Summary: An independent study by the University of Connecticut has
determined that price gouging and "tacitly collusive price conduct" by retail
stores and processors was the major cause of the price increase in fluid
milk after the Interstate Dairy Compact was implemented.
History: This confirms what the Vermont Congressional delegation said at
the time – retail stores had no justification for increasing prices in July
1997, when the Compact was implemented because the prices that farmers
in the New England region received for their milk had dropped by 35 cents
per gallon months before the Compact was implemented.
As the Wall Street Journal pointed out then, in "Are Grocers Getting Fat
Overcharging for Milk?," beginning in November, 1996, the price that
farmers got for their milk dropped by almost 25 percent -- or 35 cents or so
per gallon. Retail prices stayed high which locked in a huge profit margin
June 30, 1997, the day before the Compact was implemented, the Boston
Globe reported that "The region’s major supermarkets are raising their milk
prices 20 cents a gallon [today], ignoring arguments that their profit margins
are big enough to absorb a new price subsidy for New England dairy
farmers that takes effect this week."
University of Connecticut Report: The report concludes that supermarket
retailers and milk processors have bilked consumers out of almost $50
million in the New England region – and blamed it in part on the dairy
Compact. The report notes that: "At Compact implementation, market
channel firms moved jointly behind an 18-20 cent increase in retail prices
to lock in the extremely wide marketing margins that existed in June 1997."
The study notes that "the implementation of the Compact, a distinct
non-market event with considerable signaling of price intentions, seems to
have facilitated tacitly collusive pricing by processors and retailers."
The report shows that the Northeast Dairy Compact was responsible for
only 4.5 cents of the 29 cent increase in retail prices in the months after the
Compact was implemented. Increased profits by milk processors and
supermarkets accounted for 11 cents of the retail price increase, and other
factors such as strong raw milk markets and increased non-milk input costs
accounted for the rest.
A summary of the Report notes that "leading firms in the
supermarket-marketing channel have used . . their dominant market positions
to elevate retail milk prices well beyond level justified by the Dairy
Compact Commission action and other cost increases. The public interest is
being subverted by private economic power."
The report notes that Suiza Foods has acquired major processors in the
region such as Garelick, West Lynn Creamery and Cumberland Farms and
so the situation in only getting worse for consumers. Also, "Suiza has
closed, or caused the closure and dismantling of several milk processing
plants in New England." Suiza has closed very substantial milk plants: Stop
& Shop’s Readville MA plant, the New England Dairies in Newington, CT,
and the Cumberland Farms-Massachusetts plant. Thus Suiza is following the
approach that the best way to eliminate competition is to buy your
competitors and then dismantle them.
The Report points out that in the Boston and Providence areas, Suiza
processes between 80 and 90 percent of the milk sold in supermarkets.
The report indicates that: "The retail price data strongly suggest but
definitely confirm that the region’s dominant processor, Suiza Foods, tacitly
cooperated with leading retailers, Hannaford and Stop & Shop, by pushing
up other retailers’ wholesale prices."
The Report highlights that in terms of the time after implementation of
Compact that: "Thus 72 percent of the price elevation in the supermarket
distribution channel is due to exercise of market power by processors and
Benefits to Farmers: The Report notes that the "Compact has increased
dairy farm income 128 million dollars in the July 1997 to July 2000
The report notes that the Compact, since its existence, has maintained
feature which is simply to assure that the price farmers receive for milk
does not fall below $1.46 per gallon.
Miscellaneous Points: The study used supermarket scanner data to obtain
supermarket prices for milk. For most purposes, the study looked at the time
period beginning 18 months before the compact implementation in July,
1997, and through July 2000.
Stop & Shop, Hannafords and Star Markets increased their marketing
margins the most, 15 cents/gallon, or more, after implementation of the
Compact. Shaw and DeMoulas increased margins 9 cents and 12