GOT BILKed?

                  The growing milk processing monopoly
                  hurts farmers, consumers

                  By Edward Ericson, Jr.
                  Published 05/17/01, The Hartford Advocate

                  Between 1997 and 2000 you and
                  other New England consumers paid
                  nearly $50 million more for milk than
                  you would have in a competitive
                  marketplace, according to a study by a
                  University of Connecticut economist.

                  Professor Ronald Cotterill, director of
                  the university's Food Marketing Policy
                  Center, analyzed bar scanner data,
                  wholesale milk prices and other
                  economic factors to gauge the effect of the Northeastern States Dairy
                  Compact, a price support system approved by Congress in 1997. His study
                  found that retail prices increased by more than three times the increase
                  legislated by the compact because two companies, Stop & Shop and Suiza
                  Dairy, used their dominance as milk processors to increase their own profits
                  while blaming the compact.

                  "We certainly would agree with the report on the onset," says Matthew
                  Freund, co-owner with his brother, Benjamin, of Freund's Farm
                  Incorporated in East Canaan. "If the processors have gouged it they ought to
                  be held accountable."

                  Ben Freund says New England farmers "need good processors in the area"
                  because many have closed or have been bought out in the past few years.
                  Without the processors, who buy raw milk from the farmers, test it for
                  bacteria or contamination, pasteurize it and package it for market, the
                  farmers can't get their milk to the stores. "So we need them and it's in no
                  one's interest for us to fight with each other," he adds.

                  But the two wings of the milk business have been fighting over the price
                  support system since 1997. The farmers like it; the processors oppose the
                  compact because it increases their costs.

                  The supermarkets not only lobbied against the compact in Congress, but
                  they also lobbied consumers by drawing attention to increased milk prices in
                  the summer of 1997. A sign over Stop & Shop dairy cases read, "Due to
                  the increased cost of milk caused by the new 'Northeast Compact'
                  authorized by the U.S. Congress and signed by the U.S. Secretary of
                  Agriculture, we have had to increase our milk prices. We hope this poses no
                  inconvenience to anyone."

                  The retail price increase, according to Cotterill, averaged 29 cents per
                  gallon, but the compact alone accounts for only 6 cents of that, he says.

                  A spokeswoman for Stop & Shop, New England's largest supermarket
                  chain with 274 stores in five states, referred questions about the study to
                  Grace Nome of the Connecticut Food Association, an industry trade group.
                  Nome said last week that she had not yet read Cotterill's report, despite its
                  availability for download via the Internet.

                  In general, she said, "I think they're beating us up because they expected us
                  to swallow that (increase in wholesale milk price). We're dealing with a 1
                  percent margin."

                  Nome said she could not answer questions about Stop & Shop's milk
                  pricing policies, or about that company's milk processing system. Questions
                  left with Stop & Shop public relations people were not answered as of press
                  time.

                  Suiza spokespeople also did not return calls seeking comment. They have in
                  the past referred reporters to a Washington-based trade group, The
                  International Dairy Foods Association, which disparaged the UConn study
                  in a statement released May 2.

                  "The study's release coincides with the introduction of legislation to continue
                  and expand the use of interstate dairy compacts and uses statistical
                  sleight-of-hand to arrive at what appear to be pre-determined conclusions of
                  the authors," association president and CEO E. Linwood Tipton wrote. "For
                  example, they conclude that farmers have received an added benefit of
                  $128.5 million as a result of the higher compact price. However, they also
                  conclude that consumers paid a premium of only $19 million due to
                  compact-induced higher prices. One has to wonder where the other $109.5
                  million came from to pay the farmers. The numbers don't add up."

                  The study attributes the $109.5 million difference to a stabilized wholesale
                  price over the three-year period. Prior to the compact, the wholesale price
                  fluctuated greatly, where the retail price stayed the same. The processors
                  were, in effect, taking a bigger spread of the profits when prices fluctuated
                  downward.

                  Cotterill concludes that processor and retail profit margins could have
                  remained stable given a retail price increase of 4 to 6 cents. Much of the
                  increase beyond that fell to the bottom line as profit, he concludes.

                  But while farmers and processors try to use the report to argue for or against
                  an extension of the Northeast Compact, the report's real focus is on the
                  antitrust implications of Suiza's consolidation of the Northeast milk
                  processing market.

                  "The major policy issue now facing New England consumers of fluid milk is
                  not the Northeast Dairy Compact," the report says. "It is the exercise of
                  market power by the region's leading retailers and milk processor."

                  Dallas-based Suiza was already the nation's leading dairy processor and
                  brand retailer when the compact went into effect in 1997. But after that the
                  company went on a buying spree, gobbling up New England milk processing
                  plants. By 2000 Suiza controlled 70 percent of the processing in New
                  England.

                  "They bought every processing plant except one," says Doug DiMento,
                  communications director for Agri-Mark, a regional dairy farmers'
                  co-operative. "So the dairy farmer is in a much more precarious position
                  than he's ever been in the marketplace."

                  When processors were independently owned, for example, milk shortages
                  would occasionally compel them to pay farmers a premium to get their milk
                  and keep their machines running, DiMento says. Those days are long gone
                  now, he says.

                  According to Hoover's online, a business directory, Suiza Dairy Group
                  operates more than 80 dairy processing plants that produce and distribute
                  milk to 46 states. Its brands include Meadow Gold, Borden, Elsie,
                  Foremost, Oak Farms, Country Fresh, Tuscan, Dairymens, Pet,
                  Flav-o-Rich, Broughton, and Suiza Dairy.

                  U.S. Sen. Patrick Leahy (D-Vermont) spoke against the consolidation trend
                  in Congress, and wrote letters to the U.S. Justice Department and the
                  Federal Trade Commission asking them to investigate Suiza. Leahy has
                  gotten no response from the feds to date, his spokesman says. But the
                  senator also contacted the attorneys general from New England states, and
                  they are investigating. "We have had an active investigation into the milk
                  industry in New England," says Connecticut Attorney General Richard
                  Blumenthal, adding that his office plans to take some public action in the next
                  few weeks.

                  It is unclear what the states can do to curb corporate consolidation.
                  Agri-Mark's DiMento is skeptical. "The only mechanism in place is the U.S.
                  Justice and Antitrust Department which has been sitting in a closet for the
                  last eight years," he says. Things are unlikely to improve. President Bush's
                  nominee to lead the Federal Trade Commission, Timothy Muris, has spent
                  his academic career arguing against government intervention to prevent
                  monopoly power.

                  Suiza, meanwhile, announced a $1.5 billion merger with Dean Foods, the
                  nation's number-two milk processor, last month. Dean reported more than
                  $4 billion in gross sales in 2000, and earnings of $229 million.

                  Wall Street analysts, ordinarily delighted by mergers, tempered their
                  enthusiasm with a rare dose of caution. "My only concern for the success of
                  this deal is that the rest of the milk industry can prove to be viable
                  competitors," said Merrill Lynch analyst Leonard Teitelbaum. "We're going
                  to be a one-cow country."