State Denies Proposal to Change Milk Pricing : Agriculture: A dairy industry group’s plan sought to head off price competition.

In what is viewed as good news for consumers, the state Department of Food and Agriculture has denied a dairy industry group’s request for a regulatory change aimed at heading off price competition for milk, one of the most profitable items in Southern California supermarkets.

The department said in a statement that there was no economic reason to revise its formula for determining raw milk prices. The decision was a setback for the Dairy Institute, which sought the revision.

Its members include Ralphs, Vons, Lucky and the parent of Alpha Beta.

The Dairy Institute’s proposal would have changed the method for determining raw milk prices that are paid to farmers.

The proposal would have lowered raw milk costs for Los Angeles-area grocers while raising those costs for the Price Club warehouse store chain and other competitors.

It was believed that the proposal would have forced Price Club to raise its retail prices, blunting its competitive edge over supermarket chains.

The Dairy Institute had argued that the current formula was unfair to Los Angeles-area grocers who obtain raw milk from local dairy farmers.

Raw milk prices are higher in Los Angeles than in the San Joaquin Valley, where Price Club obtains its milk.

However, the cost of hauling milk to Los Angeles from the San Joaquin Valley makes up for the difference in raw milk costs, industry analysts have said.

Judith Bell, West Coast director for Consumers Union, which publishes Consumer Reports, said the decision came at a crucial time. “It seemed that we were finally starting to see price competition in Southern California, and our fear was that the proposal would have squashed that. It is a good decision by the department.”

Representatives of the Dairy Institute could not be reached for comment Tuesday.

The decision is the latest development in the controversy over milk pricing in Southern California. Milk prices in Los Angeles are up to 20% higher than in San Francisco or in the Inland Empire, where grocers compete aggressively for milk sales.

According to Consumers Union, Los Angeles-area consumers spend $15 million more a year than they would if they paid San Francisco-area prices.