D. Issue: Prevailing Processing and Wholesale Costs for Class I, Fluid
Milk, Inside and Outside the New England Region

    This issue is significant because processing and delivery are the
only intermediate stops in the commercial channel for milk between farm
and retail outlet other than transport of the raw supply. The delivered
cost to the retail outlet can thus be determined as a function of a
relatively few variables.
    Although the Compact Commission requested comment on this issue, it
did not receive data regarding processing and wholesale costs specific
to the New England market. While two of the fluid milk processors doing
business in the New England market did submit comment,\75\ along with a
trade organization from New York state,\76\ none of these comments
presented data with regard to costs of operation.
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    \75\ Neil Marcus on behalf of Marcus Dairy, 12/19/96 HT at 81
and 1/2/96 AC; Donald Turner, Turner's Dairy, 12/19/96 HT at 176.
    \76\ Bruce Krupke on behalf of New York State Dairy Foods, Inc.
3/31/97 AC; John H. Vetne, on behalf of New England Dairies, Inc. 3/
31/97 AC.
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    A very recent and comprehensive national study of 35 plant
operations submitted by a group of dairy economists from Cornell
University provides useful guidance to the Commission on this issue. R.
Aplin, E. Erba, M. Stephenson, ``An Analysis of Processing and
Distribution Productivity and Costs in 35 Fluid Milk Plants'', February
1997, R.B. 97-03, Cornell University. The study is particularly useful
because fourteen of plants studied, though unnamed, are identified as
being located in the Northeast.
    The study indicates that the processing and wholesale costs for
Class I milk are a function of three variables: (1) the procurement
cost for the raw product supply, in significant part, combined with (2)
processing, delivery and sales costs for servicing the retail outlet,
and (3) return on capital.
    An extract entitled ``Presentation at IDFA Annual Meeting in
Dallas, Texas (October 1996) was also submitted. This extract provides
``estimated costs of marketing 2% lowfat milk through supermarkets, New
York Metro Area, $ per gallon, 1995.'' In this extract, the raw product
cost is identified as $1.31 per gallon. (This is in line with the net
combined regulated and ``over-order'' Class I price for the New England
market.) According to the study, there is an additional plant cost of
$0.24 per gallon and a package cost of $0.10 per gallon. There are
additional delivery, selling and general and administrative costs,
totaling $0.22. Finally, the extract identifies a return for cost of
capital in the amount of $0.06.
    The study thus identifies a total, delivered, processing and
wholesale cost of $1.93 per gallon.
    The Economic Research Service of the United States Department of
Agriculture also provides a breakdown of wholesale costs, nationally,
per half gallon.\77\ According to this study, for 1992, the farm value
was $0.597; assembly and procurement totaled $0.058; the processing
cost was $0.191; and wholesaling costs were $0.196. Total costs per
half-gallon equal $1.042 according to this ERS study. For comparison
purposes, assuming equal costs per gallon as the costs per half gallon
in the study, this would mean a total delivered cost of $2.08 per
gallon, or $0.15 more than shown in the Aplin study.
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    \77\ Food Cost Review, 1995/AER-729. (Submitted as reference
source by DeGuess and Gilmeister, 3/31/97 AC.)
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    The ERS study further notes that ``processing costs have remained
stable since 1986 (through 1992), after rising 16 percent from 1982
through 1986.\78\
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    \78\ AER 726 at 26.
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    Both the Aplin study and extract, and the ERS study, indicate that
processing plants are covering their margins. The Aplin extract also
provides a precise indicator of the ``return for cost of capital.''
This amount is identified by the extract as $0.06, or only a three
percent return.