Egg Suits Could Set Precedents

MATTHEW ENIS

PHILADELPHIA — The price-fixing lawsuits filed against United Egg Producers and 14 major U.S. egg suppliers by Kroger and 10 other retailers here in Pennsylvania's Eastern District Court could potentially change the way the U.S. Justice Department deals with major agricultural cooperatives.

These retail suits are treading familiar ground. In 2008, a group of restaurants and suppliers led by Falconer, N.Y.-based T.K. Ribbing's Family Restaurant filed a very similar, ongoing suit in the same court. It has already resulted in a $25 million class-action settlement from one defendant and, from another defendant, the release of documents that corroborate some of the plaintiffs' allegations — that UEP encouraged its members to cull hen flocks, export eggs and use other methods collectively to limit domestic egg supplies and boost prices, culminating in an increase of more than 40% in the price of eggs during 2008.

Individual egg producers could hardly be faulted for wanting to cull their flocks in 2008. Federal ethanol mandates and non-commercial speculation on the commodity markets caused a massive spike in corn prices that year — up to $8 per bushel that summer, compared with $2 per bushel in 2006 and $4 per bushel in 2007. Since corn is a key component of chicken feed, egg producers faced a sudden and significant increase in input costs. Fewer birds means less to pay for feed, and a 40% increase in the price of eggs could easily be offset by the 100% spike in the price of corn vs. the prior year.

Larger cages also mean fewer chickens in conventional production facilities. In the late 1990s, UEP assembled an independent committee of veterinarians and scientists to evaluate whether battery cages should be enlarged. It recommended that cages be increased from 48 square inches per hen to 67 to 86 square inches per hen. As consumer concern over animal welfare issues became more mainstream during the past decade, many restaurants and retailers demanded that their suppliers adhere to these minimal standards. UEP later launched its “UEP Certified” program based on these and other guidelines, and the Food Marketing Institute and National Council of Chain Restaurants endorsed the program.

Adopting new animal welfare standards is all well and good for individual producers, but as retailers and retail trade associations are aware, it is illegal for most businesses to work with their competitors to limit product supplies or otherwise attempt to boost or fix a product's price.

According to a September 2008 investigation of industry documents by the Wall Street Journal, beginning in 2004, UEP actively urged its members — who account for about 90% of U.S. egg production — to install the larger cages while not increasing capacity in their existing facilities. UEP and its members also regularly worked together to arrange major exports of eggs — selling shipments of between 24 million dozen and 29 million dozen eggs to foreign buyers “at well below the domestic price” — whenever prices softened in the U.S. The group even noted in its member newsletter that the export efforts had helped achieve the goal of tightening supplies and driving up domestic prices.

One might wonder how a trade group could be so cavalier about U.S. antitrust laws. In both cases, however, UEP and its members may be exempt from antitrust prosecution under the Capper-Volstead Act, a 1922 law that gives farming cooperatives special leeway to work together as competitors. That is one key issue that the Philadelphia court will have to decide. And, UEP continues to dispute the charge that it urged its members to install larger cages in their facilities simply to cut supplies and increase prices.

“These lawsuits are an attack on United Egg Producers' and its members' animal welfare guidelines,” UEP said in a statement sent to SN. “Promoting animal welfare, including provisions for more cage space, was an initiative endorsed by the Food Marketing Institute and the National Council of Chain Restaurants and supported by many of the country's largest egg purchasers. Because the guidelines provide for larger cage space for each laying hen, among other animal welfare requirements, plaintiffs claim the supply of eggs was reduced in a ‘conspiracy’ to ‘increase prices.’ Nothing could be further from the truth.”

The Capper-Volstead Act was written during a time when farming operations were much less consolidated, and the protections it offers powerful cooperatives is coming under fire in other quarters as well. Similar antitrust lawsuits have been filed against United Potato Growers of America and United Potato Growers of Idaho. In addition, the Antitrust Division of the U.S. Department of Justice last year held a series of workshops with the U.S. Department of Agriculture to examine competition issues affecting U.S. agriculture.

Meanwhile, for UEP, the cases keep piling up. The original retail suit filed by Kroger, Safeway, Walgreens, Hy-Vee, Albertsons, A&P, H.E. Butt Grocery and Conopco in November has been followed by new, separate suits from Supervalu, Publix, Meijer and Giant Eagle.

Among the allegations, plaintiffs are arguing that UEP itself is not a processor or seller of agricultural commodities, and as a result, the group shouldn't be protected, Christine Varney, assistant attorney general of the Antitrust Division of the Justice Department explains in the December issue of The Antitrust Source. And, they contend that “the cooperatives have engaged in predatory conduct; the cooperatives have non-farmer members; the cooperatives have conspired with third parties; and the supply-restriction and price-fixing efforts fall outside the [Capper-Volstead] Act's limited purposes.”

Varney notes that whatever the outcome of the case, the issue “has great practical consequences for farmers and the agricultural community as a whole.”