Milk War Rages in the Big Apple : Prices Tumble as State’s Marketing Restrictions Give Way

Muriel Sherman’s trip Tuesday to the supermarket in her Upper East Side Manhattan neighborhood was like a visit to the distant past. Selecting a quart of milk from beneath a green sign that read “New Low Prices,” she said: “How long has it been since this was 59 cents? I can’t even remember.”

During the past few days, New Yorkers have been getting a crash course in free-market economics. For earlier this month, a federal judge here overturned a state rule that for more than 30 years had effectively closed the New York City retail milk market to all but a handful of local distributors.

The result is the kind of price war that has scarcely been seen outside the airline and long-distance telephone businesses.

The victor in the court case, Farmland Dairies, a New Jersey dealer that was prepared to undercut existing New York wholesale prices by 40 cents a gallon, promptly won a supply contract from Grand Union, one of the city’s largest supermarket chains.

On Friday, Grand Union markets were posting window signs declaring “Milk Prices Reduced!” and cutting their prices for a gallon of milk to $1.99 from $2.70, with similar reductions for smaller cartons.

Every other major supermarket chain quickly matched the price, although many complained that they were losing money in doing so.

“Everyone’s saying the same thing: ‘We’re not going to sit out there by ourselves with a higher price,’ ” said Ronald Nevers, a vice president at the competing D’Agostino’s Markets.

There’s more to the New York milk war than supermarket prices. At issue is the existence of New York state’s 1934 law allowing authorities to restrict the entry of new competitors into the market. Dozens of states still have such laws on the books.

In the West, although California years ago repealed its own law setting minimum retail prices for milk, Nevada still sets a price floor on most dairy products. Consumer advocates say that most such rules are no longer relevant.

The issue has already claimed a member of New York Gov. Mario Cuomo’s cabinet: Commissioner of Agriculture and Markets Joseph Gerace, who was forced to resign amid a public uproar over his decision in December to bar Farmland’s milk from all but one of New York City’s five boroughs on grounds that Farmland would provoke “destructive competition.” Gerace explained that the outcry made him a political liability to Cuomo, who is contemplating a presidential campaign.

Cuomo quickly associated himself with Judge Leonard Wexler’s ruling overturning Gerace’s decision, and he has endorsed a revision of the state’s milk marketing law to allow more competition. But in doing so he antagonized the state’s milk industry, the nation’s third-largest behind those of California and Wisconsin.

Lobbyists for farmers and dealers have tried to place the matter in a national context by muttering about Cuomo’s “total lack of understanding of farm issues,” in the words of Randy Spector, a spokesman for the industry.

Spector, noting that New Jersey itself restricts the ability of out-of-state dealers to sell milk within its borders, argued that New Jersey competitors would drive some New York dairies out of business. “You’ll wind up with fewer competitors in the marketplace,” he said.

Behind the war is Farmland’s eight-year effort to sell its milk within the city limits despite a state law giving Gerace broad latitude to regulate the market. After lengthy administrative hearings before state agricultural officials, months of delays in rulings and the imposition of unreasonable conditions, “our motivation got to be more than just doing business in New York City,” said Marc Goldman, Farmland’s president, in an interview.

“I felt these people were really not good people,” he said. “They were not only using the state’s powers to try to intimidate us, but they were protecting a cartel.”

At one point the state rejected Farmland’s application for a permit on grounds that the dairy had pleaded guilty some years earlier to price-fixing charges. That argument lost its luster in 1982 and 1983 when 26 New York dairies, including the five that controlled 50% of the New York City market, pleaded guilty to similar charges.

Farmland won the right a year ago to sell milk in New York’s sparsely populated borough of Staten Island. Prices there settled at an average 29 cents a gallon below those in New York’s other four boroughs. When Gerace rejected Farmland’s application to sell throughout the city, consumer groups responded with an uproar. Finally, Judge Wexler on Jan. 9 condemned Gerace’s action as unconstitutional “economic protectionism.”

“There are restrictions on milk wherever you go, although they’re not always as strict as New York’s,” said Richard Aplin, professor of marketing at the College of Agriculture and Life Sciences of Cornell University. New Jersey, for instance, requires stores planning to change dealers to give their existing suppliers 14 days to match the incoming supplier’s terms, effectively freezing out new competitors.

Considered Promotional

For now, most supermarket officials in New York consider the new prices to be akin to Burger King’s 99-cent special for its Whopper--that is, promotional rates rather than accurate reflections of market forces. By this argument, gallons will go for $1.99 as long as customers are paying attention to milk prices and will rise as soon as the issue fades.

Grocers also argue that the high price of milk in New York reflects more than wholesale prices. Nowhere is this so more than Manhattan, where real estate values, utility costs, taxes and labor and transportation expenses are among the highest in the country.

“Manhattan is a unique marketplace for a retailer,” said John Riley, dairy buyer for Gristede’s, another leading supermarket chain and one that has begun contracting for Farmland milk. But he agreed that higher expenses themselves did not entirely account for the broad differential in the price of New York City milk:

“People have had this market to themselves, and they took advantage of it,” he said.