Milk Pricing

You asked that we analyze concerns raised by Agri-Mark economist Bob Wellington about UConn professor Dr. Ronald Cotterill's milk price collar proposal. The Office of Legislative Research is not authorized to give legal opinions and this should not be considered one.

Dr. Cotterill’s milk price collar would link the amount processors pay dairy framers for raw milk to the price retailers charge consumers. Wellington raises two main issues with the price collar in a brief paper that he sent to interested parties on January 9, 2004, entitled, “Issues and Concerns Regarding Milk Price Collars as Proposed by Ron Cotterill. ” He argued that a price collar could (1) make processors uncompetitive and (2) interfere with interstate commerce. It appears that Cotterill’s proposal addresses the competition concern and that interstate commerce law would not necessarily be an issue.

Under Cotterill’s proposed milk price collar, for a gallon of milk: (1) the processor could not charge a retailer a wholesale price that is greater than 140% of the price he paid the dairy farmer (i. e. , producer) for raw milk and (2) a retailer could not charge consumers more than 130% of the wholesale price it paid the processor (or 200% more than the processor paid the producer). Under the proposal, the price the processor pays the producer is the price set for milk by the northeast milk marketing order, plus any documented premium that the processor paid to the producer for the milk.

The theory is that farmers could earn enough to stay afloat when the northeast milk marketing order price is low by linking the price retailers charge for processed milk more directly to what farmers earn. That is, if retailers want to charge consumers more, they have to the pay processor more (who would have to had paid the farmer more). Recent studies by Cotterill and others have shown that while the price paid to farmers has remained historically low, the price charged to consumers has been unusually high. For more information on milk pricing and milk marketing order, see OLR Report 2003-R-0765 (attached).

Agri-Mark, a dairy cooperative that is the largest supplier of farm milk in New England, with member farms in the six New England states and New York, has the following concerns about Cotterill's proposal:

1. while the price collar attempts to keep the price paid to farmers at a level at which they can sustain operations, doing so could make in-state processors uncompetitive (eventually causing them to go out of business) as they would have to charge retailers more than out-of-state processors to cover the higher costs paid to the Connecticut dairy farmers and

2. if the program attempts to regulate what out-of-state processors pay farmers, making them uncompetitive, the collar could be found to violate the commerce clause.

Cotterill’s proposed price collar contains a provision that allows the Agriculture Commissioner to periodically review the price collar to assure that it is not causing significant loss of (1) jobs or (2) the respective shares of the milk market for producers, processors, or retailers. It also allows the commissioner to make recommendations about the price collar to the Environment Committee (as the legislative committee having cognizance over milk pricing).

The commerce clause gives Congress the power "to regulate Commerce with foreign Nations, and among the Several States" (U. S. Const. Art. I § 8).

Commerce clause cases use two tests to determine the validity of state and local laws. A law that facially discriminates against interstate commerce violates the constitution unless there is no other means to advance a legitimate local interest. If a law is facially nondiscriminatory, supports a legitimate state interest, and only incidentally burdens interstate commerce it is constitutional unless the burden is excessive in relation to local benefits.

Whether the price collar proposal would withstand a constitutional challenge if it became law is a question the court would have to decide. Applying the above-described tests, a court would likely conclude that the proposal does not discriminate against processors on its face. That is, the proposal does not apply a different price structure to processors based on place of business (i. e. , whether they are located in- or out-of-state).

Finding no facial discrimination, a court would next decide whether the new law serves a legitimate state interest in the least intrusive way. Existing programs to preserve farmland (CGS § 22-26aa-kk) and to protect the state’s milk consumers and producers (through the Milk Regulation Board (CGS § 22-133)) show that the collar would serve a legitimate state interest. Since the collar does not force processors to pay farmers more, but attempts to link the retail sale price with the price producers are paid, it appears to be the least intrusive way to meet the state’s interest.

Taking into consideration unforeseen consequences of Cotterill's proposal, the price collar law could be enacted and would be closely monitored by the commissioner (and by the Milk Regulation Board as well). If it hurts Connecticut processors and farmers or is challenged by other states and found in violation of federal law, it could be repealed or amended. Enacting it might, however, help promote regional cooperation (Massachusetts and Maine farmers have also struggled). As the number of dairy farms in Connecticut continues to rapidly decrease (as they go out of business), the state may want consider how important dairy farms are to it.


February 20, 2004		2004-R-0204
MILK PRICING

By: Joseph Holstead, Research Analyst