The Milk Cartel

by Russ Roberts on February 2, 2006

in Regulation

The Wall Street Journal (ss) reports on an attempt by an entrepreneur to breakup the government forced milk cartel:

A lone milkman is delivering misery to the doorstep of the giant dairy industry.

Hein Hettinga was once a simple dairy farmer who sold
raw milk from his farm in Chino, Calif. Today the Dutch immigrant has
expanded his operation so much, so fast, that some of the biggest dairy
companies and cooperatives in the U.S. have banded together against
him. They are lobbying for federal laws to close loopholes they claim
he exploits. Mr. Hettinga counters that the only purpose of the
proposed legislation is to kill competition — and keep milk prices
high…

Mr. Hettinga runs a rare hybrid operation. Most dairy
businesses either only produce milk, or only process it. He does both.
As a result, he falls into a protected class that isn’t bound by an
arcane system of Depression-era federal rules. Under it, milk
processors selling into specific geographical areas, which cover most
of the country, must all pay into that area’s pool for subsidizing milk
prices. But so-called producer-distributors have always been exempt.

Mr. Hettinga also has avoided pricing rules at the
state level. Because he has a bottling plant in Yuma, Ariz., that ships
milk into California, he isn’t covered by Golden State regulations.
That means his costs are lower than those of rival processors; he can
sell his milk for less. By some estimates, his entrance into the
Southern California market lowered milk prices for retailers by 20
cents a gallon — though the dairy industry in California says
consumers haven’t seen the savings at the grocery store.

I wonder if that last claim is true.  Even if it is, it won’t stay true if Mr. Hettinga can keep growing and other can imitate him.  But the milk cartel wants to make sure that won’t happen:

Feeling Mr. Hettinga’s regulatory end run is legal but unfair, dairy-processing giant Dean Foods Co., supermarket chain Kroger
Co. and the Dairy Farmers of America, the nation’s largest such
cooperative, are backing bills introduced in Congress in recent months
by California Republican Rep. Devin Nunes, a former dairyman, and Sen.
Jon Kyl, a Republican from Arizona. The bills would force the smaller
operators doing business in those two states to pay into the pool if
they grow to a certain size.

What are the odds that bill will pass?  Pretty good, I’d guess.  And why is this bill necessary?

The International Dairy Foods Association, the largest
group representing processors in the country, and the National Milk
Producers Federation, a collective of cooperatives, call the emergence
of large farm operations that could also package their own milk a
national issue of "critical concern."

The growth of producer-distributors, they argue, would
disrupt a system developed in the 1930s to ensure that Americans would
have stable access to milk. Because the product is perishable, in the
old system, big processors exerted so much market clout over small
dairy farmers that they strong-armed pricing, sometimes causing
shortages in the milk supply. The current rules give farmers more
predictable milk prices.

Please replace the words "more predictable" with "higher" and you have the only meaningful statement in the argument.

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{ 34 comments }

FXKLM February 2, 2006 at 11:03 am

If it's true that Mr. Hettinga's actions have lowered the wholesale price of milk without lowering the price to consumers, then it must be increasing the margins of grocery stores. So why is Kroger lobbying against him?

doinkicarus February 2, 2006 at 11:19 am

Unfortunately, – this situation reeks of Sherman era anti-trust legislation, specifically the unfortunate precedent set by Standard Oil.

the Radical February 2, 2006 at 11:35 am

The sadest thing about this is that such regulations and corporate welfare schemes in the milk industry are only a small fraction of the fascist controls left over from the era when Stalin was president.

the Radical February 2, 2006 at 11:36 am

Oops! Did I say Stalin? Freudian slip…I ment FDR.

Morgan February 2, 2006 at 12:09 pm

Radical:

I laughed. Twice.

save_the_rustbelt February 2, 2006 at 1:23 pm

Apparently the milk lobby thinks it is comparable to the oil industry.

Under cover of the SOTU, the Bush administration gave a major environmental waiver to large factory farms, guaranteeing many of our states (Ohio included) will see major pollution from massive increases in dairy cow manure.

Cow manure, a fitting legacy for George Bush.

Bergamot February 2, 2006 at 2:58 pm

Exactly what terrible tragedy will befall us if milk prices become "unstable"?

Milk is nice and all, but it's not really a necessity. It provides essential nutrients, but nothing that can't be found in other sources.

Stretch February 2, 2006 at 3:32 pm

"…in the old system, big processors exerted so much market clout over small dairy farmers that they strong-armed pricing…"

And this is different from the current system how?

John Pertz February 2, 2006 at 3:37 pm

So the dairy producers are saying that milk cant be sold in a free market? I just get the feeling that they are scared to compete with low cost competitors who have developed methods to bring milk to consumers at a lower cost. This looks earily similar to the anti-walmart lobby(their competitors) that takes advantage of socialist sympathizers and actualy make them think that they are looking out for the public's best interest.

averagejoe February 2, 2006 at 9:37 pm

I don't understand Kroger and Dean Foods' position either. If they can get lower priced product, why on earth would they be against it? Must be some back room arm twisting going on. Call out the lobbyists and get K Street on the case.

Don February 3, 2006 at 10:09 am

What the hell is Jon Kyl doing putting his name on this hit job. He is suppoosed to be one of the good guys?

mark adams February 3, 2006 at 11:26 am

There is an old joke in Europe:

Capitalism: I have two cows, I sell one and buy a bull.

Socialism: I have two cows, the government takes both and gives me milk.

EU: I have two cows. The government takes one and shoots it. I milk the other one and the government pays me to pour the milk down the drain.

I had always assumed the US fell into the first category. Apparently not. How about:

US: I have two cows. I am forced to ship my milk hundreds of miles to be bottled, and then back again, to avoid uneccassary regulation. I provide customers with cheaper milk and expand my operation until my competitors get worried and lobby congress to close me down.

Any other offers?

Andy In Cleveland February 3, 2006 at 12:03 pm

What is really pathetic it that two Republicans (Rep. Devin Nunes, – California and Sen. Jon Kyl, – Arizona) are authoring this "custom" corporate welfare legislation to inflict higher milk prices on both of thier states and POSSIBLY the rest of the country.

Republicans should by passing legislation to REPEAL that entire arcane system of Depression-era federal rules to let the markets rule.

liberty February 3, 2006 at 1:52 pm

It is very sad. I was for Shadegg for majority leader, he's pretty good, a lot of the rest of repubs are dems in disguise.

Terry Mitchell February 3, 2006 at 2:08 pm

Yeah, I want the federal government out of my milk!

Improbulus Maximus February 3, 2006 at 2:20 pm

Once again, the government conspires with big business to destroy the little man. I don't mean to come off like some snivelling liberal, because God knows I'm not, but I grew up on a farm, and we sold direct to the consumers just like this guy, and we had no other choice. If we tried to sell on the market, we'd have gotten a fraction of the price, but as it was, we sold to the consumer for half of what the supermarket charged, and still made good money. We milked our own cows, gathered our own eggs, and slaughtered our own cattle and hogs, and did well. Thanks to regulations, those days are over, and most of what you pay for food is profit taken at various stages of the supply chain, but very little for the farmer.
There are so many regulations, both federal and state, that farmers have to deal with, that it's no wonder that small farmers have gone the way of the Dodo. We even got a questionnaire from the government every year about how many of what type of animal we had, which really creeped out me and my dad, as you can imagine. Hettinga is going to get screwed, and he'll be lucky if they don't bankrupt him just to prove a point. our government is incalculably corrupt, and I don't think it can be fixed, short of a bloody revolution.

liberty February 3, 2006 at 2:36 pm

>I don't mean to come off like some snivelling liberal,

How would that sound liberal? Liberals want government to regulate in order to "save" the farm from competition. Anyone paying attention knows that it does the opposite in fact, but that is supposed to be the left POV, not the right. Sadly the right has jumped on board with it. Now we are down to 2 versions of populism, one slightly worse than the other, heading toward Randian hell.
check it out:
http://www.gmu.edu/departments/economics/bcaplan/rand.doc

Tassled Loafered Leech February 3, 2006 at 3:10 pm

When I was in the orange business we had similar reulations called "prorate" Based on an initial survey of your crop, you were only allowed to ship your % of the total any given week. Kept pricing "orderly". Also made Sunkist the effective price maker, as they had the lion's share of the crop. Eventually, enough independent growers fought against this federal policy and the regulations were repealled.

liberty February 3, 2006 at 3:17 pm

>Eventually, enough independent growers fought against this federal policy and the regulations were repealled.

That is an inspiration. We need to call these congresspeople and demand a repeal of these laws.

John P. February 3, 2006 at 4:49 pm

"Now we are down to 2 versions of populism, one slightly worse than the other, heading toward Randian hell."

Liked that so much I thought it was worth repeating.

Doug Mewhirter February 3, 2006 at 9:55 pm

Kroger has a large private label milk program. They get the middleman's market as well as the retail. That's why they are mad.

Dean Foods is one of the largest milk producers in the world. That is why they are mad.

I'm not sure which set of regulations is more evil – the milk regs or the sugar regs.

Helen's_kid February 3, 2006 at 10:33 pm

This is the same group that did not want to allow organic cattle labelled as "NON BGH". They had their FDA mouthpieces attesting to the safety of Bovine Growth Hormone. To distinguish between milk and meat which had not been artificially altered would only serve to confuse the public. There is evidence that the public isn't too bright.

For instance, the meat packing industry can inject water into ham and the public is clueless. If a 5 pound processed ham is actually 4 pounds of ham and 1 pound of water, then the packer receives the same price for water that he (she) receives for ham. Typically $1.49 a pound, or roughly $7.50 for the package in the supermarket. Now water weighs about 8 pounds per gallon, so, the water sells for $12 a gallon or 4 times the price of gasoline when it is packed in a ham. The same 4 pounds of ham sold as smoked meat retails at $2.99 a pound or $12 for the package, so the sale of water with the ham is actually a benefit to the consumer since it lowers the price per pound by more than a dollar. Kapish? Neither does the public.

Christopher February 4, 2006 at 1:38 am

Corporate welfare and rent-seeking behavior? ;-(

Aaron Krowne February 4, 2006 at 4:36 am

I'm lactose intolerant.

Caucasians that can digest milk have a historically-recent mutation. Adult humans do not need milk (especially cow's milk) to survive.

That's what makes this whole thing so hilarious. Cow's milk is provably, biologically non-critical for human beings.

These people are despicable human beings.

realist February 4, 2006 at 6:58 am

i drink soymilk. it's even more expensive than milk. who knew soybeans were so expensive?

Erin Loyd February 4, 2006 at 8:43 pm

The industry-protective dairy regulations from the 30’s have far outlived their usefulness. In the 30’s the economy was in deep depression, and family farms were hurting. We did not have the option of getting fresh milk abroad, since shipping and refrigeration capabilities were obviously far below what we have now. Yes, back then large conglomerates could effectively corner the market and hurt consumers.

Now, however, we could have access to many global markets for milk. The consumer benefits of globalization alone could counteract the muscle of large US dairy producers.

Right now we don’t really have the option of global market dairy purchases because of all the silly US-specific dairy regulations. Example: we can’t even get real European gourmet cheeses because they are unpasteurized. That is another US regulation that serves the interests of large US producers. It’s not like hoards of Europeans die from cheese poisoning – obviously standard pasteurization is no longer critical to food safety.

If the industry was deregulated, and dairy producers could sell milk without the arcane rules mentioned in this article, does anyone really think that milk prices would fluctuate wildly? I don’t think we’d ultimately have to resort to eating our cornflakes with Diet Coke just because of the entry of milk entrepreneurs like Mr. Hettinga.

Erin Loyd February 4, 2006 at 8:44 pm

The industry-protective dairy regulations from the 30’s have far outlived their usefulness. In the 30’s the economy was in deep depression, and family farms were hurting. We did not have the option of getting fresh milk abroad, since shipping and refrigeration capabilities were obviously far below what we have now. Yes, back then large conglomerates could effectively corner the market and hurt consumers.

Now, however, we could have access to many global markets for milk. The consumer benefits of globalization alone could counteract the muscle of large US dairy producers.

Right now we don’t really have the option of global market dairy purchases because of all the silly US-specific dairy regulations. Example: we can’t even get real European gourmet cheeses because they are unpasteurized. That is another US regulation that serves the interests of large US producers. It’s not like hoards of Europeans die from cheese poisoning – obviously standard pasteurization is no longer critical to food safety.

If the industry was deregulated, and dairy producers could sell milk without the arcane rules mentioned in this article, does anyone really think that milk prices would fluctuate wildly? I don’t think we’d ultimately have to resort to eating our cornflakes with Diet Coke just because of the entry of milk entrepreneurs like Mr. Hettinga.

Erin Loyd February 4, 2006 at 8:49 pm

(Sorry for the double-post. My laptop has issues)

liberty February 5, 2006 at 1:47 pm

I'm not sure that those regulations were ever useful.

Keith February 6, 2006 at 9:34 am

"Cow's milk is provably, biologically non-critical for human beings."

You've obviously never eaten chocolate chip cookies.

mike February 7, 2006 at 12:44 pm

I don't feel too sorry for Mr. Hettinga. He's the beneficiary of some of the goofy milk laws too. Since the feds pay (at least they used to…I'm not sure if this is the case still anymore…) more money the further your farm is from Lacrosse, WI, it's no wonder those California cows are so happy.

Patrick R. Sullivan February 7, 2006 at 1:54 pm
jeff February 7, 2006 at 3:57 pm

There is a Milk futures market traded at the Chicago Mercantile Exchange. Consumer groups there protested last year saying the dairy industry was manipulating the price of cheese.

Their contention was that the industry artifically kept the price of cheese up to inflate milk prices. Now we see a guy who cna produce milk at low prices.

Every single agricultural crop's price we grow in the US is regulated. There are price floors and subsidies. The government should get out of the subsidy and floor business. Let the free market work.

John March 29, 2006 at 6:37 pm

Congress passed a law the day before
Hettinga's hearing for an injunction against USDA's ruling

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