Anchorage Daily News

The state-owned Matanuska Maid dairy company won't be shutting its doors next month, thanks to a state grant that will prop it up while directors decide what to do next.

But some experts are saying the state -- which for the first time is giving the company money -- shouldn't get into the habit of bailing out failing businesses.

It's the ongoing battle between free trade and protectionism. The question is whether the state should pay to keep Alaska's failing, seven-farm dairy industry afloat, even if it is temporary.

"It's a poor use of funds by the state," said economist P.J. Hill of the University of Alaska Anchorage. "If they can't make it, the state should get out of the milk business."

He said there was a time when it made sense to have a dairy in Alaska, but with more efficient competition coming up from the rest of the country the state shouldn't get involved in supporting the failing business.

He is surprised the company has survived for as long as it has considering it has lost more than $700,000 in the past two years and is averaging $170,000 in losses each month this year, he said.

But artificially supporting the faltering business will only ensure it won't become self-sufficient, he said.

"Public moneys are supposed to do things that the market can't do," he said. "The problem is, when you subsidize it, everybody pays."

Mat Maid ships its products to areas on the road system -- Bush grocers in places like Nome, Barrow and Bethel don't carry them -- and averages about $15 million per year in revenue.

If the company shuts down, more than 50 employees will be out of jobs, though about a quarter have already quit because of the company's uncertain future.

Kathy Baylis, of the Western Agricultural Economics Association, said dairies in most western countries continue to be heavily dependent on state support. "Most places are trying to disentangle state involvement in dairy production," she said.

NOT COMPETITIVE

That has been difficult in recent years, Baylis said. Technological innovations -- such as the ability to split milk into its components, keeping it fresh longer -- have made small farmers increasingly unable to compete with major producers, she said.

"Given the technological advances in recent years, people might decide it's not worth it to support the industry," she said.

Because of increasing competition, officials are considering whether niche markets for specialty Mat Maid products could help it survive.

Baylis, of British Columbia, said similar efforts have worked in Canada, but with so little milk to draw from in Alaska that option might be hard to pursue here.

If the company goes under, the dairies now selling to Mat-Maid will have few options for selling their milk because the only other FDA-approved dairy in the state, Northern Lights Dairy in Delta Junction, says it can't absorb it all. Farmers say they will be forced to kill their cows if that happens.

The state took over the Mat Maid in the mid-1980s with the intent of eventually privatizing it, said Dick Lefebvre, deputy commissioner at the Department of Natural Resources.

Back then, the dairy got all its milk from Alaska farmers. Today, it gets only 27 percent of its milk -- about 2,000 gallons per day -- from Alaska farms.

Reliance on Outside milk has caused the company major losses in recent years because of its increasing costs.

Spokeswoman Meghan Stapleton said Gov. Sarah Palin is not looking to bail Mat Maid out, but wants to keep it running long enough to decide what's best.

"This is about a governor who's just trying to find answers," Stapleton said. "This isn't about trying to save anyone or trying to subsidize anyone."

The original Creamery Board last week refused to accept the grant that would have kept the company open beyond July 7, its intended closing date. Palin subsequently removed the entire Agriculture Board because she didn't have the authority to fire the Creamery Board.

The newly formed Agriculture Board on Tuesday dismissed the entire Creamery Board and installed itself as replacements. It then accepted the $600,000 and rescinded the closure of the Matanuska Maid dairy.

'SOFT LANDING'

Stapleton said state money isn't intended to be a long-term solution. Palin supported it because the grant would give farmers a "soft landing" if the company eventually does go under, she said.

The implications could be severe if the dairy industry goes under, Stapleton said, because agriculture operations ranging from feed suppliers to the state-owned Mt. McKinley meat plant depend on the industry.

"I don't think the perspective is there about how far the tentacles reach in the agriculture community," Stapleton said. "We're talking about hundreds of people in the entire state who will be impacted by this."

Although other sectors may be affected if the company closes, a report prepared by the University of Alaska Fairbanks last year said the state's agriculture industry as a whole supplies less than 5 percent of the state's food needs. It also said traditional agricultural products constitute less than 1 percent of the state's revenues from resource industries.

Kristan Cole, chairwoman of the new Agriculture Board, said there is some sentimental value to having a dairy industry in Alaska, but the real issue is that of a dependent industry.

A state-funded grant will buy time to assess why the dairy has been losing money in the past several years, but she said it isn't the ideal solution.

"I would prefer that it not happen, but in this instance it's asset preservation," she said.

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