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The Wall Street Journal Interactive Edition -- November 25, 1997

Byzantine Method of Pricing Milk Won't Be Simplified Anytime Soon     
    

By SCOTT KILMAN Staff Reporter of THE WALL STREET JOURNAL     

Milk drinkers got some good news earlier this month, when a federal judge threw out one of the strangest federal regulations on the books. Known as the Eau Claire rule, it allowed dairy farmers to collect a bonus for their milk based on how far their cows were from the Wisconsin city.

But consumers haven't won yet. Dairy farmers in about half the country are trying to outmaneuver the judge, and the U.S. Agriculture Department has requested a stay of the order while it appeals. "There will be chaos here if the judge's order stands," says Tom Thompson, a dairy farmer who is president of Georgia Milk Producers Inc. In most of the country, prices for milk have been more heavily regulated than those for any other U.S. farm product. (Some states, such as California, opted out of the federal price scheme years ago.) ---------------------------------------------------------- The Eau Claire Rule The lowest price the Agriculture Department will allow processors in these cities to pay farmers for beverage-grade milk in December: City Min. Price City Min. Price Per Gallon Per Gallon Eau Claire $1.19 New York $1.37 Minneapolis 1.21 Charlotte 1.37 Chicago 1.22 Atlanta 1.37 Kansas City 1.27 Boston 1.38 Denver 1.34 Tallahassee 1.41 Dallas 1.37 Miami 1.46 Source: U.S. Department of Agriculture ---------------------------------------------------------- But a side effect has been the creation of an enormous bureaucracy. Administering the Eau Claire rule and other milk-price regulations takes a staff of about 500 at the Agriculture Department, almost as many people as the Office of Management and Budget uses to oversee all of federal spending. The rules cost consumers $1.7 billion some years, Agriculture Department studies show.

Now, in the wake of U.S. District Judge David S. Doty's ruling, some state lobbyists and lawmakers are scrambling to save local dairy farmers by forming regional pacts that would essentially keep out cheaper milk from elsewhere and drive the retail price even higher than the federal rules did.

"This is a nightmare," says John M. Schnittker, an economist at the Washington consumer advocacy group, Public Voice for Food & Health Policy. "Instead of our best chance at milk reform ever, we're getting cartels that will make things even worse."

The establishment of federally regulated minimum prices dates back to the 1930s, when dairy farmers had little market power. Unlike corn farmers, who can store their products until prices rise, dairy farmers must sell their daily production whatever the price. So the government created a formula for determining a minimum price that processors had to pay dairy farmers.

The Eau Claire bonus materialized in the 1960s when refrigerated trucks began making it possible to haul milk greater distances. Farmer-owned cooperatives in the upper Midwest thought the increase would make it more economical for them to ship their milk to regions suffering shortages. It became known as the Eau Claire rule because that city was in the heart of the Milk Belt. Instead, the rule made dairy farming economical in places far from the Milk Belt. As a result, Wisconsin, whose cool climate makes cows more efficient at producing milk than they are in many other areas, is no longer the biggest milking state. A group of upper Midwest dairy farmers filed the suit that led to Judge Doty's decision knocking out the Eau Claire rule.

In fact, local dairies aren't necessary anymore. Megafarms are springing up in such places as New Mexico and Idaho that produce milk far more cheaply than the postcard-pretty Vermont dairy farm. In addition, processors are experimenting with filters to remove the water from milk, which makes shipping it cross-country cheaper.

But even before Judge Doty made his ruling, one region of the country -- New England -- had moved to protect its dairy farmers from competitors elsewhere. Sen. Patrick Leahy (D., Vt.) helped tag onto the 1996 farm bill approval for a six-state New England milk-price compact. Because the compact essentially flouts the constitutional protection of interstate commerce, it required congressional approval. Called the Northeast Interstate Dairy Compact, it insures that cheap Midwest milk doesn't undercut local producers' prices by pricing all milk the same.

Beginning in July, the commission set the minimum price to farmers for beverage-grade milk at $1.46 a gallon, a level that has been 5% to 22% higher than the federally mandated minimum price, which is recalculated monthly.

For the average Vermont dairy farmer, the compact is putting about $1,000 more a month into the bank. New England shoppers, meanwhile, are paying collectively about $5 million more for milk monthly, Public Voice figures. Several supermarket chains raised their retail milk prices 20 cents a gallon over the summer.

Now, state lawmakers and milk lobbyists elsewhere are rushing to follow New England's example. Arkansas, Louisiana and North Carolina have passed enabling legislation to form a Southeast compact, and similar bills are percolating in most of the rest of the Southern capitals. Farmers in New York, New Jersey and Pennsylvania are lobbying their state houses.

But it seems that no amount of price regulation can save inefficient operations forever. The number of U.S. dairy-farm operators has dropped 44% over the past decade to 126,800. New technologies -- such as genetically engineered hormones that stimulate milk production -- are making cows far more productive. But U.S. milk consumption is stagnant -- one reason the industry launched its expensive milk-mustache ad campaign several years back. In any case, the next regional dairy compact presented for congressional approval will undergo more scrutiny. Some lawmakers are angry about the first one. "It's an abomination," says Rep. Bob Goodlatte, a Virginia Republican. "A lot of members didn't know what was going on."