By Gilbert M. Gaul, Sarah Cohen and Dan Morgan
Washington Post Staff Writers
Wednesday, July 19, 2006; A01
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."
Federal officials still don't know how much of the government's milk was diverted to foreign countries and to states that didn't have a drought. Warehouse examinations identified some abuses. But "when we turned over title [for the milk] to the states, we were finished," Farrish said.
State officials said the assistance program was fraught with loopholes that fostered the speculative trading. And when they did report cases of suspected abuse, they said, the USDA was slow to respond.
"We didn't have the capability to do enforcement ourselves," said Wyoming's Hoobler. "It was me and a part-time intern running the program. When we did phone in a concern, we didn't get a lot of feedback."An Overflowing Cave
For years, the government has periodically purchased powdered milk -- as well as butter and cheese, the other byproducts of raw milk -- as part of a congressionally mandated price-support program for milk producers. By 2003, the Agriculture Department had accumulated a record 1.4 billion pounds of powdered milk in warehouses and in a huge limestone cave in the Kansas City area.
The bulging stores coincided with a drought that left livestock pastures burned in about a dozen states. Some livestock owners were faced with selling their herds, Farrish said. Giving them the powdered milk as an emergency source of feed seemed like a good way to help out. "We did stop the wholesale liquidation" of breeding herds, Farrish said.
In 2003, the government released 390 million pounds of powdered milk for the ranchers, giving it to the states for $1 a truckload. Responsibility for running the program was given to the states. In addition, ranchers were permitted -- within limits -- to trade their government allotments to feed dealers for other feed mixes and in some cases cash.
The trading made the secondary market possible. Once the powdered milk reached a feed dealer, it had a much higher potential price. It could be mixed with other feeds and resold to ranchers or sold to brokers who in turn traded it at the going rate in the commodities market. Protein-rich powdered milk is one of the most widely traded commodities, because it is versatile enough to be used in both animal feed and human food, such as pudding, hot-chocolate mix, ice cream and infant formula.
"Our job is not to hold on to any product," explained Pam Neary, owner of High Country Mercantile Inc., a commodity-trading firm in Cody, Wyo., that acquired the rights to millions of pounds of powdered milk that it then sold to third parties. "We don't hold it. We don't store it. It's in one hand and out the other hand."
Jake Malloy, a trader in Casa Grande, Ariz., said, "I think the product had a lot of value. But ranchers didn't get that much. It was the feed dealers and mills who really made out on this."
Rancher Brad Bateman of Elberta, Utah, who runs 10,000 head of cattle, said he got "truckloads" of powdered milk. He used some as feed and traded the rest to a broker for up to $400 a load. With the profits, "I could buy soybean meal cheaper," Bateman said.A Warning in a Fax
One of the first hints of the burgeoning market in government milk came in a fax to the Utah Department of Agriculture and Food on Oct. 23, 2003.
The fax said a USDA warehouse was about to ship nearly 250,000 pounds of powdered milk from its stockpile to a private warehouse in Salt Lake City. That puzzled state officials, because the shipment was clearly outside their allotment under the federal program.
That same week, a series of anonymous phone calls were made to the Utah officials describing alleged abuses in the program. One caller "indicated that he suspected the product . . . was being shipped to foreign markets," according to an Oct. 31 e-mail written by Utah Deputy Commissioner of Agriculture Kyle R. Stephens.
The e-mail was among thousands of pages of investigative files and government records that The Post obtained from state and federal agencies under the Freedom of Information Act. Those records, as well as interviews with more than 50 government officials, traders, brokers, mill operators and feed companies, show that the Utah shipment was part of a chain of transactions that stretched from Wyoming to Idaho to Utah to Mexico.
The chain began in June 2003 when Randy Schreiber, the Utah broker, decided to get into the powdered-milk market. Schreiber's tiny company, Impression Foods, specialized in buying and selling food internationally. He said he had never sold animal feed before.
According to Schreiber, he didn't have to look very hard to find the government's powdered milk. "Traders found me," he said. "I never contacted anyone. People just called."
One call came from Walton Feed, based in Montpelier, Idaho. The firm had access to tons of powdered milk, which it had traded or purchased from ranchers and brokers.
Greg Kunz, one of the owners of Walton Feed, said his company handled 200 to 300 truckloads. Each truck held about 22 tons. Kunz said he was paid up to $160 a ton by some brokers. "I made $40 on top," he said. "But remember, I had to store and reload it."
Kunz said he had an agreement with Schreiber that the broker would use the powdered milk "within the prescribed guidelines of the program." But he added that Walton officials didn't track the milk once it left their possession and "didn't know how Randy used the product."
Schreiber arranged to have the powdered milk remixed and repackaged at two mills in the Salt Lake City area. Sherman Robinson, the owner of Lehi Roller Mills near Provo, said Schreiber paid him 9 or 10 cents to repack each 55-pound bag.
"They ran a lot of product through here . . . probably 5 or 6 million pounds," Robinson said.
Shipping records show that of the 11 million pounds of powdered milk handled by Schreiber, half went to Mexico.
"I would guess if it was going overseas it would be lumped into a [cargo] container. We loaded some containers here, too," Robinson said. "The only reason I had to suspect that it was going to Mexico was the Spanish on the labels."
Schreiber declined to identify his Mexican customers. Records show that one was Monte Roble S.A. de C.V., a small food company near Mexico City. A Nov. 19, 2003, export certificate shows that Impression Foods shipped 765 bags to Monte Roble. The description was "animal products."
A spokesman for Monte Roble, Jesus Cazare, said the small firm was in the business of brokering "food products and nourishment for human consumption." He added that he had no "recollection" of the purchases of powdered milk and had been at the firm only a short time. "There have been big changes in the company," he said. "I am not aware Monte Roble was buying from this company."
Schreiber also said he sold millions of pounds of milk to brokers whom he declined to name. Records show that all of that product went abroad.
"Can I account for what those people did to the product once it left my control? No," Schreiber said in one of a series of interviews. "Do I know some of our customers sold elsewhere? Yes. Do I know it left the country? . . . Yes. Do I know where they took it? No."'It Will Get Ugly'
When Utah's Stephens learned that brokers in his state were diverting the government's powdered milk, he turned the findings over to USDA officials, who in turn shared them with the department's office of inspector general.
In January 2004, Schreiber met with USDA inspectors at a Comfort Suites hotel in Salt Lake City. Separately, Robinson and Kunz also met with inspectors.
Schreiber said he was "completely open" about where the powdered milk was going. He said one of the inspectors even applauded him for his creativity. But later, Schreiber said, the tone of the inspectors changed and he started to worry that he was in trouble.
"As far as I know, it's still an ongoing case," he said. "I don't know what is going to happen, but I know at one point it will get ugly."
In July 2004, then-Agriculture Secretary Ann M. Veneman announced that the USDA would once again dip into its stockpile of powdered milk to help ranchers. But this time, the agency included specific restrictions on feed dealers and a more explicit prohibition on exports.
A spokesman for the USDA inspector general declined to comment on the status of any investigations into diversion of the government's powdered milk. Last fall the agency issued an audit report on government drought-relief programs that noted abuses in powdered-milk trading, including that some of the product went abroad. But the report named no names.
Schreiber said he stopped buying and selling powdered milk in 2004. Since then, his firm has gone from five employees to one, he said: "As soon as this is over, it will cease to exist."
Today, Schreiber, 42, said he is trying to sell commercial real estate while waiting for the other shoe to drop. The government "is trying to turn things inside out," he said. "Here I was trying to do something positive. They wanted to reduce their stockpile. Ranchers got feed. Now they want to say I did something wrong."