabilize and strengthen milk prices received by dairy farmers. The CWT program developed in 2003 included a herd retirement program (2003–2010) and an export assistance program (2003-present).

The CWT program was the U.S. dairy industry’s initiative to mitigate economic forces adversely affecting dairy farm profitability at the beginning of the 2000s. These economic forces included milk oversupply, which was partially due to a substantial decrease in the Federal government milk price support and a decrease in the Federal government intervention in purchasing manufactured dairy products; increasing volatility of milk prices received by dairy farmers; increasing level and volatility of agricultural input prices (in particular, feed and energy prices); and increasing exposure to fluctuations taking place in international dairy markets (Bolotova 2023; Siebert and Lyford 2009).

In 2015, a group of buyers of raw milk, cheese, and butter, who purchased these products directly from CWT dairy cooperatives filed a class action antitrust lawsuit against NMPF, CWT, and a group of dairy cooperatives: Dairy Farmers of America, Land O’Lakes, Dairylee Cooperative, and Agri-Mark. In their complaint filed in the court, the buyers alleged that by implementing the herd retirement program these cooperatives engaged in an unlawful conspiracy to limit the production of raw milk, with the purpose of eliminating competition by decreasing the number of dairy farmers, and to achieve short-run and long-run increases in prices of raw farm milk, cheese, and butter (First Impressions Salon, Inc., et al. v. National Milk Producers Federation, et al. 2015). The buyers argued that the herd retirement program was not within the scope of Capper-Volstead Act (1922) immunity and that it violated Section 1 of the Sherman Antitrust Act (1890). The dairy cooperatives settled this lawsuit with buyers of cheese and butter in 2019 for $220 million (Butter and Cheese Class Action 2021; Fu 2019). The buyers of cheese received 63 % of this settlement. The claims of raw milk buyers were not advanced during this antitrust litigation; they did not recover any damages.

This research analyzes the U.S. cheese industry dynamics (changes in wholesale cheese prices, milk price, margins, and the nature of wholesale cheese pricing) in the three periods of interest: prior, during, and after the herd retirement program. The research also highlights relevant competition (antitrust) issues. The empirical evidence suggests that wholesale cheese pricing by cheese manufacturers (dairy cooperatives and proprietary firms) in most of the analyzed cheese price series is consistent with oligopoly pricing prior and during the herd retirement program. The wholesale cheese pricing by cheese manufacturers in most of the analyzed cheese price series is consistent with monopoly pricing in the period following the herd retirement program. While wholesale cheese prices and milk price increase over time, wholesale cheese margins decrease reflecting decreasing profitability of cheese manufactures over time.

The paper is organized as follows. Section 2 discusses the herd retirement program’s implementation procedure and the market and price effects of this program using the perspective of plaintiffs in the antitrust lawsuit. Section 3 presents descriptive statistical analysis of wholesale cheese prices charged by cheese manufacturers, milk price, and wholesale cheese margins during the three periods of interest: before, during, and after the herd retirement program. Section 4 introduces a theoretical framework explaining the relationship between the wholesale cheese price and milk price by focusing on cost pass-through. Section 5 presents an econometric analysis of wholesale cheese pricing by cheese manufacturers during the three periods of interest. Section 6 summarizes the results and is followed by Section 7 discussing relevant competition (antitrust) issues.

2 Cooperatives Working Together (CWT) Herd Retirement Program: Implementation and Allegations of Illegal Collusion (Price-Fixing Cartel)

Dairy cooperatives have been historically involved in raw milk marketing, pricing, and dairy product manufacturing on behalf of dairy farmer-members in the U.S. (Ling 2011, 2012, 2014). Some dairy cooperatives perform only bargaining functions by negotiating raw milk prices and other terms of trade on behalf of dairy farmer-members with milk processors. Some dairy cooperatives own milk processing plants and process raw milk of dairy farmer-members in a variety of manufactured dairy products (fluid milk, cheese, butter, etc.) that they market on behalf of dairy farmer-members. Collective agricultural marketing activities of dairy farmers implemented through dairy cooperatives are possible due to the Capper-Volstead Act, a limited antitrust immunity to the Sherman Antitrust Act.

2.2 Herd Retirement Program as a Price-Fixing Cartel: Buyers’ Perspective

The buyers of raw milk, cheese, and butter, who purchased these products directly from CWT dairy cooperatives (plaintiffs in the lawsuit), claimed that by implementing the herd retirement program these dairy cooperatives engaged in an illegal conspiracy that aimed to eliminate competition among dairy farmers and forced some dairy farmers to exit the industry. These buyers argued that the herd retirement program limited the supply of raw milk, cheese, and butter and caused wholesale prices of these products to increase to supra-competitive levels. The plaintiffs perceived the herd retirement program as a classic price-fixing cartel agreement among competitors (dairy farmers) aiming to decrease the output (milk and manufactured dairy products) quantity with the purpose of increasing the output (milk and manufactured dairy products) price that violates Section 1 of the Sherman Antitrust Act.^[2]

Classic cartels are typically organized in oligopolistic markets characterized by a high level of market concentration (small number of sellers), homogeneous product, high barriers to entry, and inelastic demand (Bolotova 2009; Carlton and Perloff 2004; Stigler 1964). When oligopolists form a cartel, they aim to act as a single monopolist to increase their joint profit. To be successful, cartel members have to develop an effective agreement affecting their product prices and/or quantities in a way that increases their joint profit and effectively enforce this agreement. In particular, cartel members should be able to prevent cheating of individual cartel members on the agreement. The latter would occur when a cartel member would aim to increase their individual profit.

Agricultural industries are often characterized as perfectly competitive industries because there are many firms (farms) operating in these industries and barriers to entry are relatively low. Individually, agricultural producers are price-takers. Some organizations of agricultural producers and their collective agricultural marketing programs and activities possible due to the Capper-Volstead Act may be characterized as agricultural cartels. Due to the Capper-Volstead Act, agricultural producers may gain seller market power by acting collectively in a cartel-type manner.

The CWT dairy farmer-members, who paid assessments to fund the herd retirement program, marketed on average 67 %–74 % of national milk supply (Brown et al. 2010). Therefore, the combined market share of CWT dairy farmer-members was larger, compared to the combined market share of dairy cooperatives and individual dairy farmers who were not CWT members. Raw milk is a homogenous product characterized by inelastic demand. The domestic demand for raw milk is inelastic (Saitone and Sexton 2009), meaning that a one percent decrease (increase) in milk supply would cause a greater than one percent increase (decrease) in milk price. The inelastic demand is a market condition in which an effective output price effect of the supply control is theoretically possible (a percentage output price increase is greater than a percentage output quantity decrease).^[3]

The plaintiffs argued that the herd retirement program was an illegal conspiracy that was outside the scope of the Capper-Volstead Act immunity and consequently violated Section 1 of the Sherman Antitrust Act. Figure 1 demonstrates market and price effects of the herd retirement program using the perspective of raw milk and cheese buyers who filed the antitrust lawsuit. Figure 1 depicts inverse demand curves for raw milk and cheese at the wholesale level (labeled as “MP” and “CP”, respectively) reflecting price-dependent demand functions, and a Marginal Cost curve (labeled as “MC milk”) reflecting a constant Marginal Cost function. While the Marginal Cost curve is depicted in Figure 1, this cost is practically irrelevant in advancing legal claims of the output price increase due to the collective output quantity decrease by plaintiffs during antitrust litigations involving price-fixing.

Figure 1:

The market and price effects of CWT Herd Retirement (HR) Program: The raw milk and cheese buyers’ perspective.

Figure 1 also depicts price-quantity combinations for raw milk and cheese for two market scenarios: a competitive industry scenario representing the market situation prior to the herd retirement program and a scenario where the dairy industry exercises seller market power by implementing the herd retirement program. Raw milk is the main component in cheese manufacturing: ten pounds of milk are typically required to produce one pound of cheese. The same Q is used to define milk quantity and cheese quantity in Figure 1.

A decrease in milk cow inventory due to the herd retirement program causes the milk quantity and cheese quantity produced to decrease from Qc to Qm. As a result, the milk price charged by dairy farmers increases from MPc to MPm, and the wholesale cheese price charged by cheese manufacturers (dairy cooperatives in the antitrust lawsuit) increases from CPc to CPm. In the market power scenario, raw milk buyers and cheese buyers pay higher milk and cheese prices and are overcharged. The overcharge attributed to buyers of raw milk is (MPm-MPc) in $ per pound of milk. The total $ overcharge attributed to buyers of raw milk is (MPm-MPc)*Qm, which is the Overcharge-1 rectangle in Figure 1. The overcharge attributed to buyers of cheese is (CPm-CPc) in $ per pound of cheese. The total $ overcharge attributed to buyers of cheese is (CPm-CPc)*Qm, which is the Overcharge-2 rectangle in Figure 1.

The total overcharge is the basis for damages that buyers of raw milk and cheese aimed to recover during the antitrust litigation. They were entitled to recover treble damages (three times the overcharge) under the Clayton Act (1914), a federal law. While cheese buyers were successful in recovering damages, the claims of raw milk buyers were not advanced during the antitrust litigation. The raw milk buyers were not awarded any damages. The milk price increases and milk revenue increases that were due to the herd retirement program discussed earlier in this section may be thought of as proxies for the overcharge in $ per unit of milk sold and total $ overcharge, respectively, attributed to buyers of raw milk.

3 U.S. Cheese Industry: Descriptive Statistical Analysis of Wholesale Cheese Prices, Milk Price, and Cheese Margins

This section presents an analysis of the monthly averages for wholesale cheese prices, Class III milk price, and wholesale cheese margins (farm-to-wholesale margins) for the three periods of interest: prior, during, and after the herd retirement program, which are referred to as the pre-HR period, HR period, and post-HR period, respectively (Table 1). The monthly wholesale cheese prices are from the USDA Agricultural Marketing Service Dairy Market News Portal (U.S. Department of Agriculture, Agricultural Marketing Service 2021a). These are the selling prices charged by cheese manufactures for American style natural cheeses - Cheddar, Process American, and Monterey Jack – in the Midwest, Northeast, and Western U.S. The focus of empirical analysis is on American style natural cheeses because dairy cooperatives are mostly active in the production and marketing of this cheese style. For example, in 2007 the market share of dairy cooperatives in the production of American cheese was 44 % (U.S. Department of Agriculture, Rural Development 2019).

The monthly Class III milk prices are from the USDA Agricultural Marketing Service Dairy Public Database (U.S. Department of Agriculture, Agricultural Marketing Service 2021b). The Class III milk price is the price that cheese manufacturers pay for milk used in cheese manufacturing within the system of Federal Milk Marketing Orders (FMMOs). The wholesale cheese margins (farm-to-wholesale margins) are calculated as the differences between wholesale cheese prices ($ per pound) and Class III milk price ($ per 10 pounds), which represents the cost of milk used to produce one pound of cheese. The wholesale cheese margins are expressed as a percentage of the wholesale cheese prices. Wholesale cheese margins include cheese manufacturing costs and profit of cheese manufacturers. The monthly wholesale prices, Class III milk price, and wholesale margins for Cheddar 40# block sold in the Midwest and Western U.S. are depicted in Figures 2 and 3, respectively. Class III milk price is referred to as the milk price further in this section.

Figure 2:

Monthly wholesale Cheddar 40# block price, Class III milk price, and wholesale cheese margin in the U.S. Midwest (2000–2014). Data Source: U.S. Department of Agriculture, Agricultural Marketing Service (2021a, 2021b).

Figure 3:

Monthly wholesale Cheddar 40# block price, Class III milk price, and wholesale cheese margin in the Western U.S. (2000–2014). Data Source: U.S. Department of Agriculture, Agricultural Marketing Service (2021a, 2021b).

Wholesale cheese prices and margins vary across the regions. In addition, wholesale cheese prices and margins differ due to the cheese variety (Cheddar, Process American, and Monterey Jack) and the type and weight of packaging (40 pound (#) block, 5# loaf, 5# sliced, 10# cuts, etc.). In the pre-HR period, monthly average wholesale cheese prices in the analyzed regions are in the range of $1.48 per pound (Cheddar 40# block in the West) to $1.97 per pound (Monterey Jack 10# in the Midwest). The monthly average milk price is $1.12 per 10 pounds of milk. The monthly average wholesale cheese margins are in the range of 24.7 % (Cheddar 40# block in the West) to 43.7 % (Monterey Jack 10# in the Midwest).

In the HR-period, as compared with the pre-HR period, monthly average wholesale cheese prices and milk price increase. The milk price increase rate is higher than the cheese price increase rates. The monthly average milk price increases by 31 %.^[4] The monthly average cheese price increases are in the range of 12 % (Monterey Jack 10# in the Midwest) to 25 % (Process American 5# loaf in the Midwest). In the HR period, monthly average wholesale cheese prices are in the range of $1.78 per pound (Process American 5# loaf in the West) to $2.22 per pound (Monterey Jack 10# in the Midwest). The monthly average milk price is $1.47 per 10 pounds of milk.

In the HR period, as compared with the pre-HR period, monthly average wholesale cheese margins decrease. The wholesale cheese margin decreases are in the range of −32 % (Process American 5# sliced in the Northeast and Process American 5# loaf in the West) to −13 % (Process American 5# loaf in the Midwest). In the HR-period, monthly average wholesale cheese margins are in the range of 18.2 % (Process American 5# loaf in the West) to 34.4 % (Monterey Jack 10# in the Midwest).

In the post-HR period, as compared with the HR period, monthly average wholesale cheese prices and milk price continue to increase. The milk price increase rate is higher than the cheese price increase rates. The monthly average milk price increases by 30 %.^[5] The cheese price increases are in the range of 14 % (Monterey Jack 10# in the Midwest) to 26 % (Cheddar 40# block in the Northeast). In the post-HR period, monthly average wholesale cheese prices are in the range of $2.06 per pound (Process American 5# loaf in the West) to $2.54 per pound (Monterey Jack 10# in the Midwest). The monthly average milk price is $1.90 per 10 pounds of milk.

In the post-HR period, as compared with the HR period, monthly average wholesale cheese margins decrease. The wholesale cheese margin decreases are in the range of −56 % (Process American 5# loaf in the West) to −10 % (Cheddar 40# block in the Northeast). In the post-HR period, monthly average wholesale cheese margins are in the range of 7.9 % (Process American 5# loaf in the West) to 25 % (Monterey Jack 10# in the Midwest).

4 Theoretical Framework: The Relationship Between Cheese Price and Milk Price, and Cost Pass-Through in the Cheese Industry

Figure 4 is a graphical representation of the theoretical framework that explains increases in the output (cheese) price that are due to an increase in the input (milk) price.^[6] Within this framework, the milk price increase may be due to the increase in milk production costs and/or due to the herd retirement program. Figure 4 provides insights on the relationship between the wholesale cheese price and milk price and the nature of wholesale cheese pricing (perfectly competitive or oligopoly/monopoly pricing) evaluated using an econometric analysis presented in the next section. Figure 4 depicts an inverse demand curve for cheese at the wholesale level (labeled as “P”) reflecting a linear price-dependent demand function and a Marginal Cost curve (labeled as “MC”) reflecting a constant Marginal Cost function. Marginal Cost of producing cheese is basically the milk price that cheese manufacturers pay. The profit-maximizing cheese price-quantity combinations for two market structures are depicted in the figure: a perfectly competitive industry equilibrium labeled as “C” (Qc and Pc: original scenario) and a monopoly equilibrium labeled as “M” (Qm and Pm: original scenario).

Figure 4:

A perfectly competitive industry and monopoly: The output price increase due to a marginal cost increase.

The milk price increase, which may be due to an increase in milk production costs and/or due to the herd retirement program, is equivalent to an upward shift of the original MC curve (the original scenario with no herd retirement program) to the new MC curve labeled as “MC*” in Figure 4 (the new scenario: with herd retirement program). Assuming the cheese industry behaves as a perfectly competitive industry, it moves to the new market equilibrium labeled as “C*” (Qc* and Pc*). Assuming the cheese industry behaves as a monopoly, it moves to the new market equilibrium labeled as “M*” (Qm* and Pm*). In the case of both market structures, the cheese industry decreases cheese quantity and increases wholesale cheese price to pass the milk price increase on to the buyers of cheese at the wholesale level.

The difference between the two market structures is cost pass-through (CPT), which is the extent to which the industry passes the input price (cost) increase on the buyers of its output in the form of higher output prices. The CPT is a $ per unit increase (decrease) in the output price, which follows a $1 per unit increase (decrease) in the input price (or marginal cost). The CPT for a profit-maximizing perfectly competitive industry is equal to 1 (a complete CPT): C P T c = d P d M C = 1 . Figure 4 demonstrates that given a MC increase, the output price increases by the same value. The CPT for a profit-maximizing monopoly is equal to 0.5 (an incomplete CPT): C P T m = d P d M C = 0.5 . Figure 4 demonstrates that given a MC increase, the output price increases by a half of this increase. The CPT is equal to 0.5 for monopoly, because Marginal Revenue curve (MRm) is twice as steep as inverse demand curve (P). The formal derivations of CPT for a perfectly competitive industry and monopoly are presented in Appendix 2. The CPT for the Cournot oligopoly operating in a similar market environment (linear demand and constant marginal cost) depends on the number of firms and falls in the range between 0.5 and 1 (incomplete CPT): C P T o = N N + 1 (RBB Economics 2014).

Generally, in the case of imperfectly competitive market structures, CPT magnitude is affected by the type of market structure (monopoly or oligopoly), a demand curvature assumption (linear, convex, or concave), and a Marginal Cost assumption (constant or upward sloping Marginal Cost curve) (Cotterill et al. 2001; Cotterill 1998; Kosicki and Cahill 2006; Harris and Sullivan 1979; Oxera Agenda 2007; RBB Economics 2014). In addition to CPT cases explained above, the following CPT magnitudes are discussed in academic literature. CPT for monopoly operating in market with concave demand (and constant marginal cost) is smaller than 0.5 (an incomplete CPT) (Oxera Agenda 2007; RBB Economics 2014). CPT for monopoly and oligopoly operating in market with convex demand is greater than 1 (more than complete CPT) (Cotterill et al. 2001; Cotterill 1998; Kosicki and Cahill 2006). An upward sloping Marginal Cost would decrease CPT magnitude, as compared to a constant Marginal Cost (RBB Economics 2014). In the case of a perfectly competitive market structure, CPT magnitude is typically affected by demand and supply elasticities (Harris and Sullivan 1979; RBB Economics 2014).

Table 2 summarizes CPT thresholds and corresponding market structure and pricing behavior assumptions relevant to the econometric analysis presented in the next section. These CPT thresholds were also used in the existing academic literature to analyze supermarket pricing practices in the U.S. fluid milk markets (Bolotova and Novakovic 2012; Carman and Sexton 2005) and wholesale cheese pricing practices at the Chicago Mercantile Exchange spot cheese market (Bolotova and Novakovic 2015). The CPT thresholds summarized in Table 2 are the hypotheses tested using the estimated econometric models in this research.

5 Econometric Analysis

6 Results: Discussion

The wholesale cheese pricing by cheese manufacturers in the pre-HR period is consistent with oligopoly pricing in the case of seven cheese price series and with monopoly pricing in the case of two cheese price series. This empirical evidence on imperfectly competitive pricing by cheese manufacturers is generally consistent with previous academic and government research focusing on the cheese industry structure and cheese pricing practices (Bolotova 2022; Bolotova and Novakovic 2015; Gould 2010; Mueller et al. 1996; Shields 2010). The estimated cost pass-through (CPT) is incomplete (smaller than one) in all analyzed cases (cheese varieties and geographic regions). Wholesale cheese margins are of a relatively high magnitude in the pre-HR period. The monthly average wholesale cheese margins are in the range of 24.7 %–43.7 % of the wholesale cheese prices in this period.

It is important to emphasize that in this research “oligopoly” and “monopoly” pricing is determined solely by the magnitude of cost pass-through. The most critical measure of seller market power would be a price-cost margin (a profitability measure). Wholesale cheese margins analyzed in this research may be thought of as proxies for price-cost margins. Wholesale cheese margins include cheese processing costs and profit of cheese manufacturers.

While the oligopoly and monopoly nature of wholesale cheese pricing characterized by an incomplete CPT does not change in the HR period, as compared with the pre-HR period, wholesale cheese margins decrease in the HR period. The monthly average wholesale cheese margins are in the range of 18.2 %–34.4 % of the wholesale cheese prices in this period. The observed decreases in wholesale cheese margins are likely to reflect decreasing profitability of cheese manufacturers in the HR period. This is because the milk price increases at a higher rate than wholesale cheese prices increase in this period.

The milk price increase observed in the HR period reflects increasing milk production costs and the current effects of the herd retirement program (Bolotova 2023). Because of the incomplete CPT, cheese manufacturers did not pass the entire milk price increase on the buyers of cheese in the HR period. While in the case of five cheese price series, fixed absolute markups (FAM) increased, these increases were not sufficient to help maintain wholesale cheese margins at a level like the one in the pre-HR period. In the case of four cheese price series, FAM decreased in the HR period.

In summary, the observed changes in FAM, CPT, and wholesale cheese margins indicate that seller market power of cheese manufacturers reflecting their ability to maintain the output (cheese) price above their marginal cost (milk price) was likely decreasing in the HR period, as compared to the pre-HR period. Cheese manufacturers absorbed a portion of the milk price increase (which was due to increasing milk production costs and/or herd retirement program), which might have caused their profitability to decrease in the HR period, as compared with the pre-HR period.

While there are shifts from oligopoly to monopoly pricing (characterized by a decrease in CPT) in the case of six analyzed cheese price series and wholesales cheese pricing in the case of remaining three cheese price series remains consistent with monopoly pricing in the post-HR period, as compared with the HR period, wholesale cheese margins continue to decrease in this period. The monthly average wholesale cheese margins are in the range of 7.9 %–25 % of the wholesale cheese prices in this period. The observed decreases in wholesale cheese margins are likely to reflect decreasing profitability of cheese manufacturers in the post-HR period. This is because the milk price kept increasing at a higher rate than wholesale cheese prices did in the post-HR period.

The milk price increase observed in the post-HR period reflects increasing milk production costs and may also reflect delayed effects of the herd retirement program and current effects of the export assistance program (Bolotova 2023). The CPT decreased in the post-HR period, as compared to the HR period, and became more incomplete in the case of all analyzed cheese price series. The observed decrease in CPT may suggest that cheese manufacturers did not pass the entire milk price increase on the buyers of cheese in the post-HR period. Furthermore, as compared to the HR period, cheese manufacturers passed a smaller portion of the milk price increase on the buyers of cheese in the post-HR period.

To compensate for a decrease in CPT to maintain a viable profitability level, cheese manufactures increased FAM in the case of all analyzed cheese price series in the post-HR period, as compared to the HR period. However, the FAM increase was not sufficient to help maintain wholesale cheese margins at a level like the one in the HR period.

In summary, the observed changes in FAM, CPT, and wholesale cheese margins indicate that seller market power of cheese manufacturers reflecting their ability to maintain the output (cheese) price above their marginal cost (milk price) was likely kept decreasing in the post-HR period, as compared to the HR period. Cheese manufacturers absorbed a portion of the milk price increase (which was due to increasing milk production costs and/or herd retirement program), which caused their profitability to decrease in the post-HR period, as compared with the HR period.

Presuming that they had a Capper-Volstead Act immunity, the CWT cooperatives acted in a cartel-like manner to decrease milk supply to increase and stabilize milk prices received by dairy farmers. The herd retirement program may have allowed dairy farmers to modestly increase their seller market power to receive higher milk prices and improve their returns (Bolotova 2023). In contrast, seller market power of dairy cooperatives involved in cheese manufacturing decreased during the HR and post-HR periods. This is because the cost of milk used in cheese manufacturing increased at a higher rate than wholesale cheese prices, which caused wholesale cheese margins, and consequently the profitability of cheese manufacturing, to decrease.

The behavior of wholesale cheese prices, milk price, and wholesale cheese margins evaluated in this research may reflect the effects of factors other than the herd retirement program. First, milk production costs increased during the analyzed periods (Bolotova 2023), which contributed to increasing milk prices that cheese manufacturers paid, their wholesale cheese prices, and consequently to decreasing wholesale cheese margins. Second, changes in the demand for cheese at the retail level and buyer market power of food retailers may have affected the behavior of wholesale cheese prices that food retailers pay to cheese manufacturers.

Third, the CWT export assistance program (2003-present) that provides subsidies on the export of cheese and other manufactured dairy products to the participating dairy cooperatives decreased the quantity of cheese available for the domestic market and consequently contributed to higher wholesale cheese prices in the domestic market in the HR and post-HR periods. Table A2 presented in Appendix 3 summarizes data on American cheese supply and use for the period of 2000–2014. For example, the export of American cheese increases by 117 % in the HR period, compared with the pre-HR period, and this export further increases by 212 % in the post-HR period, as compared with the HR period.

Fourth, changing cheese processing and marketing costs that cheese manufacturers incur may have affected the behavior of wholesale cheese margins. Finally, the herd retirement program may have had a delayed effect on both the milk price and wholesale cheese prices during the post-HR period. The herd retirement program’s delayed effects may have lasted 3–5 years after each round (Brown et al. 2010). Given that the last round took place in 2010, the herd retirement program may have affected milk prices and cheese prices during the period of 2011–2015.

7 Competition (Antitrust) Issues

The CWT dairy cooperatives presumed that their herd retirement program was within the scope of the Capper-Volstead Act immunity. Section 1 of the Capper-Volstead Act provides a limited antitrust immunity for collective agricultural marketing activities to Section 1 of the Sherman Antitrust Act. Section 1 of the Capper-Volstead Act declares:

Persons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers may act together in associations, corporate or otherwise, with or without capital stock, in collectively processing, preparing for market, handling, and marketing in interstate and foreign commerce, such products of persons so engaged. Such associations may have marketing agencies in common; and such associations and their members may make the necessary contracts and agreements to effect such purposes: Provided, however, That such associations are operated for the mutual benefit of the members thereof …

Absent the Capper-Volstead Act, collective agricultural marketing activities of individual agricultural producers implemented through their organizations would have violated Section 1 of the Sherman Act, which declares illegal contracts, conspiracies, and combinations in restraint of trade in interstate commerce. Price-fixing and output limitation agreements among competitors are examples of the most common restraints of trade violating Section 1 of the Sherman Act (Hovenkamp 2005). Price-fixing agreements aim to increase, decrease, or fix (stabilize) product prices, and can be verbal, written, or inferred from the conduct of firms (Federal Trade Commission 2023).

In 2015, buyers of raw farm milk, cheese, and butter, who purchased these products directly from CWT dairy cooperatives, filed a class action antitrust lawsuit alleging that the CWT herd retirement program was not within the scope of the Capper-Volstead Act immunity because it was not a form of collective agricultural marketing. The organizations of agricultural producers in the potato, egg and mushroom industries in the U.S. also implemented agricultural supply management programs affecting quantities of agricultural products produced and faced similar antitrust lawsuits (Bolotova 2014, 2015; Peck 2015). Apparently, there was a very limited case law interpreting legal status of agricultural supply management programs in light of Section 1 of the Capper-Volstead Act.

In December 2011, a U.S. district court for the first time in history of the Capper-Volstead Act evaluated legal status of agricultural production restrictions in a lawsuit against a group of cooperatives of potato growers and individual potato growers (In Re: Fresh and Process Potatoes Antitrust Litigation 2011). After conducting a comprehensive analysis, in its advisory opinion the court stated that “acreage reductions, production restrictions, and collusive crop planning are not activities protected by the Capper-Volstead Act.”

One of the main arguments of the defendants (potato cooperatives) in this antitrust litigation was that if the Capper-Volstead Act cooperatives were allowed to fix prices, they should be allowed to restrict production. The existing case law has established that price-fixing activities of agricultural cooperatives are generally within the scope of Capper-Volstead Act immunity because “price-fixing” is a form of pricing activities, which are essential elements of “marketing” mentioned in Section 1 of the Capper-Volstead Act. This argument did not persuade the court, which responded that “Individual freedom to produce more in times of high prices is a quintessential safeguard against Capper-Volstead Act abuse, which Congress recognized in enacting the statute.”

Recent legal discussions establish that the types of agricultural supply management programs, whether they are implemented at the pre-agricultural production stage, agricultural production stage, or post-agricultural production stage, affect their legal status in light of the Capper-Volstead Act (Bolotova 2015; Peck 2015; Frackman and O’Rourke 2011; Hibner 2011). It is crucial whether collective agricultural marketing activities (programs) in question can be interpreted as “marketing” in light of Section 1 of the Capper-Volstead Act. Collective agricultural supply management activities implemented at the post-agricultural production stage are more likely to be interpreted as “marketing” and therefore are likely to be within the scope of Capper-Volstead Act immunity. Collective agricultural supply management activities implemented at the pre-agricultural production and agricultural production stages are not likely to be interpreted as “marketing” and therefore are outside the scope of Capper-Volstead Act immunity. The courts interpret the legal status of collective agricultural marketing activities on a case-by-case basis.

If in the future the U.S. dairy industry is to consider implementing a supply management program affecting quantities of raw milk produced at the farm level, this program should be designed as a public program under the Agricultural Marketing Agreement Act (1937) with the participation of the U.S. Department of Agriculture. The U.S. dairy industry implemented two public voluntary supply management programs in the 1980s: Milk Diversion Program and Dairy Termination Program (Brown et al. 2010). The U.S. Congress authorized these programs, and they were funded through the dairy producer assessments and government funds.