Why our milk costs so much. It may do a body good, but this dairy staple is a pricey commodity in Chicago thanks to `archaic and inefficient' rules.
By Andrew MartinWashington Bureau
Published June 25, 2006
WASHINGTON -- Here's something to sour your next trip to the grocery store. Chicago-area consumers are charged more for milk than consumers in all but ahandful of urban markets, according to statistics maintained by the U.S.Department of Agriculture. Milk might be an all-American staple, a beverage so important the federal government recommends drinking three cups a day. But in Chicago, it also is a cash cow. Chicago was the most expensive market in the nation for whole milk in 2005, averaging $3.96 a gallon. In the first half of 2006, it has slipped to second behind New Orleans, which has Hurricane Katrina to blame. For 2 percent milk, Chicago does a little better. It was the fifth-most expensive market in the nation in 2005--at $3.58 a gallon--in the USDA'ssurvey of 30 urban markets. So far in 2006, Chicago has slipped to seventh place for 2 percent milk. In comparison, a gallon of milk in Carbondale, Ill., just five hours away,was among the cheapest in the nation last year, averaging $2.68 for wholemilk and $2.55 for 2 percent. It might seem that Chicago would have a competitive advantage over other cities when it comes to milk because the second-biggest repository of milk in the nation--Wisconsin--is just up the road. But not much makes sense when it comes to milk pricing in the United States. The marketplace has been warped by consolidation and outdated federal regulations that even the Justice Department describes as "archaic andinefficient." When it comes to milk, there isn't much that resembles a competitive marketplace. The federal government determines the minimum price that dairy farmers should be paid for raw milk based on a formula that is staggeringly complex and roughly follows the price of block cheddar cheese at the Chicago Mercantile Exchange. The cheese exchange, in turn, is controlled by a handful of major dairy companies and milk cooperatives, the largest of which publicly boasted to agroup of dairy producers in 2004 about artificially boosting the price. Meanwhile, because of consolidation, there are fewer milk bottlers and fewer grocery store chains to sell the milk. Who profits? So who is cashing in on Chicago milk? Based on industry and USDA statistics, it isn't the dairy farmers. Dairies do not sell raw milk directly on the market; they are represented by cooperatives that collect the milk and find a place to sell it, balancing the ebbs and flows between production and demand. Once they sell it, they send payment to the farmers. Last year, dairy farmers in Wisconsin received about $1.34 a gallon for raw milk, which translates to about 34 percent of what Chicago consumers spent on whole milk. Nationwide, dairy farmers received an average of about 39 percent of what consumers paid for whole milk. The cooperatives that serve Wisconsin farmers receive about 22 cents for each gallon of milk sold in Chicago. That is among the most expensive in the country, according to USDA statistics. In Denver, for example, cooperatives make about 7 cents per gallon. Once the milk is sold to a processing plant, it typically costs 70 cents to 80 cents per gallon for processing, packaging, distribution to stores and profit, said Corey Durling, a partner with the consulting firm DairyTechnomics in New Jersey. Those "non-milk costs" incurred by milk processors are not available for public review, and Durling said it was possible,though unlikely, that bottlers in the Chicago area charge higher prices. Adding all those costs, using the higher number for "non-milk costs," the result is that Chicago supermarkets and convenience stores paid about $2.36for a gallon of whole milk in 2005. That means grocery stores--at least the ones charging $3.96 --made an average gross profit of $1.60 off every gallon of whole milk sold in 2005, or 40 percent of total revenue." Baby, that is out of sight," Durling said. "Way screwed up."Chicago-area retailers appear to be making far more than the national average on milk. According to Durling, retailers usually make about 30 percent of total revenue on milk. Ed Jesse, a dairy economist at the University of Wisconsin-Madison, speculated that because Chicago has such dominant grocery stores in Dominick's Finer Foods and Jewel-Osco, the chains are making most of the profit. In fact, Jewel-Osco and Dominick's were accused in a class-action lawsuit in 2000 of fixing the price of milk; the case was later dismissed for lack of evidence. In that lawsuit, the plaintiffs' attorneys argued that Jewel and Dominick's were making up to 63 percent of what the consumer paid for milk. In addition, Jewel and Dominick's have the largest market share -- 61 percent-- when compared with chains' market share in 10 urban markets, according tothe Food Marketing Policy Center at the University of Connecticut." You have considerable concentration at the retail level in Chicago," Jesse said. "While there isn't any overt collusion, I would argue that there's passive collusion in that they are not going to under cut each other."But Mary Ledman, a dairy consultant based in northwest suburban Libertyville, said she was surprised by the high prices. She questioned whether the USDA monthly survey was capturing the overall marketplace because many stores offer milk at lower prices, and even large supermarket chains had recently offered discounts that reflect falling prices for rawmilk." I buy a lot of milk, 4 to 6 gallons a week, and I'm buying it at Walgreens for $2.29 per gallon," she said, adding that Dominick's recently offered two gallons of its house brand of milk for $5.Wynona Redmond, a spokeswoman for Dominick's, echoed Ledman's remarks, saying that the USDA survey isn't an accurate reflection of what customers are paying for milk at Dominick's stores."Milk is a highly competitive item, and one we actively and frequently promote at deep discounts," she said in an e-mail last week. "For instance,we often feature milk in our ads--last week we had gallons of whole milk on sale with a `super coupon' for 99 cents the entire week."Jewel officials did not return calls seeking comment. Milk prices since the first of the year have declined across the nation because of a glut of milk and increased imports. Farmers in Wisconsin made 26 cents less per gallon in May than they did in December. But since the first of the year, the price for a gallon of whole milk in Chicago has dropped by only 6 cents, according to the survey. Survey revisions considered The Agriculture Department is considering revisions to the survey process because of the growing influence of Wal-Mart and other non-traditional grocery chains in the retail milk marketplace, said John Rourke, chief of the market information branch for the USDA's dairy programs. As it stands, the department surveys three retail outlets in 30 U.S. cities each month. The three outlets are always the same: the two largest grocerystore chains and the largest convenience store chain. The USDA declined to provide the names of the stores it surveys in the Chicago area. Surveyors are instructed to sample prices only of the milk brand with the most shelf space, meaning that discounted milk isn't counted in the survey unless it is the store's biggest brand. But even if the system isn't perfect, the fact remains that Chicago's largest grocery stores and its largest convenience store are, on average, charging more than their counterparts in other cities. As for the overall high prices in Chicago, dairy experts say they are caused, in part, by a shift in how milk is sold to consumers. Where it was once a "loss leader" to draw customers into the store, the milk case is now seen as a profit center.- - -Got high milk prices? MILK PRICES Chicago-area consumers pay some of the highest milk prices in the country despite the city's proximity to Wisconsin. One expert says this is due to the fact that Chicago is dominated by two food-store chains. Per gallon, for selected cities, in 2005 CITY WHOLE MILK REDUCED FAT (2 PERCENT) MILK Atlanta $3.35 $3.28Chicago $3.96 $3.58Dallas $3.18 $3.22Denver $3.78 $3.69Philadelphia $3.28 $3.12Phoenix $3.68 $3.52Seattle $3.65 $3.31St. Louis $3.05 $2.92Avg. for 30 selected cities $3.32 $3.20Source: U.S. Department of AgricultureChicago Tribunefirstname.lastname@example.org