Days Of Bargain Milk May Be Numbered In Phila. Area

Posted: October 29, 1989

Tom Finucane's commute takes him through the heart of Pennsylvania's dairy country. The roadsides along Route 30 on the way to his law office in Chambersburg are dotted with grazing dairy cattle.

But you'd hardly know this is the dairy belt when it comes to the supermarket. In Chambersburg, a gallon of whole milk costs $2.37, at the very least.

Far from the herds, in supermarkets in the Philadelphia area, the same milk can be purchased for as little as $2.

But probably not for long.

For years, residents of Philadelphia, Bucks, Chester, Delaware and Montgomery Counties have been blessed with the lowest milk prices in Pennsylvania. Now, the area's big food stores, led by Acme Markets, have banded together to bring the area's milk prices up to parity with those of the rest of the state. If they succeed, consumers here could expect to see increases as high as 20 to 30 cents per gallon.

That would cost area consumers at least $12 million a year, says Finucane, who is fighting the proposed increase in behalf of consumers. "The farmer doesn't get a penny of it," he said. "It will be divided between the stores and (milk) dealers."

It's not a question of the stores' trying to fix prices, which is illegal under federal antitrust laws. The retailers are trying to set uniformly higher prices for milk in an entirely lawful manner, working through an obscure state agency - the Pennsylvania Milk Marketing Board.

Pennsylvania is unique among the populous states in the way it regulates milk prices. The milk board, made up of three members appointed by the governor, is empowered to set minimum prices. Under state law, a store owner who sells milk for less than the legal minimum can be charged with a crime. There is nothing to prevent a store from setting a higher price.

"The stores are making a lot of money on milk. This is not a question of an industry in need of government help. It is an industry that is using this so-called regulatory board to price-fix and gouge the consumer more," said Irv Ackelsberg, a lawyer with Community Legal Services in Philadelphia.

Thanks to a series of successful lawsuits - several by the Cumberland Farms Inc. convenience-store chain - challenging the board's authority in the 1970s and early 1980s, Philadelphia-area residents have not had much cause to fret about minimum milk prices in recent years.

Not only does the Philadelphia area enjoy the lowest prices for whole milk, it is the only one of the state's six milk areas with no minimums for low-fat and skim milk.

In mid-September, the milk board heard three days of testimony on area milk prices in response to a petition from the Pennsylvania Food Merchants Association. The trade group wants an increase in the minimums for whole milk and minimums set for low-fat and skim milks. A decision is expected early next year.

Consumer groups believe the deck may be stacked against them in this latest round for a number of reasons:

* Cumberland Farms, which initially fought the increase, abruptly dropped its opposition during last month's hearings. Consumer advocates contend that Cumberland Farms withdrew for fear of jeopardizing its contract to supply milk to Acme's New Jersey stores. Acme said it did not pressure Cumberland Farms to withdraw; Cumberland Farms would not comment.

* Consumer advocates had trouble stating their case during an Oct. 3 hearing set up specifically for public input into the proposed price increases

because they were repeatedly interrupted by milk industry lawyers.

* Consumers, for the first time in years, have no active representative on the board. Although state law requires that one member be named to represent consumers, the governor's designee, Robert J. Derry, said he was not told that was his role.

In May, the board's consumer representative, a college administrator, was replaced by York dairy farmer Donald E. Lanius.

Vincent P. Carocci, a spokesman for Gov. Casey, said the governor's intention was that Derry, the board chairman, would become the consumer representative. A former dairy executive, Derry retired in 1964 from Borden Inc.

"He was basically in a semiretired position so he could meet the technical specifications of the law and serve as the general consumer representative," Carocci said.

But Derry said he was not aware that this was his role. "I guess I would probably be the consumer member because the other two are farmers . . . but I don't know yet," Derry said. "The governor has that responsibility."

Also on the board is Chester County dairy farmer Leon Wilkinson.

Under the milk-marketing law, the consumer representative is to oversee a bureau of consumer affairs. That bureau is run by Tom Kugle, the board's public information officer, who says he has no idea who the board's consumer representative is.

"Do you know who it might be? I'm curious," Kugle said.

*

Milk pricing is an arcane and quirky business - governed by an interlocking set of federal and state regulations. It tends to get easily mired in political struggles between farmers and city dwellers.

This is especially true in Pennsylvania, the fifth-largest dairy state.

The Pennsylvania Milk Marketing Board was established in the 1930s, in the depths of the Depression.

The rationale, then and now, is simple: Milk is too important to be left subject to the vagaries of market forces such as supply and demand.

In Pennsylvania and most of the country, a system of price supports has been established for raw milk.

PENNSYLVANIA'S SYSTEM

Where Pennsylvania differs is that its system goes beyond the farmer: It also sets minimum retail prices, which consumers pay, and minimum wholesale prices, which stores pay to milk processors. Most states have abolished resale price controls or, as in New Jersey, have replaced them with laws that simply prohibit milk from being sold below cost.

Numerous attempts to abolish the milk board, or at least curtail its power to set minimum prices, have been shot down over the years by opposition from the dairy industry.

"We often used to say that the hottest subjects in town were the Liquor Control Board and the Milk Marketing Board," says Franklin Kury, a former state senator who is now a Harrisburg lawyer. "People from the cities oppose minimum prices and people from rural counties support" them.

Some peculiarities result.

In State Line, Pa., a Franklin County community straddling the Maryland border, there are two groceries. Earl Leckron, the owner of Earl's Market, says he is losing customers because he has to sell whole milk at the legal minimum of $2.37. He says his competitor, 500 yards down the road in Maryland, can sell it for less than $2.

"It doesn't seem fair to me . . . But some bigger people than me have challenged it and it still stays the same," said Leckron.

PAST ANGER

Area residents used to bristle at similar disparities. Milk was being sold at far lower prices in South Jersey stores. While no one was about to cross the Delaware to save a few cents on milk, it was particularly insulting that much of the milk drunk in New Jersey came from Pennsylvania cows.

But beginning about 1972, consumers found a tireless ally in Cumberland Farms. The company believed it could build volume in its convenience stores if it were allowed to sell milk, supplied by its own dairies, at lower prices.

Cumberland Farms made a regular practice of challenging the Pennsylvania Milk Marketing Board.

In 1979, state Supreme Court Justice Robert N.C. Nix Jr. struck down an 8- cent milk-price increase after the board's consumer member contended that the board chairman at the time had met secretly with a lawyer for the milk dealers. A smaller increase was imposed.

Commonwealth Court voided subsequent increases for the Philadelphia area, and in 1983, after accusing the milk board of "capricious disregard of the only material cost evidence," suspended all minimum prices for low-fat and skim milk in the Philadelphia area.

This is not to say that milk prices have not increased; they fluctuate monthly as the retail-price minimum rises or falls, based on the raw-milk price set by the federal government. What has been essentially frozen since 1979 is the markup between the raw-milk price and the retail price.

Elsewhere in Pennsylvania, minimum retail prices for October range from $2.22 to $2.37 for a gallon of whole milk. Most supermarkets charge the minimum. But not in Philadelphia, where this month's minimum is $2. The prevailing supermarket price is $2.13, the milk board says.

Those in the milk industry say that the low minimums in the Philadelphia area allow some stores to sell milk below their cost to draw in customers.

The region's dairy processors - the biggest of which are Johanna Farms and Lehigh Valley Dairy, both owned by John Labatt Ltd., a Canadian beer company - support the retailers' request. They also would stand to get higher wholesale prices.

"The milk business in the Northeastern United States is a pressured one

from a profitability standpoint," said Johanna Farms official Gene Madill.

Walt Rubel, general counsel and spokesman for Acme Markets, says, "There has not been an increase (in the Philadelphia area) in years and we are significantly behind the rest of the state. Every other area has received an increase in the last two to three years."

Rubel said an increase in the minimum prices would not necessarily prompt a price increase at Acme.

Such arguments irk consumer advocates such as Averill Hecht, a volunteer worker for the Consumer Education and Protection Association (CEPA), the group headed by Max Weiner, who died last week.

"I have no problem with Acme Markets. . . . They have every right to make a profit. . . . I just don't see what justification, if any, they have to ask (the milk board) to raise the minimum and give them more profits," he said.

Unfortunately for consumer groups, retailers do have justification. In fact, it is the law.

The Pennsylvania Milk Marketing Act was amended in 1984 to require that the minimum prices yield milk processors and retailers a "reasonable return," defined as a pretax net profit of 2.5 percent to 3.5 percent of sales.

All we are doing, says David McCorkle, president of the Pennsylvania Food Merchants Association, is trying to "make sure the law of the state is being adhered to."

The various ways of calculating profits and costs was the topic at the three-day hearings held by the milk board, starting Sept. 11, in the Agriculture Building in Harrisburg.

The most keenly watched figure during those hearings was Sheldon Weiss, a New Jersey lawyer who represents Cumberland Farms and who consumer lawyers say is the person most responsible for keeping milk prices low in Philadelphia.

Weiss dominated the hearings, quibbling with virtually every figure presented by the Pennsylvania Food Merchants Association.

* He objected that the retailers' group would not disclose the wholesale prices its stores pay for milk. (Even though wholesale minimums are set by the milk board, virtually all large supermarkets buy for less because of a provision in the law that allows discounts.)

* He objected to a study by retailers showing that it cost them 7 cents per quart to handle milk in a store and 28 cents a gallon. Weiss contended that efficiencies of handling larger containers make the actual costs of handling a gallon closer to 16 cents.

* He protested that the retailers' association did not offer evidence as to whether it was achieving the 2.5 percent to 3.5 percent profit mandated by law - a profit margin that, he said, is higher than the supermarket's margin on other products.

Then, during a morning recess on Sept. 12, while Weiss was preparing to resume his cross-examination, he received a telephone call. He did not return to the hearings.

Weiss said he and Cumberland Farms remained committed in principle to the fight against minimum milk prices, but he was unable to comment on his departure because of client confidentiality.

Acme's Rubel said he did not know why Weiss left. "We are a big customer of (Cumberland Farms'), but if they made that decision, they made it on their own."

Cumberland Farms has held an exclusive contract since 1986 to supply milk to Acme's New Jersey stores. Cumberland Farms officials did not return telephone calls requesting an explanation.

The subject remained touchy during the Oct. 3 hearing in Norristown.

When Ackelsberg, the Community Legal Services lawyer, tried to link Cumberland Farms' withdrawal to its Acme contract, milk-industry lawyers immediately objected. Wilkinson, the board member presiding over the meeting, threatened to have Ackelsberg thrown out and ordered his remarks about Cumberland Farms stricken from the record.

Others had difficulty speaking. The testimony of several consumers was interrupted with objections or questions from attorneys representing milk dealers and retailers. And the attorneys tried, without success, to bar Finucane from speaking on the ground that he was a lawyer, not a consumer.

Finucane told the board he was representing his mother, a Newtown Square resident, and a niece and nephew who are students at the University of Pennsylvania.

Since Weiss' departure, Finucane has taken the lead in fighting the proposed increase. "Nature abhors a vacuum," he explained.

Decisions of the Milk Marketing Board can be appealed to Commonwealth Court. Finucane has done so for consumers in other areas of the state. He intends to do the same for the Philadelphia area if large price increases are ordered. But this, he says, is expensive and time-consuming work that should be taken over by the state's consumer advocate, who is empowered only to represent consumers on utility-rate matters.

In some ways, the Pennsylvania milk industry resembles the public utilities in that, as a regulated industry, its profits are guaranteed by law, Finucane said. But unlike utilities, the companies that process milk or sell it to the public are not required to open their financial books for public inspection.

Derry, a six-year veteran of the milk board, is not totally unsympathetic to these complaints. He says the board may expand its own scrutiny into the profits and costs of handling milk.

"I've always been a little skeptical of these (cost) studies . . . I think the figures are inflated," Derry said.

Derry added that he expected the board to approve a price increase for the Philadelphia area, although not necessarily as large as the food stores would like.

"I imagine the minimums will be comparable with the rest of the state," he said.

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