Supermarket News 49(23):2, June 4, 2001,

Editorial by Robert Vosburgh, Editor, Fresh Market

Got Profits? Some Believe It's Too Much
Retailers' days of "white gold" may soon be over as high milk prices are reviewed.

                      Connecticut’s attorney general is using terms like “market concentration” and
                       “monopolistic pricing” to sketch the general direction of a probe of retail milk prices
                       that he and several other states in New England are wrapping up (see news article,
                       page 49). Like any law enforcement official, he declined to go into specifics regarding
                       the investigation. Inquiries into pricing practices certainly aren’t new to the food
                       industry — just look at the still-hot spotlight that was recently turned on slotting fees. But
                       this milk dilemma has been building for several years now, and involves one of the
                       most basic food items required by consumers. In fact, it’s high on the list among the
                       most regulated commodities sold in supermarkets. It was only in the late 1990s that
                       Congress found the fortitude to dive into the archaic, New Deal-era mound of
                       legislation to try to update pricing structures for farmers. And that’s the source of this
                       latest activity. The University of Connecticut released a study examining the impact of
                       the 1997 Northeast Dairy Compact, which was enacted in the name of smaller dairy
                       farmers by setting minimum prices as a way of protecting their way of life. A very noble
                       cause, but a flawed endeavor that has opened up the potential for price manipulation
                       down the distribution pipeline. Before retailers throw up their hands and deny anything,
                       they might be wise to think about milk’s importance in the home, and the adverse
                       publicity that even the perception of price fixing might generate. The study certainly
                       didn’t paint a flattering picture, finding that some $50 million of the $130 million
                       increase in milk sales across the New England region has gone straight into the
                       coffers of supermarkets and processors. Milk prices grew from an average of $2.49 a
                       gallon just before the compact took effect, to $2.78 a gallon by the beginning of 2000.
                       Within that 29-cent increase, processors and retailers were drinking up 11 cents of
                       that. For the past few years, California has been the center of the milk-price battle, led
                       on one side by Consumers Union, the consumer advocacy group and publishers of
                       Consumer Reports magazine; and on the other by Californians for Nutritious Milk, a
                       group whose members consist primarily of processors. Two years ago, a study by the
                       University of California at Davis confirmed that retail prices in that state do indeed
                       mimic price activity on the dairy level. But it also found that retailers were quicker to
                       raise fluid dairy prices, than to lower them. And there’s more: a Penn State survey
                       reached a very similar conclusion last year regarding price increases and decreases
                       in the New England states. To be sure, all of this comes at a bad time, when
                       regulators, from the Federal Trade Commission on down, are looking back on the
                       recent series of mergers and acquisitions within the industry with increasing suspicion.
                       Published reports are increasingly examining price fluctuations in select categories —
                       including milk — in the context of consolidation’s impact. And even though
                       consolidation can’t be undone, the authorities do possess the power to make it a lot
                       more unpleasant for supermarkets and their vendor partners to do business in a
                       unfettered environment. One of the possible remedies mentioned by the attorney
                       general includes negotiating an agreement that resolves the findings of his office’s
                       investigation. Given his legal authority, and the general public sentiment about large
                       companies and high prices, retailers and processors better get ready to rewrite their
                       ledgers, or prepare a strong court defense for the prices they currently charge.