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

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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