Modernizing Milk Marketing Orders for Colorado
The milk industry continues to change rapidly, often in step with the consolidation of farms, processors, distribution systems and mass retailers.
The pastoral dairy farm that once milked a few dozen cows and produced fresh milk, cream, butter and cheese for nearby communities slowly disappeared after WWII, until they were decimated when on-farm production of milk products was essentially outlawed by federal regulators. In the 1970’s and 80’s, the USDA’s demand for larger scale operations, coupled with its willingness to guarantee only very large infrastructure loans, combined with extraordinarily high interest rates and a drop in the value of the land and improvements pledged as loan collateral, to eliminate or consolidate most of the remaining small operators.
In Colorado, dairy herds dwindled from the tens of thousands of small herds on dispersed farms across the state (as listed in the 1935 agricultural census) to fewer than 200 farms managing dairy herds in 2020. Of those, only 87 farms have herds over 100 cows, and the majority of animals belong to herds over 1,000 cows. In total, there remain only 120 significant milk producers and only six or seven purchasers of their bulk milk in Colorado.
Dairy farms were not consolidated in isolation of other economic and political forces, and efficiencies of scale alone cannot account for fewer, larger farms. Data shows that a larger herd has lower costs per gallon of milk produced, often due to externalizing costs, but the profits resulting from lower production costs and federal price supports no longer accrue to the farmer.
Scaled-up mega-dairies are the economic result of consolidated milk processing and vertically integrated retail supply chains because monopolistic wholesale milk buyers have the power to determine both purchasing volume and profit margins in concert with federal price support rules. This dynamic is especially strong when national retailers also become the de facto handlers/processors and manufacturers of milk products.
Furthermore, fully 88% of retail food sales in Colorado are tallied by only five corporations — all of them owned by public shareholders and headquartered out of state. Of note, one of the largest purchasers and processors of milk in Colorado is the international cheese manufacturer and distributor Leprino Foods, which dominates the wholesale milk and cheese market.
[All data reflects official USDA Ag census and NASS reporting unless specified otherwise.]
Retail Market Share in Colorado
The table below specifies the market shares of these retailers, which reflect the retail market share for all milk and milk products across the state. Convenience stores, gas stations, corner stores, and a handful of independent/affiliated grocers are not included in this table. Their total impact is likely smaller than the combined “dollar store” sales below, because many of traditional food stores have been replaced by, or their sales diverted to, this type of non-community retailer.
Consolidation of Milking, Processing, Distribution and Retailing
The dairy supply chain in Colorado (and the nation as a whole) has adapted its organization, ownership and trade practices to support the demands of the largest national and international retailers. In addition to consolidating milking into only 120 licensed dairy farms, the industry in Colorado has taken advantage of every technical innovation to reduce or externalize costs and increase productivity. (Colorado is a leader in per-cow milk production.) Genetics, automation, and advance nutrition science have all been leveraged to improve operations to the point where little new incremental improvement is likely.
The intensive capital investment required to consolidate dairy herds and build efficient large-scale milking infrastructure is dependent on reliable buyers for ever-larger consolidated quantities of milk. Thus, Colorado has also consolidated down to only seven milk handlers/processors that pool milk from the licensed dairy farms, where it is pasteurized and processed into various milk products before being transferred to other dairy handlers. These primary milk users include:
• The Leprino cheese plant, which converts milk into soft cheeses like mozzarella, primarily for sale out of state. Leprino is a multi-billion-dollar international manufacturer and distributor.
• The Sinton factory in Colorado Springs, which only produces a reduced number of dry milk powder and cottage cheese products. Sinton was acquired most recently by a Mexican food manufacturer; it no longer produces the Sinton brand.
• Aurora dairy, which is the only remaining milk handler/processor that manages its own herds. It produces private label organic liquid milk for various retailers via this operation and dozens of other mega-dairies in other states.
• Royal Crest Dairy focuses on consumer home delivery of milk and other foods
• DFA Fort Morgan pools milk for processing into dried and evaporated milk products typically sold to institutions and other manufacturers.
• DFA/Meadow Gold in Englewood produces branded packaged and bulk products for various users.
• Safeway and Kroger dairy plants in Denver package and bottle liquid milk products and produce butter, ice cream, cottage cheese and cream cheese and other milk products for retail sale in their own stores, and use milk in various consumer packaged goods or as ingredients in bakery and food service offerings. Note that as of October 16, 2022, Kroger announced its intention to purchase and operate Safeway/Albertson’s stores, manufacturing, and distribution assets, which would give the combined entity control of nearly 50% of food sales in Colorado.
As large retailers enter the market as processors, competing milk processors and groups of processors attempted to enforce parts of anti-trust law by claiming the retailer would be able to control too much of the market. However, in most cases, any single retailer only reached a relatively modest share of the overall market, so courts and regulators refused to intervene.
Retailer handler/processors also controlled the outcome of these court challenges by claiming to also be legitimated wholesalers to out-of-market buyers. Typically, the retailer-owned plant would under utilize its potential production capacity but stop selling products produced by other dairies. When the competing dairies failed and closed, the retailer’s plant was brought up to full output. Some of the retail processing plants were big enough to service their stores in a wide multi-state region.
In Colorado, the vestiges of the traditional dairy industry structure remain only as a few wholly-owned dairy plants and brands. Meadow Gold and Sinton plants were acquired under duress after their retail markets dwindled due to competition with vertically integrated retailers’ internal production. Hundreds of smaller dairy plants across the state closed under similar circumstances, but were too small or localized to be acquired and integrated into consolidated operations.
Despite the clearly stated and often repeated goals of Colorado’s agricultural statutes, the slow and devastating withdrawal of economic support in rural and remote communities took place in full view of the state’s legislatures and regulators. Time again, political leadership recognized with great clarity that agriculture is the foundation of the state’s small communities, and that they must be allowed and encouraged to build wealth — and an independent tax base — to support their local needs in codependence with the wealthier urban centers that depend on them for food. With very few exceptions, these warnings about rural decline have been ignored.
The History of Milk Marketing Orders
Milk marketing orders date back to the Great Depression of the 1930’s, when reduced demand for milk clashed with high production and failed banks to trigger foreclosed loans and widespread dumping of commodities. The federal agricultural acts of the 1930’s sought to establish adequately high farm-gate prices for milk (and a variety of other products), while reducing production to match demand, in an effort to provide parity purchasing power to farmers. Whatever the price in current dollars farmers are paid for milk, it should allow them to purchase farm inputs, food and other goods and services at prevailing prices to successfully continue operating their farms.
After many constitutional challenges to federal authority, these national efforts resulted in a set of federal milk marketing orders which have been adapted and updated periodically to reflect times of scarcity and abundance. In any case, however, federal policy has proven ineffective at maintaining the viability of traditional dairy farms and has essentially supported their consolidation into large milking operations that in turn transfer milk to consolidated handlers/processors and manufacturers. In the last fifty years, consolidated vertically integrated retailers have become handlers, processors, manufacturers and distributors as well, usually by acquiring struggling small and medium sized operations who were no longer competitive due to widespread consolidation of the large retailers and dairies.
The concept of dispersed dairy farms and dairy processors supporting and serving local communities was abandoned.
Background on Colorado Milk Marketing Orders
The Colorado Agricultural Marketing Act of 1939 (Title 35 Section 28) reflected many of the goals and methods of the federal bills enacted in this era. The Act enabled and authorized state agencies to create boards and programs to help agriculturalists in the state regain and maintain a viable economic foothold.
Below are the specific public needs the 1939 Colorado legislature was addressing with the Act, and which all subsequent rules and regulations enabled through it have been interpreted and enforced:
35-28-103 Agricultural Marketing Act of 1939 begins:
(1) Purposes of article are:
(a) To enable agricultural producers of this state, with the aid of the state, more effectively to correlate the marketing of their agricultural commodities with market demands therefore;
(b) To establish orderly marketing of agricultural commodities;
(c) To provide for uniform grading and proper preparation of agricultural commodities for market;
(d) To provide methods and means for the development of new and larger markets of agricultural commodities produced in Colorado;
(e) To eliminate or reduce unfair competition and economic waste in the marketing of agricultural commodities;
(f) To restore and maintain adequate purchasing power for the agricultural producers of this state.
For better or worse, the language used to justify and guide the Act is vague and general; it can be read to authorize almost any authority and action. As often happens in situations where the most powerful and forceful political voices represent out-of-state financial interests, many rules, regulations, boards, commissions and enforcement actions created under the authority granted by Section 28 were controversial among Colorado producers. In 1963, a Colorado Supreme Court ruling established that the intent of the 1939 legislature was indeed to provide broad powers to quasi-governmental entities. Importantly, the court also ruled that not all purposes (a) through (f) had to be taken into account for actions and orders under the Act to be considered constitutionally and statutorily legal. Any one would do.
In short, the Colorado Supreme Court gave notice that any objection to state sanctioned agricultural marketing entities or orders would have to be addressed through the General Assembly, not law suits. Thus, when rhetorical persuasion fails, there is no effective way to challenge the authority of entities like the Colorado Milk Marketing Board or its rules and enforcement actions, except through the legislature. However, the Commissioner of Agriculture is authorized (and may in some cases have a duty) to suspend enforcement of orders or parts of orders that in his or her analysis do not support fair economic competition. By law, such enforcement discretion may last for up to sixty days.
While various milk marketing orders have come and gone since 1939, the milk marketing board as currently established by the Department of Agriculture appears to date to 1963, when Commissioner Schultz formalized the board, its membership, processes and enforcement authority. Commission John Salazar updated the milk board rules in 1987, during the time the national farm and dairy crisis swept up the state.
The current milk order was issued by Commissioner Tim Schultz in 1987 and updated in 2014 by Commissioner John Salazar. The order specifically reiterates the following goals:
Past organization of Colorado milk production, processing, distribution and retailing.
Through most of the 1900’s, the Colorado dairy industry was organized by the distinct activities at each step of production and handling. Dairy farms maintained herds and milked cows, processors picked up milk at the farm and processed for sale to retailers, manufacturers, and institutions. Distribution of wholesale and packaged milk and milk products was performed by the processors themselves or warehouse intermediaries. Branded dairy delivery trucks moved product to homes, retail stores, institutions and manufacturing plants daily.
The first diagram below page depicts how the Colorado dairy industry was organized and operated for most of the state’s history. Retailers acted as purchasers of locally produced finished goods that were delivered to them by the processors or distributors. Out-of-state goods were supplied to retailers through independent broker/distributors.
The following diagram uses the current definitions and naming conventions of the Colorado Milk Marketing Board. Defined terms are in bold type.
Most large retailers now operate their own dairy manufacturing plants and distribution systems. With the exception of managing herds and milking cows, Wal-Mart, Safeway and Kroger have fully vertically integrated their supply chain for much of their dairy departments. Products they do not produce are purchased directly from manufacturers and delivered in large quantities to the retailers’ distribution centers.
The consolidation of the dairy industry has resulted in only 120 licensed dairy farms in Colorado and only six or seven processors that collect and process milk from those farms. Two of those processing plants belong to Safeway and Kroger. Aurora Dairy is the only plant that manages its own herds; it primarily sells white label packaged liquid organic milk to retailers such as Target and Wal-Mart. The Sinton Dairy in Colorado Springs is now foreign-owned and produces only dry milk powder and some cottage cheese. DFA Coop is the dominant national cooperative milk pooling plant that provides bulk milk to wholesale customers and markets the Meadow Gold brand to retailers. Leprino is a multi-billion-dollar international processor of cheese, much of which leaves the state. Royal Crest focuses on home delivery of milk and other goods.
Grocery retailing and the dairy industry in other states in similarly organized, often with the same national retailers operating large milk pooling and processing plants that supply all their stores in a wide region. In general, liquid milk is the most perishable and can travel the shortest distance. The more shelf stable products tend to be manufactured in larger centralized facilities and are thus shipped farther.
The diagram below incorporates how retailers have vertically integrated their supply chains to circumvent or capture third party distributors and manufacturers.
Current organization of Colorado milk production, processing, distribution and retailing
Colorado milk orders no longer reflect how the dairy industry is organized and operated.
As shown in the diagram on the preceding page, current practices no longer match how the Colorado milk orders envision them. The diagram uses the definitions and process flow that appears in the milk orders, but they no longer reflect economic reality because retailers dominate all aspects of the supply chain.
The two blue brackets highlight how a vertically integrated supply chain challenges the assumption that a producer sells to a processor that sells to a packager that sells to a distributor that sells to a retailer. In some cases, all of these steps are undertaken by a single actor.
How is the Colorado Milk Marketing Board funded?
In addition to significant administrative support provided by the Department of Agriculture, the CMMB taxes (certain, selected) wholesale milk and milk product sales at $0.03 per hundredweight. This money funds a senior executive staff of five plus an auditing and support staff of six.
What does the Colorado Milk Marketing Board Do?
The Board creates rules around wholesale pricing of some dairy products, but exempts seemingly random entities and products in the supply chain. CMMB auditors are authorized to examine the books of non-exempt entities to ensure compliance with its rules. Note in particular the Board does not exercise authority over the prices paid to the 180 milking dairies in Colorado (or other states), nor does it exert controls over retail milk prices charged to the public or institutions except by manipulating wholesale pricing. Instead, the Board uses its authority to demand weekly reporting of prices on milk products sold at the wholesale level after it has been pasteurized by one of the six pooling dairies. However, the rules are unevenly applied and appear to cater to special interests. For instance:
Recently, the Board issued rules that are targeted specifically to disadvantage organic and grassfed milk products that are produced out of state and sold via full-line grocery distributors. Those sales can only be discounted based on the volume of deliveries to each store site, meaning small rural and independent grocers are arbitrarily charged up to 20% more. This new policy clearly benefits conventional milk producers and the dairy co-op by making natural, organic and grassfed brands financially out of reach for most shoppers.
Non-exempt entities must send weekly price reports and discount schedules to the CMMB by mail, fax, or email. CMMB staff print them on paper, physically ink-stamp them as “approved by the Commissioner”, and place them in metal filing cabinets. There is a fee of at least $30 to access a price list, which may require a formal CORA request. Yet, the Board states that its activities are critical to maintaining “price transparency”.
Current CMMB rules have the effect of significantly and irrationally increasing retail milk prices, especially at independent and rural food markets. The greatest need to modernize the Colorado milk orders is how rebates and discounts are controlled. Currently, these price reductions can only be calculated based on the volume delivered by a distributor to each individual business site annually. Volume discounts cannot be offered based on the total sales completed by al l members of the buying group.
The Kroger and Safeway dairy processing plants, which handle upwards of 50% of all retail milk and milk product sales in the state, qualify for large purchasing discounts from their “suppliers”. However, when Kroger and Safeway are their own suppliers (through their vertically owned supply chains), their business transactions are essentially unregulated. Similarly, Kroger and Safeway can transfer their own products from their own distribution warehouses to their own retail locations at will. These transactions can possibly be audited to ensure transfer valuation are not below the retailers’ all-in cost, but there is no effective way to validate the validity of internally concocted rebates and discounts.
Kroger, Safeway, Wal-Mart/Sam’s, Target, Costco, Trader Joe’s, Sprouts and dollar stores operate their own internal distribution systems to supply their stores. All of them purchase milk products from their own factories or from their wholesale suppliers for delivery to a single warehouse location, and thus claim they qualify for rebates and discounts based on their respective total volume of sales of all stores within the state, not the sales volume of each of their own individual stores they deliver to.
Retailers like Natural Grocers, Lucky’s, the Affiliated Grocers, the Associated Wholesale Grocers, independent grocers, convenience stores, corner stores, and others use full-line third party distributors such as Affiliated, Associated, McLane, Sysco, US Foods, DPI, KeHe, and UNFI. Deliveries are made to individual stores sites. Thus, under the current milk orders, because rebates/discounts are allowable based only on the annual sales delivered to each location rather than total sales at all locations of a retailer serviced by the distributor, all customers using third party full-line distributors are not eligible for volume rebates or discounts.
Equitable Treatment Across Classes of Trade
The method of managing rebates and volume discounts based on point of delivery used to make sense. It protected the thousands of small grocery businesses in the state from anti-competitive practices such as preferential pricing and dumping. Similarly, prohibiting the sale of milk and milk products below the cost to produce them helped maintain “order” in the markets by preventing “waste” caused by excess production that might be dumped, given away, fed to animals or sold below cost. Managing volume discounts theoretically ensures a floor of competitive pricing among like kinds of retailers – all in an effort to protect parity purchasing power for farmers by matching supply to demand.
In the current environment, however, national retailers dominate supply chains and consumer markets using local vertically integrated supply chains as well as global production and manufacturing. As a policy to ensure competition, controls on rebates and volume discounts have been overwhelmed by the market control exerted through extreme consolidation and vertical integration.
Volume alone is a poor proxy for the efficiencies on which rebates/discounts can be based. On one hand, the remote food store ordering by phone and paying by check for a partial pallet delivered along a remote rural route is the most expensive retailer customer to service. By contrast, a tech savvy retailer that orders, receives and remits electronically and takes delivery of full pallets and truckloads along an efficient delivery route may order less but be far more profitable for the distributor.
Retailers that supply themselves and distribute to themselves can circumvent all constraints on rebates/discounts. This inequitable treatment can create wholesale disparities of up to 30% between different retailers, with commensurate disparities in retail consumer prices.
Effects on Rural Prosperity and Economic Development
the loss of local milking dairies and milk processing in Colorado’s rural and remote communities has caused multiple cascading negative effects. As seen in the decline of all other local value-added processing like butchering, baking, and canning,
The loss of local value-added production causes a drain of local wealth when money is used to import and purchase goods that were once produced locally. Dairy jobs, expertise, and traditions are lost, along with all the supporting suppliers and skilled trades required to make and market dairy products locally. With minor artisanal exceptions, all milk and milk products sold in Colorado Grocery stores are now imported from just six processors in five north central Colorado counties, or from out of state sources.
It bears repeating that the legislators who drafted and passed Section 28 of Title 35 did not contemplate this lopsided and detrimental outcome, and certainly believed their efforts would lead to more equitable, profitable, and resilient food production system across the state.
Here is the legislative declaration of the Agricultural Marketing Act of 1939:
Unfortunately, it appears that the current Colorado Milk Marketing Board is operating within a situation wherein almost all dairy farmers and farms who were operating in 1939 are now defunct. Most Colorado agricultural producers cannot maintain an acceptable standard of living or collectively support the infrastructure, services, and educational functions in their own communities without off-farm jobs. As our tax rolls and state budgets attest, Colorado is forced to “unfairly” tax metropolitan citizens of the state to support rural and remote areas
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While it is outside of the scope and authority of the Colorado Milk Marketing Board to address many of these macro-economic issues, the CMMB can review its current orders in light of this changed reality. Simply requiring milk sales to be at or above cost no longer helps Colorado communities, since it only affects 120 large dairy farms, and those farms are all located in four north central counties and all are effectively captured by large retailers and wholesale customers.
Similarly, the prohibition on offering rebates and discounts to smaller grocers further encumbers the remaining small and independent grocery retailers in rural areas. For instance, the R&R grocery in San Luis has been operated by the community for 150 years; the nearest small grocer to the north is in Fort Garland, and from there people must drive further to Walsenburg or Alamosa to access a full supermarket. There is no grocery store to the south of R&R until Taos, New Mexico.
Not only should residents of southern San Luis Valley be offered affordable prices on milk and milk products by way of discounts provided to R&R, but the state should likely subsidize those products when sold at groceries in this and similar communities. Otherwise, the few remaining grocery stores simply will not survive another year. For a population that is elderly, less affluent, and may not have transportation, traveling and hour to Alamosa or Walsenburg or Taos – if possible, at all – it prohibitively expensive and potentially dangerous during wind storms and winter blizzards.
Full line grocery distribution is not the relic of an antiquated system that can be left to chance or allowed to be discontinued. For instance, the operation of the full line Affiliated Grocers distribution route that services San Luis, Fort Garland and other remote areas of Colorado is critical to the health of these communities. And, dairy is fundamental to the economics of this kind of rural distribution. Dairy does not provide significantly higher margins to the grocer, but dairy (with bread and eggs) is absolutely necessary to support a core metric of success: customer visits.
The CMMB would do well to examine how it can use its powers to strengthen the resilience of underserved rural, remote and urban communities. If an enterprise like R&R closes, the only remaining food stores are the downtown gas station and the food aisle in the dollar store on the outskirts of town. You cannot eat a full and health diet in those circumstances. Yet, these circumstances are common across the state.
Home Delivery as a Distinct Channel of Trade
Home Delivery, which is given special – and clearly anachronistic — recognition as a non-retailer activity in the current milk orders, is now a primary function of retailers. Although Royal Crest, Longmont and a few other small processors have maintained a consumer-direct sales channels for decades, those sales are now dwarfed by online ordering and deliver services undertaken by the large retail grocers and their agents.
Even prior to COVID, all metropolitan retailers could use Instacart and similar services to deliver their milk products and other groceries to homes. In addition, Walmart, Safeway, Whole Foods (via Amazon) and others have built their own ecommerce and home delivery infrastructure.
The2020 pandemic established home delivery as a permanent fixture of grocery retailing.
Modernizing Oversight Orders for Colorado Milk Marketing
(MOO-CoMM)
Whereas:
Much of Colorado’s population resides in rural, remote and urban areas communities are not served or are underserved by the small number of national retailers that control over 88% of the Colorado food retail market; and
The surviving food retailers, if any, that sell milk and milk products into underserved rural, remote, and urban communities are saddled with the most expensive distribution costs, lowest rebates and weakest volume discounts by CMMB rules; and
The surviving retailers that sell milk and milk products into underserved rural, remote, and urban communities are forced by the CMMB to purchase milk and milk products at the highest wholesale prices; and
The surviving retailers that sell milk and milk products into underserved rural, remote, and urban communities must therefore sell milk and milk products at significantly higher retail prices than all other retailers in the state due to CMMB rules; and
The surviving retailers that sell milk and milk products into underserved rural, remote and urban communities are often sole available source of food and nutrition for many residents;
Therefore, the Commissioner of Agriculture, the Department of Agriculture, and the Colorado Milk Marketing Board shall review and amend current rules and establish additional rules to satisfy the purposes of the Agriculture Marketing Act of 1939 as well as the purposes of the CMMB as set forth in 1987 by acting to:
Review the current organization, commercial relationships, conflicts of interested, exemptions, inequitable treatment, and other practices of the Colorado milk industry, including:
The import and export of milk and milk products to and from other states and nations; and
The distinct, independent, interrelated, shared, and/or vertically integrated practices of producers, handlers, processors, manufacturers, importers, warehousers, distributors, retailers, and home delivery services of milk and milk products;
Within the context of mass merchandise, discount, club, independent, convenience, petroleum, corner grocery, and ecommerce food retailers;
That handle food, sundries, fuel and other merchandise for sale or delivery within Colorado; and
Review the requirement that separate classes of customers be provided rebates and discounts based solely on the volume of sales of products delivered to each place of business, especially in underserved rural, remote and urban areas; and
Fulfill the purposes of the Agriculture Marketing Act of 1939 and the milk marketing orders of 1987 with emphasis on maintaining and reestablishing affordable food retail operations, including milk and milk products, in underserved remote, rural, and urban communities.