Aid to Ranchers Was Diverted For Big Profits

Flory Eutzy walks past bags upon bags of powdered milk, part of the federal government's stockpile, stacked in her company's warehouse in Chambersburg, Pa.
Flory Eutzy walks past bags upon bags of powdered milk, part of the federal government's stockpile, stacked in her company's warehouse in Chambersburg, Pa. (By Bill O'leary -- The Washington Post)
By Gilbert M. Gaul, Sarah Cohen and Dan Morgan
Washington Post Staff Writers
Wednesday, July 19, 2006

When a drought left pastures in a handful of Plains states parched in 2003, ranchers turned to the federal government for help. Officials at the U.S. Department of Agriculture quickly responded with what they considered an innovative plan.

They decided to dip into massive stockpiles of powdered milk that the agency had stored in warehouses nationwide as part of its milk price-support program. Livestock owners could get the protein-rich commodity free and feed it to their cattle and calves. The milk would help ranchers weather the drought while the government reduced its growing stockpile.

But within months, the program spawned a lucrative secondary market in which ranchers, feed dealers and brokers began trading the powdered milk in a daisy chain of transactions, generating millions of dollars in profits. Tens of millions of pounds of powdered milk intended solely for livestock owners in drought-stricken states went to states with no drought or were sold to middlemen in Mexico and other countries, a Washington Post investigation found.

Taxpayers paid at least $400 million for the emergency milk program, one of an array of costly relief plans crafted by Congress and the USDA to insulate farmers and ranchers from risk. In some cases, ownership of the powdered milk changed hands half a dozen times or more in a matter of days, with the price increasing each time. A commodity that started out being sold for almost nothing was soon trading for hundreds of dollars a ton.

One government inspector stumbled upon huge cargo containers being loaded with the milk at the Port of Houston. The destination: Europe. A New Zealand official complained to USDA officials that American brokers were flooding her country with the powdered milk, undercutting local dairy suppliers. Still other records show the milk going to the Netherlands and the Philippines.

"The milk was being bought and sold, bought and sold. Some of it was probably ending up in dog food and pet food," said Matthew J. Hoobler, a Wyoming official who oversaw the distribution of more than 60 million pounds of powdered milk in that state. That trading was possible, he said, because "there was no enforcement."

Tons of the surplus milk entered the commercial market in one of two ways. Some states ended up ordering more powdered milk than ranchers could use and then auctioned the rest to brokers. And ranchers sold powdered milk they didn't want or need back to feed dealers, who marked it up and sold it to other dealers or brokers.

In its contracts with eligible states, the Agriculture Department required that the milk be used to feed cattle within the state's borders. The trading itself was not illegal, but shipping the milk outside of the states violated the rules.

Even when agriculture officials learned that the product was being diverted, however, there was little they could do. The USDA had allocated the milk directly to the states, and state officials did not have the resources to track the middlemen. In any case, penalties were nonexistent.

"The problem came in when we got lots of different brokers looking to turn a buck," said Bert Farrish, the USDA's deputy administrator for commodity operations. "They didn't seem too concerned about the restrictions on the use of the product."

One Utah broker, Randy Schreiber, sold 11.1 million pounds of powdered milk to Mexican middlemen and others, records and interviews show. Schreiber, who is the subject of an investigation by the Agriculture Department's inspector general, said he does not think he broke any rules.

"I tried to be creative . . . entrepreneurial," he said. "This is a chapter in my life I would really like to forget."

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