Stores Seek New Milk Price Rules : Agriculture: Critics say the move is an attempt to prevent Price Club from undercutting the supermarkets.

A dairy industry group dominated by the state’s grocery chains is seeking a regulatory change that critics say is aimed at heading off price competition for milk, which is one of the most profitable items in Southern California supermarkets.

The Dairy Institute, whose members include Ralphs, Vons, Lucky and the parent of Alpha Beta, has asked the state Department of Food and Agriculture to alter the formula used to determine raw milk prices. The change would lower costs for the grocers and raise costs for Price Club, a nimble discounter that has been stealing milk sales from Southern California’s supermarkets.

The proposal is the latest development in a growing controversy over milk pricing in Southern California. Milk prices in Los Angeles are up to 20% higher than in San Francisco or the Inland Empire, where independent grocers compete aggressively for milk sales.

State agricultural regulators and consumer activists have maintained that Los Angeles-area grocers do not compete for milk sales. An exception is where supermarkets compete directly with Price Club, which sells milk in two-gallon packages at deep discounts. Albertsons and Lucky, the two chains that stress low prices in their marketing, now sell the two-gallon packs at stores located near Price Clubs.

The Dairy Institute contends the current method for determining raw milk prices gives retailers who truck in milk from the San Joaquin Valley an unfair advantage over Southern California grocers who buy and process their milk locally.

“All we are looking for is a level playing field,” said Ken Silver, chief of Ralphs dairy operations and Dairy Institute president. Although Price Club is the only significant retailer that gets its milk from the San Joaquin Valley, he said: “This proposal isn’t aimed at the Price Club. There are opportunities for others to do the same thing.”

Price Club would not comment directly on the proposal. Mitchell G. Lynn, the firm’s president, said: “It is certainly correct that an increase in costs would most likely affect retail prices.”

By underpricing the supermarket chains, Price Club has made a dent in milk sales at Los Angeles-area supermarkets. Industry sources have estimated that Price Club has taken perhaps as much as 5% of all supermarket milk sales in the last year.

The supermarkets have complained that they are hampered by the high prices they must pay dairy farmers for raw milk. The Dairy Institute’s proposal calls for a uniform statewide price for raw milk, eliminating a 3 1/2-cents-per-gallon cost difference between the San Joaquin Valley and Southern California.

The state is currently divided into three market areas: Northern California, Southern California and the San Joaquin Valley. The state Department of Food and Agriculture sets raw milk prices for each region based on production costs.

The department has scheduled a hearing on the proposal for Feb. 2 in Sacramento. A decision is expected sometime in April.

It is not clear whether the proposal would benefit consumers.

L. J. Butler, a professor of agricultural economics at UC Davis, said consumers in Los Angeles could see slightly lower prices at the supermarket. But that would be offset by reduced competition from retailers who get their milk from the San Joaquin Valley, of which Price Club is by far the largest.

Butler maintains that the current pricing formula doesn’t suppress competition. He said the cost of shipping milk to Los Angeles from the San Joaquin Valley more than eliminates the cost advantage on raw milk. He said San Joaquin Valley processors are able to ship milk profitably to Los Angeles because their operations are extremely efficient.

Representatives of the Dairy Institute avoided making predictions on how retail prices might change.

“It depends on competitive pressures in the marketplace,” said Ralphs executive Silver.

Fred A. Douma, a dairy farmer and a director of the Ontario-based Milk Producers Council, predicted that retail prices in Southern California supermarkets would not fall. His group opposes the change.