Offutt key player in lawsuit claiming potato price-fixing

FARGO, N.D. -- Fargo, N.D., business magnate Ron Offutt, whose meager roots on his family's Moorhead, Minn., potato farm sprouted into a wildly successful career as the nation's largest potato producer and dealer of John Deere farm equipment, is being sued by grocers who claim Offutt and others illegally pumped up the price of spuds.

The civil lawsuit, filed in federal court in Kansas by Associated Wholesale Grocers Inc. against the United Potato Growers of America, Offutt, R.D. Offutt Co. and 22 other defendants, alleges a conspiracy in which the growers and their partners artificially inflated the price of fresh potatoes by agreeing to plant fewer acres, destroy potato stocks and limit the number of spuds available for sale.

While UPGA and a group of Idaho potato growers are the primary targets of the lawsuit, Offutt and his companies are mentioned on at least 10 pages of the 86-page complaint, and it suggests they had a key role at certain stages of the alleged conspiracy.

The lawsuit -- which the grocers say involves growers controlling 80 percent of potato production -- could also affect a potato grower cooperative based in East Grand Forks, Minn., that is a member of the UPGA.

'Within bounds of law'

Paul Noah, general counsel for R.D. Offutt Co., said Ron Offutt was out of the country and unavailable for comment. The company doesn't comment on pending litigation, Noah said.

The antitrust lawsuit was filed April 17 in U.S. District Court by Kansas-based AWG, which supplies more than 2,000 grocery stores and retail outlets with a variety of foods, including fresh potatoes. Offutt and the other defendants have until July 22 to respond to the complaint.

Contrary to the tangled web of backroom deals portrayed in the lawsuit, Jerry Wright, president and CEO of UPGA, said the co-op's goal has been "to help growers provide quality potatoes at reasonable prices to American consumers.

"We have always acted openly and within the bounds of the law," Wright said in an emailed statement. "We are confident in our legal position and look forward to a favorable outcome in court."

The UPGA's attorney, Randon Wilson, did not return a phone message seeking comment. He recently told the Associated Press that the growers' group is protected under the Capper-Volstead Act, a 1922 federal law designed to give agricultural cooperatives a limited exemption from antitrust rules as long as it doesn't lead to the kind of artificially high prices a monopoly can produce.

The grocers' lawsuit argues that the defendants aren't entitled to Capper-Volstead's protections because, among other reasons, the UPGA and its members consist of "vertically integrated" producers who also run potato packing and shipping operations in violation of the act.

"UPGA member cooperatives are made up of direct competitors rather than small farmers banding together to cut out the corporate middlemen who would otherwise market their potatoes," the complaint says.

'Anticompetitive' goals

The complaint alleges that 23 Idaho potato growers, who combined account for a quarter of the nation's fresh potato production, met in 2004 and agreed to collectively reduce potato supplies and fix prices through the United Fresh Potato Growers of Idaho Inc.

The grocers claim in the lawsuit that the conspiracy was a response to a downturn in potato demand -- which fell from 139 pounds per person in 2001 to 126 pounds per person in 2007.

The complaint also alleges forming a so-called "potato cartel" was becoming easier as farms grew larger. The number of potato farms fell from 1,425 in 1997 to 818 in 2002, driving the average size from 229 acres to 445 acres, the lawsuit claims.

The UPGA website describes the Idaho co-op's origins in less insidious terms, stating that in 2004 -- after years of overproduction that sent potato prices plummeting -- the growers formed the co-op under Capper-Volstead with a mission to "manage their potato supply, matching it to demand to help their growers receive a reasonable price for their product."

R.D. Offutt Co. was aware of the supposed scheme almost from the start, the complaint alleges. It says the company had representatives at a November 2004 meeting where the founders of UPGI recruited members and outlined its commitment to raising fresh potato prices by curbing supply.

"Ron Offutt and R.D. Offutt were therefore aware of UPGI's anticompetitive objectives and eventually agreed to join these efforts," the complaint alleges.

The Idaho group reached out to growers from other regions, forming UPGA with five cooperatives in 2005. The Red River Valley Fresh Potato Growers Cooperative, based in East Grand Forks, voted to join UPGA in 2008, becoming its 10th member cooperative.

Joining forces

Offutt, the founder of RDO Equipment Co., which owns and operates more than 60 dealerships in nine states, didn't join the growers' groups in 2004.

The complaint outlines a more involved role for Offutt starting in 2007, when UPGI purchased four potato dehydrating plants in Idaho owned by Idaho Fresh-Pak Corp., as well as the "Idahoan" brand name.

Around the same time, UPGI formed a second cooperative, United II Potato Growers of Idaho Inc., whose purpose was to "stabilize potato prices and supplies" in Idaho, according to its Articles of Incorporation quoted in the complaint.

R.D. Offutt Co., with its three dehydration plants in North Dakota, Nevada and Idaho, teamed up with United II to form a joint venture called North American Foods LLC -- which later changed its name to Idahoan Foods LLC -- to create the country's largest potato dehydrator.

"Ron Offutt and R.D. Offutt were aware that UPGI and United II desired to create the dehydration joint venture in order to further manipulate the fresh potato supply," the complaint alleges.

R.D. Offutt Co. still has a majority stake in Idahoan Foods through two Offutt subsidiaries, U.S. Foods Inc. and RDO Frozen Co. of Delaware.

Spuds 'siphoned off'

The complaint alleges that United II's contract with its grower-owners allows the co-op's board of directors to "siphon off" a percentage of each grower's highest-quality fresh potatoes at shipper's warehouses and divert them to the processing market.

"This 'siphoning' is not done at normal market conditions or rates," but rather to reduce fresh potato supplies and boost prices for the co-op's grower-owners and Idahoan Foods, the complaint states.

The lawsuit claims R.D. Offutt Co. participated in the alleged supply-restriction and price-fixing scheme "and agreed to reduce potato acreage and participate in a scheme to divert fresh potatoes to the dehydration market, among other things."

Offutt farms roughly 60,000 acres of potatoes, making him the nation's largest potato producer.

However, only a small fraction of those acres are planted for the fresh potato market. The majority of his potatoes are contracted and sold before they're even planted.

Wright, who in March 2007 was president and CEO of UPGI, discussed the joint venture in that month's newsletter, which is quoted in the complaint.

"This new venture will not only lead to a more stable (dehydration) industry but also serve as an important tool for growers to balance their fresh crop and fresh industry marketing pipelines, all with the objective of improving grower returns," Wright is quoted as saying. "As a result, potato growers, our communities, and the entire industry will benefit."

Ties to valley growers

Associated Wholesale Grocers is seeking a jury trial and triple damages, as well as a permanent injunction barring the defendants from engaging in practices that violate antitrust laws.

The grocers allege in the lawsuit that the price-fixing effort worked. The lawsuit, pulling information from the UPGA annual report in 2011, says total shipment of fresh potatoes from 2004 to 2005 and 2010 to 2011 fell by 11 percent, while prices had more than tripled. In 2009, the complaint states, for the first time in the more than 100 years the U.S. Department of Agriculture has tracked the market, potato prices went up or stayed constant for four straight growing seasons.

If successful, the lawsuit could affect potato growers in the Red River Valley.

The Red River Valley Fresh Potato Growers Cooperative was formed in 2007 by 27 growers representing 10,000 acres, or about half the fresh potato acreage in the valley at the time, according to USDA. The co-op's chairman, David Moquist of O.C. Schulz & Sons in Crystal, N.D., said he didn't know the current number of co-op members because it's the end of a membership year.

Moquist referred questions about the lawsuit to Wright. But speaking generally about how the UPGA has helped growers, Moquist said the biggest benefit has been the information provided about potato crops, supplies, shipments and so on.

"Which is really all public information anyway. It's all basically coming from USDA," he said. "But we're tracking in a way that can make sense to growers. And so therefore we kind of know a little better the situation of supply and demand and can market accordingly. That's all. You know, there's nothing mysterious going on."

Chuck Gunnerson, president of the Northern Plains Potato Growers Association, which has about 250 grower-members in Minnesota and North Dakota, also referred questions about the lawsuit to Wright.

Steve Tweten, president of Nokota Packers of Buxton, N.D., declined comment on the suit, saying members and consultants to the company are referring questions to the UPGA officials in Salt Lake City, Utah, to ensure a "consistent" message on the topic.

Gregg Halverson of Grand Forks and president of Black Gold Farms, produces primarily chipping potatoes and some fresh potatoes, but declined comment to Agweek on the lawsuit because he isn't involved with the association.