June 17, 1999
Washington, DC
Mr. Chairman and Distinguished Members of the Subcommittee:
I am Geoff Covert, Senior Vice President and President of Manufacturing of The Kroger Co. I am honored to have the opportunity to testify before this panel. Kroger is the nation's largest grocery retailer. We operate 2,200 food stores in 31 states. We recently completed our merger with Fred Meyer, Inc. of Portland, Oregon. In 1998, the combined Kroger and Fred Meyer stores had sales of $43 billion. To put that in perspective, 10 cents of every food dollar spent on food to be eaten at home was spent in a Kroger store.
Our food stores are known by such familiar names as Kroger, Ralphs, Fred Meyer, Fry's, Smith's, Dillon, King Soopers, City Markets and QFC. We also operate 800 convenience stores and 43 grocery and dairy manufacturing facilities. In 1998 Kroger customers (excluding Fred Meyer, Inc. stores) purchased 289 million gallons of milk.
The Kroger Co. is very concerned about the proposed dairy compact legislation (H.R. 1604). The bill would make the current Northeast Dairy Compact permanent and authorize a southern compact. Milk is a wholesome food that provides essential nutrition for children and adults. In our opinion, dairy compacts hurt consumers who drink milk, especially lower income individuals and families. Our opinion is based upon the experience of the Northeast Interstate Dairy Compact that was created in July 1997.
Since then, the northeast region has seen:
Milk Prices Go Up
In the Northeast, the Compact Commission set a floor price of $1.46 per gallon for dairy farmers. This caused the retail price for fluid milk to jump about $0.20 per gallon. Consumers of milk in the six New England states found themselves paying a "milk tax." Even our government's own Office of Management and Budget (OMB) says "Some economic benefits expected by compact supporters, including lower retail prices through stable, regulated producer prices, have not been proven so far."
Milk Demand Declined
As a result of higher milk prices, consumption of fluid milk in the Northeast has declined. A December 1997 study by A.C. Nielsen Advanced Analytics found that a 5% increase in retail price--roughly the same increase caused by the Compact in its first 14 months--corresponds to a 2% to 4% decrease in milk sales. The Nielsen analysis simply confirms textbook economic expectations that higher prices lead to decreased milk consumption. Higher prices encourage milk consumers to purchase other beverages. In fact, according to economists, a 10% increase in the retail price of milk can lead to as much as an 8% decline in milk consumption.
USDA Nutrition Programs Impacted
Because of the higher fluid milk prices, the Northeast Dairy Compact Commission exempted two federal child nutrition programs from the Compact price premiums--the supplemental feeding program for Women, Infants and Children (WIC) and the National School Lunch and Breakfast programs. However, until the school meals programs' exemption was granted, schools paid an additional $1.75 million in higher milk prices.
The exemptions do not cover food stamp recipients and other essential government nutrition programs for children and the elderly. According to the figures obtained from USDA, since the Compact began its price hikes have wiped out more than $4.7 million of the purchasing power of New England food stamp recipients. New England states' Child and Adult Care Food Program and the Nutrition Program for the Elderly have had to absorb nearly one-half million dollars in higher milk prices since the Compact went into effect.
If Congress approves the proposed compact legislation, those who depend most upon milk as a low-cost, accessible nutritious food will continue to feel the impact.
Among our customers, milk is the number 2 beverage choice, with soda pop leading the way. We sell a lot of soda, but I would readily concede it is not a nutritional food.
The relationship between retail prices and customer purchases is seen in our own experience. Milk is an elastic commodity. When milk prices increase, sales decline. For example, in January through March of 1999, we experienced record high raw milk costs. As a result of the corresponding retail cost increases, milk sales declined 5-6%.
Local Dairy Farmers Still Leaving the Farm
A goal of the Northeast Dairy Compact was to prevent the loss of local dairy farms. Despite higher prices to farmers, during the first year of the Compact the rate of dairy farm loss in New England was 41% higher than the rate of loss of commercial dairy farms in the previous two years, according to an annual dairy farm survey by the American Farm Bureau Federation.
If regional dairy cartels are created around the country, milk prices are very likely to increase. Excess supply will result, which will ultimately hurt the dairy farmer the Compacts are purporting to help.
Summary
In summary, Kroger believes dairy compacts hurt both consumers and dairy farmers. They create a hidden tax on consumers. This tax especially hurts lower income families who depend upon milk as a quick, easy, low cost, highly nutritional food. Dairy farmers also are hurt by compacts because they lead to artificially inflated wholesale prices, which in turn creates excess supply and lower demand.
Kroger strongly urges this subcommittee to continue the pro-consumer reform of the dairy industry that began with the 1996 Farm Bill. The Northeastern Compact should sunset and additional regional dairy compacts should not be authorized.
I appreciate this opportunity to be with you today and I would be happy to try to answer your questions.
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