Dairy Industry Crushed Innovator Who Bested Price-Control System

By the early 1990s, Hettinga was working with partners and relatives and had half a dozen dairies in Arizona and California. Then he decided to build his own bottling plant in Yuma, Ariz.

His first customers were in Mexico. Later he made a deal with a chain of Arizona stores catering to the fast-growing Hispanic population. In 2002, he and his son began building a second Yuma plant to supply Costco stores in Southern California.

For Costco shoppers, it was a good deal, according to an e-mail sent last year to Reid's office by Joel Benoliel, Costco Wholesale Corp.'s senior vice president. The arrangement lowered the average price of milk "by 20 cents a gallon overnight and it stayed that way for three years," Benoliel wrote in the e-mail, made available to The Washington Post. "Milk suppliers in southern California were gouging the public on price (20 cents a gallon higher than N. California) for years and were unresponsive to our call for lower prices. It was a brazen case of price gouging and profiteering by the strongest, largest market suppliers simply because they could."

In Arizona, Hettinga was competing for retail sales against Arizona's biggest milk company, Shamrock Foods Co. of Phoenix. He "wasn't by any stretch a more cost-effective operator than we are. He just didn't have the same rules apply," said Shamrock's general manager, Michael A. Krueger.

United Dairymen of Arizona, a cooperative that handles 85 percent of the state's milk, complained that by keeping his milk outside the Arizona pool, Hettinga was affecting the USDA price-setting formula, lowering returns for other dairies.

In California, the Hettingas were taking on the two biggest players in the U.S. milk industry: Dean Foods Co., the largest processor of dairy products, with $10 billion in annual sales and five California plants, and Dairy Farmers of America, a co-op that controls nearly a third of the nation's liquid milk.

In Southern California, the co-op sells to Dean Foods, which in turn sells to retailers. As Hettinga's milk began reaching Costco stores, there was a snowball effect as other milk suppliers were forced to lower their prices, Costco's Benoliel said.

Dean Foods recently said that Hettinga was unfairly exploiting a "regulatory loophole" and that his actions led to lower milk prices for California dairies.

Hettinga's operation was "damaging to the marketplace," said Elvin Hollon, director of economic analysis for Dairy Farmers of America. "Nobody ever envisioned there would be such large handlers" outside the pool.

"So," Hollon said, "the regulations had to change."

Political Education

The first challenge to Hettinga came in late 2001, when Sen. Jon Kyl (R-Ariz.) proposed a measure that would have forced Hettinga to pay in to the pool that Shamrock was governed by.

Shamrock's chairman, Norman P. McClelland, had contributed thousands of dollars to Kyl, beginning with Kyl's first House campaign, in 1986.