U.S. potato-grower cooperatives in the early 2000s deployed drones and scanned satellite images as they colluded to reduce the amount of potatoes grown across the country in an effort to increase their profits, according to a report by California State University, Northridge business law professor Melanie Stallings Williams.

The cooperatives’ plot meant Americans paid more for their french fries, while cooks of every stripe — from those at home to those in high-end restaurants and even manufacturers — paid up to 49 percent more for a staple of the American diet.

Melanie Williams

“If you had a potato in the last decade or so, then you paid significantly more because of widespread collusion in the potato industry,” Williams said. “Every time you went to McDonald’s, every time you had something that had potato starch added to it, you paid more.”

Williams and her colleagues — Michael A. Williams, director of Competition Economics, a legal research and consulting firm, and Wei Zhao, a consultant with Competition Economics — published their findings in a report titled “The OPEC of Potatoes: Should Collusive Agricultural Production Restrictions Be Immune from Antitrust Law Enforcement?” in the winter 2017 edition of Virginia Law & Business Review.

Their report is the result of an investigation of American potato farmers as part of an antitrust, class-action lawsuit brought by potato buyers against the United Potato Growers of America (UPGA) and the United Potato Growers of Idaho (UPGI), collectives of farmers and agricultural cooperatives that agreed to reduce the output of potatoes. Though the collectives settled the lawsuit in 2015 before it went to court, a look into collectives’ practices provided Williams and her colleagues evidence of how the UPGA, within one year of its formation in 2005, controlled more than 60 percent of the nation’s fresh potato-growing acreage, reduced the amount of potatoes grown and increased the open-market prices for the vegetable by 48.5 percent. By 2007, UPGA had reduced potato-growing acreage by 20 percent from its 2004 levels.

As a result, Williams and her colleagues concluded, the production caps “significantly increased the cost to buyers, with an average nationwide overcharge of 30 percent for fresh potatoes and 48.7 percent for Russet potatoes at the point of shipping, and 24.4 percent for fresh potatoes and 36.5 percent for Russet potatoes at the wholesale level. The social welfare costs are thus substantial.

“Potatoes are the leading vegetable crop in the United States,” Williams said, “and are a staple in every household in America. Even those who don’t eat potatoes on a regular basis may be surprised to learn how often potato starch is used in everyday items that we consume, as a supplement or a filler. That means every one of us was impacted.”

In 2005, America’s potato farmers, buffeted by market volatility and high supply, banded together to form the UPGA. The Capper-Volstead Act, a pre-Depression era statute, allows farmers to cooperate in marketing their goods as a way to counter the clout of industrial agricultural behemoths. Some people, Williams noted, have interpreted the act to mean that farmers can avoid antitrust laws. Others contend otherwise and have filed class-action suits, which is what happened in the recent case involving the UPGA and UPGI, she said.

The UPGA hosted conferences to monitor and set minimum prices for potatoes. To ensure compliance, the organization conducted on-site inspections, deployed drones, scanned satellite imagery and did surprise audits. Violators were subject to a $100-per-acre fine. Anyone who was not part of the association was pressured to comply with its rules.

“They called those farmers who didn’t comply ‘cheaters,’ and monitored what they did with flyovers, crop inspections and financial penalties,” Williams said. “By 2010, one cooperative reported that they had cut potato growing acreage by 38 percent.”

In 2008, the UPGA’s chairman said the goal was “to take potatoes to market in an orderly manner so that farmers make a profit,” and he noted that the organization has reduced potato acreage by 20 percent in just three years. The goal, according to documents Williams and her colleagues examined, was “a steady, planned and coordinated lifting of market prices across the country.”

Williams said the cooperatives’ leaders celebrated the higher prices, with one member observing, “growers who’ve historically competed with each other are now communicating and coordinating supplies for the betterment of the industry as a whole.”

Reporters with the Wall Street Journal did not question the legality of the UPGA’s actions, and, in a 2006 article, even noting that one farmer destroyed part of his potato crop to keep prices high. The reporter went on to observe that the UPGA “aspires to be to potatoes what OPEC is to oil by carefully managing supply to keep demand high and constant.”

But, Williams pointed out, no court has held that agricultural cooperatives that restrict output are exempt from antitrust law enforcement. While four class-action lawsuits have been filed in recent years against agricultural cooperatives — against milk, egg product, mushroom and potato producers — none of the proceedings have yet to reach a verdict.

“The potatoes case settled, but more cases are pending, with class-action lawsuits against the milk, egg and mushroom industries,” Williams said. “However, because of the expense, uncertainty of the verdict and potentially high awards, cases like these tend to settle. But while the legality of agricultural cartels is uncertain, what is indisputable is that such behavior raises prices — a lot.”

Williams said UPGA officials justified their efforts as “marketing,” which is allowed under the Capper-Volstead Act.

“But marketing does not traditionally include production restrictions, because those hurt consumers by raising prices and reducing incentives for innovation,” she said.

Williams said small farmers have used cooperatives for decades to reduce costs by sharing processing plants and to be more economically efficient in their marketing. She cited the example of Sunkist.

“There is no single farm called Sunkist, it’s a cooperative of orange growers who share processing, distribution and advertising. That’s what the (Capper-Volstead Act) is designed to do,” she said. “The fact is the law, in this instance, was not used to help in the production of potatoes. The potato cartels weren’t working together to distribute potatoes, they were working together to limit the supply and manipulate prices.”

David Nazarian College of Business and Economics, Department of Business Law, Potato Prices