The Arizona Republic – Phoenix, AZ
November 14, 2006
Scott Wong and Kelly Carr

Long before he discovered a way to sell milk for far less than his competitors, before he enraged the multibillon-dollar dairy industry so much that Congress passed a law to stop him, Hein Hettinga clipped cow hooves for a living.

It was menial work. But it put him on a career path that, in time, would lead him to found Yuma-based Sarah Farms, one of the largest and most innovative private dairy operations in the country.

Now, 12 years after building his dairy business into a proverbial cash cow, Hettinga finds himself waging war against big-dairy lobbyists, high-profile lawmakers and the federal government.

At 64, the Dutch immigrant said he simply is defending his family business, preserving competition in the dairy industry and trying to keep milk prices low for consumers. His critics counter that Hettinga had long exploited a federal loophole that gave him an unfair leg up on his competitors.

Most in the dairy industry fall into two categories: those who produce the raw milk and those who process it into the milk we pour onto our cereal each morning.

Hettinga is different. The self-proclaimed black sheep guides his milk through all stages of production, from his dairy cows to his bottling plants to supermarket shelves. That enables him to cut out the middleman, reduce costs and pass those savings to his customers. And, of course, make a tidy profit.

Because of his producer-distributor status, Hettinga was able to take advantage of a technicality in Depression-era federal regulations. Those rules require milk processors who do business in certain geographic markets to pay into a revenue pool shared among farmers who own the region’s dairy cooperative.

Cooperatives help stabilize the dairy market, guaranteeing farmers a place to sell their perishable products at a fixed price. That helps avert price wars and milk dumping.

Some big processors, such as Shamrock Farms, use milk from their own dairies. But they also buy milk from cooperative farmers, meaning they’re still subject to federal regulations.

Hettinga bottles only his own milk, which made him exempt.

When Hettinga began seizing a larger share of the market, the $27 billion-a-year dairy industry struck back. This past spring, its most powerful members successfully lobbied Congress to support legislation targeting Sarah Farms.

The Milk Regulatory Equity Act, introduced by Republicans Rep. Devin Nunes of California and Sen. Jon Kyl of Arizona , essentially forces the Yuma farm to pay its competitors through the local dairy pool.

Because Hettinga had been trucking milk across the state line to Southern California retailers, he also had been exempt from abiding by that state’s pricing minimums. That allowed Hettinga to drop his prices below those of his competitors and secure lucrative contracts with Costco stores and local distributors.

The legislation sealed off that loophole, subjecting Hettinga to Arizona price floors.

Hettinga, whose farms have captured about 15 percent of Arizona ‘s milk market, said it was his success that made him the target of the dairy industry.

His Yuma plant was referred to multiple times on the House floor during debate of the bill. And Sarah Farms is the only U.S. business that falls within a narrow category of dairy operations targeted by the law: Arizona producer-distributors who turn out more than 3 million pounds of milk per month.

“They passed a law to kill one private dairy. Does that make any sense? It’s not the way the government should conduct business, to limit competition,” Hettinga said recently as he navigated his car on Interstate 8, traveling toward his Yuma plants. “Big business shouldn’t be able to influence in this way.”

Leveling the playing field

Despite passage of the law, Hettinga isn’t backing down.

This summer, he and six other family members gave a total of nearly $30,000 to Jim Pederson’s unsuccessful campaign for Kyl’s Senate seat.

And on Sept. 21, Hettinga and his wife, Ellen, sued the federal government in U.S. District Court, claiming the legislation singles out Sarah Farms and has caused the company considerable financial loss.

Hettinga said his farms and the retailers they supply have absorbed extra costs resulting from the law, estimated at about 15 cents per gallon.

Now, it’s just a matter of time before he is forced to hike his prices or competitors put him out of business, he said. Either way, Hettinga believes consumers will be paying more.

A Justice Department spokesman said that the agency had no comment about the lawsuit but that it plans to issue a legal response at the end of this month.

Andrew House, senior policy adviser for Nunes, said that regulatory issues addressed by the law were thoroughly debated within the industry and Congress.

He and other proponents of the law said it was Hettinga who was disrupting the marketplace, supplying milk at bargain-basement prices to Food City , Sam’s Club and Costco stores in Arizona , and undercutting competitors.

Both Costco and Sam’s Club sell a 2-gallon carton of 2 percent milk for $3.99, up from $3.69 a month ago.

Meanwhile, Fry’s Food and Safeway, which buy milk from Arizona ‘s dairy cooperative, sell a single gallon of 2 percent milk for as much as $2.99 and $3.79, respectively. Such grocers, however, often offer significant discounts or 2-for-1 specials with a club card.

Several factors determine milk prices. Prices drop during the summer, when milk-guzzling children are absent from school cafeterias. And they rise during the holiday season, when large amounts of dairy products are consumed.

But Hettinga’s major competitors in Arizona said the legislation serves to “create a fair and equitable system.”

“It levels the playing field for all Arizona dairy farmers,” said Sandy Kelly, a spokeswoman for Phoenix-based Shamrock Farms Dairy.

Although Hettinga benefited from the federal loophole, critics said he received hundreds of thousands of dollars in federal subsidies.

And they scoffed at the notion that Hettinga — who drives a Lincoln Town Car, flies a private plane and owns homes in three states — is simply a small-town farmer battling the big bad dairy industry.

“(Hettinga) is the epitome of big dairy,” said House, whose boss represents the biggest dairy-producing congressional district in the country

>From 1995 to 2004, Hettinga’s farms collected $895,000 in such subsidies, just under $100,000 a year, according to Environmental Working Group, a Washington-based public watchdog. That ranked his farms third among dairy-subsidy recipients.

House, who helped draft the legislation, said it was hypocritical of Hettinga to draw federal subsidies, “but when it comes to abiding by regulations, he doesn’t want to do it because it will mean his profit margin will go down.”

‘I have no choice’

Something as simple as the price of milk does matter to families. Picking up a 2-gallon pack of 2 percent milk at a West Valley Costco store one recent afternoon, Daisy Castillo of Surprise said she will be forced to shop for a better deal or shell out more for milk if prices are boosted.

“It’s essential to our family,” Castillo, 22, said while pushing her 1-year-old daughter in a cart. Castillo’s family gulps down the $3.99 2-gallon milk pack each week. “I don’t think we’d stop buying it (if prices went up). But I’d be upset because I have no choice.”

Costco did not return several phone calls for this story. Wal-Mart Stores Inc., which owns Sam’s Club, said it is company policy not to comment on its relationship with suppliers.

But Basha’s Family of Stores, parent company of Food City , said shoppers have not seen a rise in milk prices because of the legislation.

The path to success

Hettinga’s road to riches was a long one.

After graduating from a California high school in 1960, Hettinga was faced with a choice. He could take a job driving a truck for a local grocery store or try his fortune trimming cow hooves and castrating bulls.

Hettinga chose the latter.

It paid $2 an hour, a dollar less than the trucking job. But he learned the ins and outs of the dairy industry.

More than a decade later, he bought his own dairy farm in Chino , Calif. , where like most other dairymen he shared milk profits in a cooperative.

Twelve years ago, Hettinga built a milk processing plant in Yuma where he could pasteurize and homogenize his raw milk, package it in his own bottles and ship it to stores.

“I wanted to be integrated, to have the right to sell my milk,” said Hettinga , who put all his cows up as collateral to persuade banks to loan him money for the $160,000 project

Today, he supplies about 25 million gallons of milk a year to more than 60 Food Cities and almost all the Costcos and Sam’s Clubs in Arizona , as well as to distributors in Mexico .

The dairyman raised the stakes when he built a second Yuma processing plant. This one cost $12.5 million and today supplies about 700,000 gallons of milk each month to Costco stores in Southern California , according to a recent news report.

Today, the Sarah Farms empire includes 16 dairy farms in California , Texas and Arizona , six between Gila Bend and Yuma .

Looking after Sarah Farms, a business he built from the ground up and named after his daughter, is a seven-day-a-week job. Hettinga, dressed in boots and jeans, jokes that he works half-days: 12 hours instead of 24.

Now, as the legal process unfolds, he continues to defend what he built.

“I got big enough that they can’t kill me, but it has financially crippled me,” Hettinga said. “It has stopped every independent dairyman of doing their own thing.”

Copyright 2006 The Arizona Republic
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