Dairy Industry Crushed Innovator Who Bested Price-Control System
By Dan Morgan, Sarah Cohen and Gilbert M. Gaul
Washington Post Staff Writers
Sunday, December 10, 2006; Page A01
In the summer of 2003, shoppers in Southern California began getting a break on the price of milk.
A maverick dairyman named Hein Hettinga started bottling his own milk and selling it for as much as 20 cents a gallon less than the competition, exercising his right to work outside the rigid system that has controlled U.S. milk production for almost 70 years. Soon the effects were rippling through the state, helping to hold down retail prices at supermarkets and warehouse stores.
That was when a coalition of giant milk companies and dairies, along with their congressional allies, decided to crush Hettinga's initiative. For three years, the milk lobby spent millions of dollars on lobbying and campaign contributions and made deals with lawmakers, including incoming Senate Majority Leader Harry M. Reid (D-Nev.).
Last March, Congress passed a law reshaping the Western milk market and essentially ending Hettinga's experiment -- all without a single congressional hearing.
"They wanted to make sure there would be no more Heins," said Mary Keough Ledman, a dairy economist who observed the battle.
Hettinga, who ran a big business and was no political innocent, fought back with his own lobbyists and alliances with lawmakers. But he found he was no match for the dairy lobby.
"I had an awakening," the 64-year-old Dutch-born dairyman said. "It's not totally free enterprise in the United States."
Most U.S. dairy farmers work within a government system set up in the 1930s to give thousands of small dairies a guaranteed market for their milk and to even out prices for consumers. Farmers who participate in regional pools operated by the federal government or the states deliver raw milk to cooperatives or food processors. They get a guaranteed price, whether the milk ends up in a gallon jug, cheese, butter or ice cream. In Arizona and other federally regulated regions, the Agriculture Department uses a formula to set the price processors pay for raw milk, issuing "milk marketing orders."
Developed for a bygone era of small dairies and decentralized milk plants, the system lives on when 3,000-cow dairies are not uncommon and huge cooperatives and food companies dominate the business.
Business groups, fiscal conservatives and some dairy organizations have called for Congress to overhaul the complex system of protections and subsidies, which they say is costly to taxpayers and consumers. A recent USDA study acknowledged that "dairy programs raise the retail price" of milk. The watchdog group Citizens Against Government Waste estimates that the programs cost U.S. consumers at least $1.5 billion a year.
The 1937 law allowed "producer-handlers" -- dairy farmers who bottle milk from only their own cows -- to operate outside the pools. But it was risky for a farm to do this because it might end up with more milk than it could sell. Most of these outsiders were small.
Hettinga started out as a hired hand in the Dutch American dairies of Southern California, where his family emigrated after World War II. He soon figured out he could buy cows with injured hooves, then fix and sell them at a profit that exceeded his weekly paycheck.
By the early 1990s, Hettinga was working with partners and relatives and had half a dozen dairies in Arizona and California. Then he decided to build his own bottling plant in Yuma, Ariz.
His first customers were in Mexico. Later he made a deal with a chain of Arizona stores catering to the fast-growing Hispanic population. In 2002, he and his son began building a second Yuma plant to supply Costco stores in Southern California.
For Costco shoppers, it was a good deal, according to an e-mail sent last year to Reid's office by Joel Benoliel, Costco Wholesale Corp.'s senior vice president. The arrangement lowered the average price of milk "by 20 cents a gallon overnight and it stayed that way for three years," Benoliel wrote in the e-mail, made available to The Washington Post. "Milk suppliers in southern California were gouging the public on price (20 cents a gallon higher than N. California) for years and were unresponsive to our call for lower prices. It was a brazen case of price gouging and profiteering by the strongest, largest market suppliers simply because they could."
In Arizona, Hettinga was competing for retail sales against Arizona's biggest milk company, Shamrock Foods Co. of Phoenix. He "wasn't by any stretch a more cost-effective operator than we are. He just didn't have the same rules apply," said Shamrock's general manager, Michael A. Krueger.
United Dairymen of Arizona, a cooperative that handles 85 percent of the state's milk, complained that by keeping his milk outside the Arizona pool, Hettinga was affecting the USDA price-setting formula, lowering returns for other dairies.
In California, the Hettingas were taking on the two biggest players in the U.S. milk industry: Dean Foods Co., the largest processor of dairy products, with $10 billion in annual sales and five California plants, and Dairy Farmers of America, a co-op that controls nearly a third of the nation's liquid milk.
In Southern California, the co-op sells to Dean Foods, which in turn sells to retailers. As Hettinga's milk began reaching Costco stores, there was a snowball effect as other milk suppliers were forced to lower their prices, Costco's Benoliel said.
Dean Foods recently said that Hettinga was unfairly exploiting a "regulatory loophole" and that his actions led to lower milk prices for California dairies.
Hettinga's operation was "damaging to the marketplace," said Elvin Hollon, director of economic analysis for Dairy Farmers of America. "Nobody ever envisioned there would be such large handlers" outside the pool.
"So," Hollon said, "the regulations had to change."...
washingtonpost.com
We're from the government and we are here to help you
gregmankiw.blogspot.com |
