Danone-WhiteWave deal raises buyer power concerns among US organic farmers

31 January 2017 9:54am

9 December 2016 by Flavia Cortes and Curtis Eichelberger

French dairy giant Danone's planned acquisition of US organic food producer WhiteWave Foods has raised concerns among farmers in the United States about the combined company's buying power.

Small and mid-range dairy producers are worried they won't get a fair price for organic milk when dealing with one buyer.

The $10.4 billion deal, announced in July, is under in-depth review by the US Department of Justice. The companies had expected to close in 2016, but extended the projected closing date to the first quarter of 2017.

The European Commission is also reviewing the transaction and has until Dec. 16 to decide whether to approve the deal or open an in-depth examination. It is understood EU officials are seeking industry feedback on a proposed remedy package.

In the US farmers' view, the deal would create a monopsony — when a customer becomes so powerful it can dictate to suppliers the prices, services and special contract terms it receives.

Although US antitrust officials haven't brought many monopsony cases recently, they have raised concerns that a merged entity would have too much power in negotiating contracts with other industry players.

Recently, the DOJ and the US Department of Agriculture investigated buyer power in the dairy sector in a workshop, and stressed the importance of vigorous antitrust enforcement.

The government's position may change, however, under a Trump administration. And with the extension of the closing deadline to the first quarter of 2017, the new president taking over soon will likely play a role in how the review is resolved if it isn't finished before Trump's inauguration in January.

Ed Maltby, the executive director of the Northeast Organic Dairy Producers Alliance, or Nodpa, said that with the merger, Danone will be able to source milk for its yogurt directly from the farmgate, ending its supply agreement with Organic Valley, an independent cooperative of organic farmers.

"This will make [the combined company] the largest buyer of organic milk with end sales as branded product," Maltby said. "This will give them the dominant power and leverage in purchasing raw organic milk from the farm."

The Cornucopia Institute, an organic industry watchdog, sent a letter to DOJ urging the regulator to investigate the potential anticompetitive effects of the deal.

"This acquisition raises serious questions about the future of the organic milk supply market as it will have a chilling impact on both competition in the consumer marketplace and the wholesale market for organic milk," said the letter.

The institute said that it has specific concerns about the organic yogurt and organic fluid milk markets in the US.

Danone, which owns the brands Activa, Oikos, Dannon and Stonyfield yogurt, is already one of the biggest players in the organic dairy market. WhiteWave owns the Horizon Organic brand of dairy products and Wallaby organic yogurt. Cornucopia identifies WhiteWave as "the major competitor to Danone's organic dairy brands," and said that the Horizon Organic brand controls a larger market share than any other organic dairy in the US.

The institute said that although both companies control significant shares of the dairy market as a whole, their primary concern is for the market for organic dairy. "This market must be considered apart from conventional dairy because there are fewer large players in organic dairy and the market is more sensitive to consumer choice."

The institute echoed the farmers' concern of Danone controlling a significant share of the organic dairy market and pushing out smaller companies or farmstead dairies "who would have difficulty competing with Danone's superior economy of scale."

Organic Valley, which is a rival in the yogurt sector, currently supplies Stonyfield yogurt production with raw milk and has a licensing agreement to market packaged, fluid milk under the Stonyfield label. There are also concerns that Danone will transition from acquiring milk only from Horizon suppliers for Stonyfield-branded products.

"Phasing-out the supply and marketing arrangements with Organic Valley might materially weaken the only other national competitor for WhiteWave or Groupe Danone," the institute said.

Nodpa said that DOJ could apply conditions to the deal that would alleviate the monopsony concerns that represent the main antitrust hurdle to close the deal. The network suggested that Danone sell off the Stonyfield brand of yogurts and retail milk. "There would then be at least two, if not three, competitive buyers for organic milk in New England and Northeast."

Nodpa also suggested that DOJ impose a commitment to extend the supply contract with Organic Valley for another 10 years with a minimum volume requirement.

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