Connecticut's attorney general is using terms like "market concentration" and "monopolistic pricing" to sketch the general direction of a probe into 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 of the most regulated commodities sold in supermarkets. It was only in the late 1990s that Congress even 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 New England.
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 suspicion.
Published reports are increasingly examining price fluctuations in select categories -- including milk -- in the context of consolidation's effect on the marketplace.
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 defense for the prices they currently charge.