Retailers Get Caught Up in the Raw-Milk War

The owners of small food stores worry that an ongoing government investigation and crackdown on dairy farmers could seriously hurt their business

by David E. Gumpert

Tommy York, an owner of the landmark Morgan & York food and wine store in Ann Arbor, is a big Michigan booster. "I love Michigan. I love the people. I love the countryside," he says.

Now, though, the basic beliefs of York and other food retailers are being called into question as they feel the ripples of an attack by Michigan authorities on a three-farm cooperative that supplies them with grass-fed beef, organic eggs, and other high-quality food products, to the extent they fear it could overwhelm their well-established small businesses.

The farm cooperative also supplies its members—who have no connection with the store—with raw milk, which is at the center of the state's investigation.

On Oct. 13, the Michigan Agriculture Dept., together with state police, completed a sting operation by confiscating an estimated $7,000 worth of the cooperative's food products and executing search warrants on the home of the cooperative's manager, Richard Hebron, in Vandalia, along with a warehouse owned by Morgan & York in Ann Arbor (see BusinessWeek.com, 10/19/06, "States Target Raw-Milk Farmers").

Cease and Desist

While no charges have yet been filed, the investigation has expanded. The federal Food & Drug Administration, along with the Indiana Board of Animal Health, have twice sent investigators to the northern Indiana dairy of the Amish farmer who supplies the cooperative's raw milk.

According to the farmer, who has asked not to be identified, and a lawyer representing the cooperative, the investigators are exploring possible violations of a federal prohibition on selling raw milk via interstate commerce. The agencies decline to comment on grounds that the investigation is still open.

Meanwhile, the investigation has twice targeted Ann Arbor retailer Morgan & York. The first time the authorities completed the sting operation and served Tommy York with a search warrant, he didn't feel especially threatened. He's accustomed to dealing with Michigan's Agriculture Dept., which licenses him and other food retailers, and it periodically inspects his facilities, including the warehouse out back that he has made available for the last two years to the Family Farms Cooperative. The co-op uses it for weekly distribution of raw milk and other food to a couple hundred Ann Arbor-area members.

The second time was different. Last Thursday, MDA inspector Beth Howell—"Inspector Beth" as she's known to York—walked in with a five-paragraph "cease-and-desist order", and told York to sign it. While the technical language orders the store "to cease and desist in the delivery, holding, or offering for sale of adulterated or misbranded food," the real purpose was to prevent the store from allowing the cooperative to distribute its products from the store's storage area, as it has done for the last two years.

"Good Neighbors"

Getting nervous by this time, York didn't hesitate to obey the order, knowing that if he didn't, he would likely lose his food license. "I'm wise enough to know when to sign," he says. Food accounts for about one-third of the store's $3 million annual sales, and, equally important, it's growing at 10% annually and has higher margins than his wine and liquor sales, which are flat.

He describes Richard Hebron, the owner of one of the three farms in the cooperative and its manager, as "the nicest guy in the world. I've gotten to know him well over the last two years."

York had offered his store's storage area as a distribution outlet for the co-op at no charge because "We were trying to be enlightened good neighbors," he says. He figured that if a couple hundred people who obviously are committed to consuming high-quality food came to his store for co-op pickups each week, "Maybe they'll come over and buy from us. And they did.