Got Enough Money to Buy Milk?

Like a one-woman consumer price survey, Maria Flores marches through San Francisco’s Mission district searching for deals.

The 87-year-old knows where to find the 50-cent sack of chiles, the five-for-a-dollar oranges, the two loaves of bread for the price of one that all crowd into her mesh bag.

What infuriates her is milk. At Cala Foods, a chain store near her, it is always expensive. On this trip, it’s $4.13 a gallon.

“Ay! They are thieves!” she declares.

Yet Cala Foods is no anomaly.

California’s milk prices have risen steadily over the past decade to become the nation’s highest. Last June, A.C. Nielsen Milk Market surveys listed Los Angeles, San Diego and San Francisco among the 10 most expensive U.S. cities for milk.

The reasons are excruciatingly complex--critics say intentionally arcane--and they are a lesson in special interest politics.

Milk issues are about to pour into the state Capitol with legislation that would radically alter the way milk is regulated and, perhaps, reduce its cost. Along with the proposed laws will flow age-old disputes among consumer advocates, California dairy farmers and state regulators--joined by feisty newcomer Mad About Milk, a pseudo-consumer group financed by out-of-state dairies.

Those hoping to cut milk’s cost are targeting 20-year-old state policies that guide retail prices and milk enrichment regulations that critics say suppress competition by effectively barring most out-of-state milk.

California fruit must meet size standards and raisins are subject to a web of pricing rules, but no agricultural product is as thoroughly controlled as milk.

The state sets the price that farms must charge for milk--currently $1.72 a gallon, up 49 cents from a year ago. California also prevents retailers from selling below their costs, including processing and store overhead, and allows only specially enriched milk to be sold here.

Grocery chains tend to blame dairy farmers for California’s high prices, farmers blame grocers and ultimately both chalk it up to the state’s high cost of living.

Saying that milk is more expensive here is “like saying housing is more expensive here than elsewhere,” said Jim Tillison, director of the Alliance of Western Milk Producers, which represents more than two-thirds of the state’s dairies.

Tillison acknowledged that his theory does not fully explain why California’s retail prices are so high while its milk production costs are among the nation’s lowest, thanks to milder weather and large, high-tech dairy farms.

California is king of the U.S. dairy world, with a $3.7-billion-a-year industry that outproduces Wisconsin by milking 2.3 billion gallons from 1.3 million cows annually.

Campaigns to get people to drink more--the “Got Milk?” ads, for example--started here, where consumption is down, a trend some attribute to high prices.

It takes guts to take on milk. Newly elected state Sen. Jackie Speier (D-Burlingame) is bracing to do just that, attacking price controls with a bill she plans to introduce next week that would end state regulation of retail prices.

“Just because we legislated it years ago doesn’t mean it should stay in place,” said Speier, who says milk policies “play a price stabilization game on the backs of poor people, infants and children.”

Californians Pay More

In 1998, Consumers Union, the publisher of Consumer Reports, found an average grocery store price of $3.58 a gallon in California, tops in the country. Prices in Los Angeles supermarkets averaged $3.72.

Dairy lobbyists and state regulators say that Californians pay only about a penny a cup more than others for milk. Speier says that those pennies add up, especially for large families in which “it ends up being $300 a year--that’s real money.”

Preemptive strikes against new milk legislation have already been launched in Sacramento. Weeks before the session began in January, lawmakers received a letter from colleagues, most from rural areas, saying that with milk consumption dropping, “it’s clearly not the time to be talking about lowering our milk quality standards.”

The state Department of Food and Agriculture followed with a letter noting that it does not set store prices. But it does set the farmers’ price, and prevents stores from discounting below their costs--which only about 12 other states do.

Which is how Mark Kassab landed on the wrong side of the law.

No Choice for Store Owners

Kassab bought Murphy’s Market in a low-income area of San Diego in 1981. He slashed milk prices to near his wholesale cost to attract customers and soon drew a state agricultural officer too.

As Kassab tells it, the officer accused him of selling below cost and ordered the price raised. When Kassab objected, the official threatened to fine him $1,000.

“Booze, beer, wine, cigarettes, produce, meat--everything we have a choice on, except milk,” groaned Kassab, who had not factored his overhead costs into his lowered milk price.

Murphy’s Market had been turned in by a large grocery outlet nearby, irritated by the store’s sale ads. About once a year, Kassab said, he receives a reminder visit from state officials.

“I know when [my prices are] low there’s a chance they’re going to come in,” he said. “Sometimes we play a cat and mouse game.”

In states without such controls, one reason milk is cheaper is that it often is the target of price wars, according to Consumers Union.

A price war in Seattle in October 1997 put milk at 98 cents a gallon at Safeway, the group found. At a San Francisco Safeway, where there was limited competition, the same house brand sold for three times as much.

California milk regulators say they are more lenient about prices than they used to be. The reason is a lost lawsuit.

A decade ago, the state Department of Food and Agriculture took a chain of Northern California convenience markets to court for stubbornly keeping milk at $1.69 a gallon--too low, according to state officials. A jury found in favor of Supercheaper! stores.

But the experience left such a bad taste in company President Ned Roscoe’s mouth that he printed his saga on his grocery bags, urging his customers to protest the state’s milk laws.

Grocery stores consider milk an “inelastic” product, a staple shoppers will buy wherever they get their other groceries, regardless of its price, said Elisa Odabashian, a Consumers Union policy analyst.

Odabashian asserts that grocery stores use state laws as an excuse to keep prices high. Her analysis shows that when the state-set farm price rises, supermarket prices rise, but when the farm price drops, supermarket prices often do not.

Her surveys also consistently find that, defying economies of scale, larger grocery stores tend to charge more than mom-and-pop shops. Last spring, Consumers Union reported that milk in large grocery stories in Los Angeles and Orange counties was as much as 87% higher than at smaller stores in the same areas.

Roscoe explains that as a retailer, he has “the best of both worlds: I can be as self-righteous as anything about how evil the milk prices are. . . . On the other hand, we’re still able to make a healthy margin.”

Competition could be sparked without any change in law if consumers bought milk where it is cheapest or bought only two-gallon packs, which are discounted, suggested David Ikari, chief of dairy marketing for the Department of Food and Agriculture.

But Odabashian noted that large grocery stores are far more likely than small shops to accept food stamps and other government coupons. As for the two-gallon discounts, she said: “That’s great if you have a car--if you’re not an inner-city poor person who takes a bus or is walking--and if you have children so you’re going to drink two gallons before the expiration date.”

While Consumers Union works with Speier on her legislation, the organization also is trying to distance itself from Mad About Milk, which wants to halt not only price controls but also California’s requirement that protein- and calcium-rich condensed milk be added at the processing plant. California is the only state that mandates enrichment beyond federal standards--a process that costs money and therefore discourages most out-of-state competition.

Mad About Milk has gathered the backing of numerous consumer and senior groups in the year since it was formed, but it is financed by a coalition of out-of-state dairies, headed by Arizona-based Shamrock Foods Co. In government circles that approach to lobbying is known as “astroturf”--a fake grass-roots uprising.

Consumers Union is loath to be associated with such an undertaking by a special interest. “We don’t think their motivation is truly to save consumers money,” Odabashian said, charging that the out-of-state dairies are latching on to the consumer issue in hopes of siphoning profits for themselves.

Shamrock hired veteran community organizer Audrie Krause, whose position is that past attempts to alter milk policy failed because of the dairy lobby’s power in Sacramento. So Krause went to city councils, persuading 17--including the influential councils of Los Angeles and San Diego--to call for repeal of state milk laws.

“We’re trying a lot of different things to make the Legislature aware that their constituents care,” Krause said.

Trying to Enter State’s Market

Krause freely admits the effort is Shamrock Foods’ latest attempt to get into the California market after its non-enriched milk was ordered off San Diego shelves in 1994. The dairy would have to create separate processing lines to meet enrichment standards and that, Krause said, is expensive.

The company sued the state the following year in federal court, alleging that California’s milk standards are preempted by federal standards accepted in other states. Although enriched milk is available in many other states--usually at higher prices than non-enriched milk--California is the only state where it is the sole option.

Shamrock won its first lawsuit. Then, California dairies and the state Department of Agriculture got Congress to grant the state an exemption. Shamrock filed another suit declaring California’s laws unconstitutional, which it lost. Meanwhile, the state counter-sued, and the company was fined nearly $700,000 for selling Californians unenriched milk. An appeal is pending.

In Defense of the Status Quo

State officials said the enrichment requirement began in 1962 because producers were concerned that the consumer shift away from whole milk to lowfat would cut the farm price, which was based largely on fat content and therefore higher for whole milk. Factoring in the added protein and calcium would help maintain prices, they believed.

Today, improving children’s bone development and warding off osteoporosis have become the rule’s prime defense.

In a letter circulated to the media last summer by California dairy lobbyists, a medical professor wrote: “For many years, Californians have enjoyed milk of a quality superior to what most U.S. citizens get, [putting] both young people and oldsters in your state at a significant nutritional advantage.”

But Margo Wootan, a senior scientist at the Center for Science in the Public Interest, says that the nutritional claims for enriched milk are exaggerated. Americans do not need more protein, she said, and their high need for calcium would be better addressed if they consumed less calcium-depleting caffeine and sodium.

In recent weeks, Mad About Milk hired one of Sacramento’s premier lobbying firms to back the Speier bill and try to persuade legislators to eliminate the enrichment requirement as well.

On Jackie Speier’s desk perches a squishy plastic cow delivered to all state lawmakers’ offices during the holiday legislative break by someone dressed in a cow suit. “California Milk!” says a card attached to the toy’s neck, “It does a body better.”

Though it takes little digging to discover that the dairy lobby was behind the delivery, the plastic cow carries its own “astroturf” label: Californians for Nutritious Milk.

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Milk Prices

The publisher of Consumer Reports does an annual price survey of milk in major California metropolitan areas. The most recent, conducted last spring, found the highest prices at major grocery chains and the lowest at small shops, with a per-gallon difference of up to 87%.

Los Angeles area

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High Low San Fernando Valley $3.74 $2.59 Downtown-West L.A. $3.74 $2.49 South Bay $3.74 $2.69 Orange County $3.74 $1.75

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San Francisco area

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High Low San Francisco $3.85 $2.49 East Bay $3.38 $2.58

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Source: Consumers Union, 1998

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Average U.S. Retail Prices, 1997

The federal government tracks retail prices in most major American cities except in California, the only state that has rejected the federal marketing order. During 1997, Consumers Union found milk prices in major California cities averaged $3.51 a gallon, well above the next highest, Seattle at $3.15.

Price per gallon

Seattle: $3.15

Chicago: $2.85

Kansas City, MO: $2.73

Detroit: $2.60

Washington, D.C.: $2.58

Dallas: $2.57

Atlanta: $2.56

Boston: $2.51

Philadelphia: $2.49

Phoenix: $2.43

Source: GAO report: Marketing and Pricing of Fluid Milk, 1997