text:
[Senate Hearing 106-721]
[From the U.S. Government Printing Office]
S. Hrg. 106-721
FEDERAL DAIRY POLICY
before the
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
FEBRUARY 8, 9, 2000
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
U.S. GOVERNMENT PRINTING OFFICE
67-541 CC                   WASHINGTON : 2000
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
RICHARD G. LUGAR, Indiana, Chairman
JESSE HELMS, North Carolina          TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAUL COVERDELL, Georgia              THOMAS A. DASCHLE, South Dakota
PAT ROBERTS, Kansas                  MAX BAUCUS, Montana
PETER G. FITZGERALD, Illinois        J. ROBERT KERREY, Nebraska
CHARLES E. GRASSLEY, Iowa            TIM JOHNSON, South Dakota
LARRY E. CRAIG, Idaho                BLANCHE L. LINCOLN, Arkansas
RICK SANTORUM, Pennsylvania
Keith Luse, Staff Director
David L. Johnson, Chief Counsel
Robert E. Sturm, Chief Clerk
Mark Halverson, Staff Director for the Minority
Hearing:
Tuesday, February 8, 2000, Federal Dairy Policy..................     1
Wednesday, February 9, 2000, Federal Dairy Policy................   211
Appendix:
Tuesday, February 8, 2000........................................    69
Wednesday, February 9, 2000......................................   271
Document(s) submitted for the record:
Tuesday, February 8, 2000........................................   195
STATEMENTS PRESENTED BY SENATORS
Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman,
Committee on Agriculture, Nutrition, and Forestry..............     1
Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois..........    38
Craig, Hon. Larry E., a U.S. Senator from Idaho..................    33
Santorum, Hon. Rick, a U.S. Senator from Pennsylvania............    24
Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member,
Committee on Agriculture, Nutrition, and Forestry..............    22
Leahy, Hon. Patrick J., a U.S. Senator from Vermont..............    34
Specter, Hon. Arlen, a U.S. Senator from Pennsylvania............     4
Grams, Hon. Rod, a U.S. Senator from Minnesota...................     5
Kohl, Hon. Herb, a U.S. Senator from Wisconsin...................     7
Jeffords, Hon. James, a U.S. Senator from Vermont................     8
Feingold, Hon. Russell, a U.S. Senator from Wisconsin............    11
Wellstone, Hon. Paul, a U.S. Senator from Minnesota..............    13
Kind, Hon. Ron, a U.S. Representative from Wisconsin.............     9
Green, Hon. Mark, a U.S. Representative from Wisconsin...........    15
Ryan, Hon. Paul, a U.S. Representative from Wisconsin............    16
Thompson, Hon. Tommy, Governor, State of Wisconsin...............     2
Panel One - Review of Federal Dairy Policy
Collins, Keith, Chief Economist, U.S. Department of Agriculture,
Washington, DC.; accompanied by Larry Salathe, Senior
Economist, USDA................................................    25
Panel Two - Current structure/status of the Dairy industry
Bok, Wayne, Dairy Farmer, Geddes, South Dakota...................    56
Engles, Gregg L., President and CEO, Suiza Foods Corporation,
Dallas, Texas..................................................    43
Gorder, Richard, Wisconsin Farm Bureau Federation, WI............    54
Hoover, Gordon, National Milk Producers Federation, PA...........    53
Rudgers, Nathan L., Commissioner, New York State Department of
Agriculture and Markets........................................    19
Vanderstelt, Dennis, President, Western States Dairy Producers
Trade Association, ID..........................................    50
Wilson, John, Corporate Vice President for Marketing/Economic
Analysis, Dairy Farmers of America, MO.........................    48
Yoder, President, Indiana Professional Dairy Producers, IN.......    46
Prepared Statements:
Lugar, Hon. Richard G........................................    70
Helms, Hon. Jesse............................................   190
Santorum, Hon. Rick..........................................   110
Harkin, Hon. Tom.............................................   108
Leahy, Hon. Patrick..........................................   135
Breaux, Hon. John............................................   191
Grams, Hon. Rod..............................................    80
Schumer, Hon. Charles, E.....................................   189
Specter, Hon. Arlen..........................................    77
Wellstone, Hon. Paul.........................................    87
Green, Hon. Mark.............................................    92
Kind, Hon. Ron...............................................    85
Kohl, Hon. Herb..............................................    83
Ryan, Hon. Paul..............................................    96
Bok, Wayne...................................................   186
Collins, Keith...............................................   112
Engles, Gregg L..............................................   150
Gorder, Richard..............................................   182
Hoover, Gordon...............................................   174
Rudgers, Nathan L............................................   102
Thompson, Tommy G............................................    71
Vanderstelt, Dennis..........................................   170
Wilson, John J...............................................   164
Yoder, Martin................................................   159
Statement of the American Association of Grain Inspection and
Weighing Agencies..........................................   196
Letter to Hon. Richard G. Lugar, from James A Graham,
Commissioner, Department of Agriculture, Raliegh, North
Carolina, submitted by Hon. Jesse Helms....................   199
Letter to Hon. Richard G. Lugar, from John W. Lincoln,
President, New York Farm Bureau............................   201
Testimony by the National Grange Regarding Current U.S. Dairy
Policy and the U.S. Dairy Pricing System...................   204
Comments on the Federal Milk Marketing Order program from
Fred LaClair...............................................   209
Survey on bottled milk and cheddar cheese prices in several
states, and the Market Administrators Bulletin, submitted
by Fred LaClair (this information is retained in the
Committee files)...........................................
Committee on Agriculture, Nutrition, and Forestry..............   211
Santorum, Hon. Rick, a U.S. Senator from Pennsylvania............   245
Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois..........   231
Grassley, Hon. Charles E., a U.S. Senator from Iowa..............   223
Grams, Hon. Rod, a U.S. Senator from Minnesota...................   228
Leahy, Hon. Patrick J., a U.S. Senator from Vermont..............   247
Conrad, Hon. Kent, a U.S. Senator from North Dakota..............   221
Daschle, Hon. Tom, a U.S. Senator from South Dakota..............   212
Lincoln, Hon. Blanche L., a U.S. Senator from Arkansas...........   224
Brey, Bill, President, Wisconsin Farmers Union, Sturgeon Bay,
Wisconsin, on behalf of the National Farmers Union.............   258
Clayton, Kenneth G., Associate Administrator, Agricultural
Marketing Service, U.S. Department of Agriculture; accompanied
by Richard M. McKee, Deputy Administrator for Dairy Programs,
Agricultural Marketing Service, U.S. Department of Agriculture,
Washington, DC.................................................   213
Jaeger, Arthur S., Assistant Director, Consumer Federation of
America, Washington, DC........................................   226
Jensen, Larry J., Senior Vice President of Supply, Distribution
and Business Development, Leprino Foods, Denver, Colorado......   236
Frydenlund, John E., Director, Center for International Food and
Agriculture Policy, Citizens Against Government Waste,
Furth, Mark, General Manager and Chief Executive Officer,
Associated Milk Producers, Inc., New Ulm, Minnesota............   229
Hinsdale, Clark W. III, President, Vermont Farm Bureau Inc, on
behalf of The American Farm Bureau Federation, Richmond,
Vermont........................................................   248
Hughes, Will, University of Wisconsin, Center for Cooperatives,
Madison, Wisconsin.............................................   254
Meyer, Dennis, Member, Board of Directors, Family Dairies, USA,
Bernard, Iowa..................................................   238
Paul, Eugene, Legislative Coordinator, National Farmers
Organization, Ames, Iowa.......................................   256
Scarlett, John N., New Market, Tennessee, on behalf of the South
East Dairy Farmers Association.................................   249
Tillison, James, Alliance of Western Milk Producers, Sacramento,
California.....................................................   234
Vanblarcom, James, Columbia Cross Roads, Pennsylvania............   232
Fitzgerald, Hon. Peter.......................................   148
Daschle, Hon. Tom............................................   272
Grams, Hon. Rod..............................................   373
Baldwin, Hon. Tammy..........................................   274
Brey, Bill...................................................   362
Clayton, Kenneth C...........................................   279
Erb, Debora, A...............................................   371
Frydenlund, John E...........................................   331
Furth, Mark..................................................   296
Hinsdale, Clark W. III.......................................   323
Hughes, Will.................................................   339
Jaeger, Arthur S.............................................   288
Jensen, Larry J..............................................   312
Meyer, Dennis................................................   317
Paul, Eugene.................................................   355
Scarlett, John N.............................................   326
Tillison, Jim................................................   306
Vanblarcom, James............................................   298
Documents submitted for the record:
Testimony on the Northeast Dairy Compact, submitted by Linda
Smith Dyer, Chair, Northeast Diary Coompact Commission
(this information is retained in the Committee files)......
U.S. Senate,
Committee on Agriculture, Nutrition, and Forestry,
Washington, DC.
The Committee met, pursuant to notice, at 9:00 a.m., in
room SH-216, Hart Senate Office Building, Hon. Richard G.
Lugar, (Chairman of the Committee), presiding.
Present or submitting a statement: Senators Lugar,
Fitzgerald, Craig, Santorum, Harkin, Leahy, and Conrad.
OPENING STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM
INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND
The Chairman. This hearing of the Senate Agriculture
Committee is called to order. We have this morning a number of
distinguished witnesses including the distinguished governor of
Wisconsin, at least six of our colleagues in the U.S. Senate, 4
members of the House, and the Commissioner of Agriculture, Mr.
Rudgers of New York. And we look forward to hearing from all
you. I will dispense with an opening statement except to say
that the hearing comes about through agreement at the end of
the last session of the Congress. Those of you were following
our deliberations on that day will recall that pledges were
made to Senators who were conducting extended debate on the
dairy issue that the Committee would hold hearings on dairy
policy in which all views could be heard and which once again
we could examine this very, very important industry in America.
And so this is the first of the 2-days of hearings.
Tomorrow we will have another full day of opportunities and we
have called witnesses from public life. Likewise, the United
States Department of Agriculture; we will have Keith Collins
reviewing from the standpoint of USDA agricultural policy and
dairy policy, and then, including that this morning, a number
of witnesses describing the current status and structure of the
dairy industry.
It is my privilege to call upon the distinguished witnesses
and I will ask the governor of Wisconsin to testify first and
then we will proceed through our colleagues in the Senate. I
will ask each of you, if you will, to give 5-minutes of
testimony. Your remarks in full will be published in the
record, but as a courtesy to all of the witnesses, because we
know that our public witnesses will take us well into mid-
morning, if not longer, and then we still have the USDA and the
other witnesses, we will try to proceed with the 5-minute time
limit for testimony. Likewise, for comments or questions from
Senators if we come to those rounds. Governor Thompson, it is
good to have you, as always.
[The prepared statement of Senator Lugar, can be found in
the appendix on page 70.]
STATEMENT OF HON. TOMMY THOMPSON, GOVERNOR, STATE OF WISCONSIN
Governor Thompson. Well, thank you so very much, Chairman
Lugar, and thank you so very much for holding this hearing. It
is wonderful and I thank you so very much for taking me out of
order. Mr. Chairman, I would like to thank you for holding
these hearings. I certainly appreciate your interest in
agriculture and your desire for agriculture and for this
committee to reclaim the issues associated with dairy, issues
that affect Wisconsin probably more so than any other state in
Wisconsin is the Nation's top producer of cheese. In fact,
if Wisconsin were a Nation, it would be the second leading
cheese producer in the world, second to New Zealand. My state
has more dairy farms than the states of California, New York,
and Pennsylvania combined. However, the number of family farms
in my state is dwindling rapidly, and with their loss, we are
witnessing the demise of the very people who helped build this
great country, our proud farm families.
In 1990, to give you some idea, 34,000-dairy farm families
existed in Wisconsin. Today, that number has plummeted to
21,000, representing a loss of three daily, farms each day for
an entire decade. What is most distressing is the dramatic
increase in the number of farms that have gone out of business
since the Northeast Dairy Compact was enacted. Between 1997 and
1998, more than 2,000-family farms have folded, increase of
roughly 100-percent over the previous average yearly loss.
Ladies and gentlemen, to say Wisconsin's dairy farms are in
trouble is an understatement. They are in dire straits and I am
at a loss to understand why Congress continues to stand with a
heavy foot on the throat of the Wisconsin dairy farmer. As all
of you know, Wisconsin dairy farmers have been discriminated
against under the Federal milk marketing order system commonly
known as the Eau Claire rule ever since 1937.
Congress has attempted to update this pricing regime for
years. Farm bills in 1980, 1985 and 1990 all called for reform
but failed. When discussions began to take place in the last
farm bill, we thought our dairy farmers might finally get equal
treatment. However, when the final version of the 1996 farm
bill emerged, there were no market based reforms. Instead the
farm bill let the USDA decide what type of changes were
necessary to reform the 1937 system and was able to consolidate
the 31-milk marketing regions nationwide. It did consolidate it
It also granted temporary consent to the Northeast Compact
while the USDA considered action. In January 1998, Agriculture
Secretary Dan Glickman proposed two potential approaches to
reforming the milk pricing system. While I personally as
governor was not pleased with the scale of the reforms, I was
pleased finally that some reforms would be implemented and that
the Northeast Dairy Compact would be eliminated when the new
fiscal year began October 1, 1999.
I was confident the reforms the USDA created would be
implemented because there was no reason to believe otherwise
for the Senate held no debates on the Federal milk marketing
order system or dairy compacts in any committee nor on the
Senate floor. However, as the Congress was wrapping up the
final appropriation conference bill, dairy became the issue. At
the last minute, a bill was added to the final package to throw
out the reform plan the USDA spent 2-years developing. The
spending package also included language to extend the Northeast
Dairy Compact until September 30, 2001.
Wisconsin farmers, along with many of their Midwestern
peers, were again left on the political auction block. Compacts
were supposedly designed to save family dairy farms. Instead
the opposite has proven to be true. Together compacts and the
Federal milk marketing orders have resulted in a devastating
effect on Midwestern dairy farmers, driving milk prices to
record lows and family dairy farms closing to new heights.
Mr. Chairman, some individuals argue that a compact in one
area of the country has no effect in another part of the
country. This is either economic ignorance or intentional
misrepresentation. Try as we might, we cannot evade the power
of the marketplace. A compact in one region will lead to lower
prices in another region because we are lessening, not
increasing, consumer demand due to higher prices.
When supply outstrips demand, something has to give. In the
case of compacts, the Federal Government is again asking
consumers in the compact regions and dairy producers in the
non-compact regions of the country to do the giving. Vermont's
production increased 4-percent in 1998. Production in the other
five compact states was up 2\1/2\-percent. In fact, a
University of Wisconsin--I got one final page and I will finish
up quickly, Mr. Chairman--in fact, a University of Wisconsin
study estimates the real cost of dairy impacts exceed $145,000
in lost farm revenues per year in non-compact regions.
Even those states with compacts are witnessing a decline in
small family farms, as Vermont is losing farms with herds with
less than 100-cows. So while the United States is charging into
the longest period of economic growth in history, our dairy
farm families are watching it roll by and over them.
Simply stated, we are doing our national dairy industry a
real disservice if we continue to price milk based on the
location of the cow and proceed down the path of regional
pricing compacts. What the Wisconsin and American dairy farmer
will benefit most from is bold and dramatic reform that
eliminates Eau Claire as the standard for setting milk prices
paid to farmers and forgets about pricing milk regionally.
Mr. Chairman, I urge you strongly and this committee to rid
the entire country of dairy compacts and do not create more.
Thank you so very much for having this opportunity, Mr.
Chairman.
[The prepared statement of Governor Thompson, can be found
in the appendix on page 71.]
The Chairman. Thank you very much, Governor Thompson. The
Chair will say that as each of our distinguished public
witnesses concludes, he or she is free to leave the podium as
opposed to participating in the further dialogue, and I will
call upon our distinguished colleagues from Congress in the
order in which they have appeared. And that will be Senator
Specter, Senator Grams, Senator Kohl, Senator Jeffords,
Congressman Kind and Senator Feingold. Senator Specter.
STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM
Senator Specter. Thank you very much, Mr. Chairman, and
thank you for convening these important hearings. This is an
extraordinary group of witnesses in this major Senate hearing
room so I will be very brief. My full statement, I know, will
be included in the record as you have announced.
The Chairman. Included in full.
Senator Specter. And I appear to strongly support the dairy
compact being extended to the Mid-Eastern states, states like
Pennsylvania. There has been an extraordinary fluctuation in
the price of milk, as high as $17.34 per hundredweight in
December of 1998 to exactly 1-year later $9.63 per
hundredweight. And with that kind of a fluctuation, it is just
impossible for dairy farmers to plan and more fundamentally for
dairy farmers to stay in business.
Pennsylvania has many small dairy farmers and in the era
from 1993 to 1998, Pennsylvania lost between 3- to 500-dairy
farmers a year, more than 11-percent of the farmers in the
state. Now, it is a Pennsylvania issue that agriculture is
Pennsylvania's number one industry and that dairy is the
largest component of Pennsylvania's agriculture. But it is a
national matter to maintain an adequate supply of milk so that
it gets to the consumers and there is a delicate balance to be
maintained between a free market and just the bit of
governmental assistance which will maintain the small dairy
We do not want to see a situation arise where the large
corporations control dairy, nor do we want to see a situation
arise where certain states which may have a competitive
advantage because grain costs dominate the market and, in
effect, squeeze out other dairy farmers. The compact which has
been in existence in the northeastern part of the state has
been very successful--northeastern part of the country--has
been very successful and when some of the states, Vermont, New
Hampshire, Massachusetts, Connecticut, have the benefit of
these compacts, as a matter of fundamental fairness, it ought
to be extended to states like Pennsylvania and other states
which wish to participate.
There is not a matter of cost to the Federal Government and
it is a matter of basic fairness. Now, we had a fierce battle
last year known to those even beyond the people assembled in
this room, and I sit next to one of my best friends, Senator
Herb Kohl, who chaired with me the hearings on Ruby Ridge in
this room where we saw eye to eye and we see eye to eye on most
matters, and I believe this matter can be accommodated so that
Pennsylvania farmers can live as well as Wisconsin farmers. So
I urge you, Mr. Chairman--I know your fairness and your
astuteness and your experience--I know you will give
consideration, but I think the merits support extension of the
compacts to states like mine. I yield the balance of my time,
Mr. Chairman.
[The prepared statement of Senator Specter can be found in
The Chairman. Well, thank you very much, Senator Specter,
and I appreciate your compliment. This really requires the
wisdom of Solomon and beyond.
Senator Specter. I still feel confident about the judgment
in this matter, Mr. Chairman.
The Chairman. I appreciate that. Senator Grams.
STATEMENT OF HON. ROD GRAMS, A U.S. SENATOR FROM MINNESOTA
Senator Grams. Thank you very much, Mr. Chairman, and the
members of the Committee. I want to thank you for the
opportunity to be here today and to address you concerning the
critical issue of Federal dairy policy. It is my hope that
these hearings will shed some light on the unfair and the
outdated pricing structure that we currently live under and
help turn the tide in our country to free markets for our dairy
farmers.
Mr. Chairman, I want to point out first today that milk,
which is an important member of the food group, is also a
beverage that competes with a host of other beverage choices
for the consumer's dollars. In 1998, each American consumer
drank 23.8-gallons of fluid milk products. This is compared to
56.1-gallons of soft drinks, 15-gallons of fruit juices, 13.9-
gallons of bottled water. In fact, per capita beverage milk
consumption has declined from 28.6-gallons in 1975 to just
23.9-gallons in 1997.
Our Federal pricing policies also run counter to the
conventional wisdom that we need to be promoting milk
consumption as an important part of a healthy diet. If we
continue to artificially raise milk prices, we cannot expect
farmers to be successful in the long-run competing against each
other and other beverages available in the grocery store. Our
daily policy must be focused on permitting farmers to capture
additional market share, both domestically and internationally.
That is one of the reasons I have introduced legislation,
Senate bill 1930, which would eliminate the Federal milk
marketing orders and allow farmers to compete in the free
market. Eliminating the milk marketing orders would end the
regional price discrimination that hamstrings Upper Midwest
dairy producers and would obviously benefit the consumer,
especially low income families with children that need milk for
good health and spend a high percentage of family income on
The milk marketing orders artificially inflate prices for
beverage milk and other dairy products within a region which
prevents producers from lower cost regions, such as in the
Upper Midwest, from penetrating markets in other areas. Not
only does it keep Upper Midwest producers from increasing
market share in other regions with lower cost, high quality
milk, but the Federally mandated higher prices for fluid milk
in other regions stimulate production there resulting in more
milk flowing into the production of manufactured dairy products
which in turn depresses prices that Minnesota producers
receive.
So the adverse effects of milk marketing orders on
Minnesota farmers are twofold. In fact, the milk marketing
order system, while raising the price farmers receive for
beverage milk, actually depresses the prices farmers receive
for manufactured dairy products, and the Upper Midwest Federal
Order used only 13-percent of its milk as beverage milk in
January 1999, the remaining 87-percent going to the production
of manufactured dairy goods.
Mr. Chairman, without Federal orders, Upper Midwest farmers
would receive a higher price on the 87-percent of its milk used
for production of processed products. How can Congress possibly
justify artificially raising the price that farmers receive for
fluid milk and depressing the price they received for processed
products? It cannot. Congress absolutely should not be picking
winners and losers in such an arbitrary manner.
Minnesota farmers do not want special advantages. They
simply want the heel of an antiquated system off their neck. No
other consumer food product is micromanaged as much in America
as the dairy industry. As our colleague, Phil Gramm, memorably
put it last year, ``dairy compacts would make a Soviet
commissar blush.'' The same goes for the U.S. milk marketing
order system. The communist countries used to price goods and
services using complicated formulas representing estimated
values of input. Like the Federal milk marketing orders, it had
little to do with supply and demand.
Mr. Chairman, my bill would allow the production of milk in
the United States to be based on a fair playing field for all
producers and would that be good for the Upper Midwest? Yes, it
would. Would it be good for the consumer and for American
agriculture as well? Yes. The Upper Midwest is blessed with the
natural conditions conducive to milk production including a
favorable climate, low feed costs and ample water supplies. We
are the most competitive producers in the country and the
American consumer should be able to reap those benefits.
So, Mr. Chairman, in closing, I just want to thank you
again for holding these hearings. I hope it does lead to some
changes in this dairy industry or the pricing. Our dairy
farmers, as Governor Thompson pointed out, are just at the
mercy of antiquated, old-fashioned, outdated milk marketing
order system. We would never put a dairy policy like this in
place if it were being constructed today. So I just hope we can
put some fairness into this dairy policy so when I go home that
I can tell my dairy producers, our farmers who get up every
morning to go out and milk those cows, that we are not going to
discriminate against them.
Mr. Chairman, I also have the remaining part of my
statement I would like to have entered into the record as if
[The prepared statement of Senator Grams can be found in
The Chairman. The record will include your statement in
full. We thank you, Senator Grams.
Introducing our next testimony of Senator Kohl, I would
simply mention, as I said at the outset, before Senator Kohl
arrived, that on the concluding day of our session, our
Majority Leader, Senator Lott, called me to the floor because
he said that Senators from Wisconsin and Minnesota in
particular wanted assurance from this committee, as did Senator
Lott, that we would hold hearings. And one reason for
concluding the debate on that day was a pledge on my part on
behalf of our committee to hold the hearings. So I am very
pleased that Senators from Wisconsin and Minnesota are here.
Senator Kohl was a leader of that debate and it is good to call
upon you and have you here in our hearing this morning, Herb.
If you would commence with your testimony.
STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM WISCONSIN
Senator Kohl. We thank you, Mr. Chairman, and we thank you
for holding these hearings today as you promised you would. We
also thank witnesses who have come a long way to help us sort
out our antiquated and unfair dairy pricing system. Mr.
Chairman, there are those who think that these hearings are
meaningless. They argue that Wisconsin dairy farmers need
justice and we are only giving them words. They point to the
long history of backroom deals and last minute betrayals that
have tilted our current dairy laws hopelessly against the
family farmers of the Upper Midwest.
Mr. Chairman, I am not ready to give up on my colleagues in
Congress. I continue to hope that they will side with us when
they come to understand how far our dairy pricing system has
strayed from the basic American principle of honest pay for
honest work. Last November, as you point out, when we forced
Senate leadership to look at our argument literally by barring
the door, we got strong and open commitments from the majority
and minority leaders to fight the regional dairy pricing fixing
cartels known as dairy compacts.
This year with hearings like this and with legislation I
hope this committee will report and through the efforts of
those of us from the Midwest committed to this fight, I believe
that we can change more minds. The current pricing system is
like a vampire. It cannot survive in the light of day. So I am
not ready to give up on Congress and I am certainly not ready
to give up on the struggling family dairy farmers of my state.
Right here with me today I have a list of the 10,519-dairy
farmers who stopped milking over the last 3-years. If these
were farmers ruined by a natural disaster, then it would be a
list of those eligible for FEMA loans and grants to rebuild
their businesses. If these were farmers put out of business by
unfair trade practices in other countries, then it would be a
list of those eligible for trade adjustment assistance. But
because their ruin was brought on by an unfair policy
intentionally imposed by their own Federal Government, this is
only a list, a sad, sad record of a way of life that should not
have to die.
Mr. Chairman, we in the Upper Midwest are not asking for a
bailout. We are only asking that Congress end a dairy pricing
system that is uncompetitive and un-American. The facts are
clear, number one, increased prices in some regions either
through compacts or Federal orders result in overproduction
that lowers prices for farmers outside the protected region.
History shows this to be demonstrably true.
Number two, dairy compacts are an unprecedented price
fixing scheme contrary to the principles of free markets that
have made America's economy the strongest in the world.And
three, the way to end regionalism and divisiveness is not to
expand compacts and exacerbate milk price distortions but to
develop and enact policies that help all farmers equally. Those
who suggest we can have a national dairy policy to help all
farmers and regional policies like compacts are just plain
Mr. Chairman, it is ironic that the Midwest is often
accused of regionalism for opposing policies which help only
other regions. The Upper Midwest has never sought special
treatment. We have only sought a level playing field. We need a
national dairy policy that will help all family dairy farms
throughout our country, that will neither distort markets nor
tax consumers. And we need you, Mr. Chairman, and the members
of your committee, to commit to pursuing that goal and pursuing
it openly. Congress should never again agree to a last minute
special interest dairy deal that goes against every basic
principle of fairness and American free enterprise. I thank
you, Mr. Chairman.
The Chairman. Thank you very much, Senator Kohl. Senator
Jeffords.
STATEMENT OF HON. JAMES JEFFORDS, A U.S. SENATOR FROM VERMONT
Senator Jeffords. Thank you, Mr. Chairman. It is a pleasure
to be here with you. As you know, I have been deeply involved
in dairy policy since I got here some 20-odd years ago and so I
have been through a number of trials and tribulations and
programs and all, and it is just seems to us here in Vermont
that the one that we have now certainly is the best one we have
had as far as allowing compacts to be able to satisfy the needs
of a region.
We have to remember what the basic policy of the dairy
policy is and that is each region of this country is entitled
to have an adequate supply at a reasonable cost of fresh milk.
To say that it can all be supplied from the West or the Midwest
is not consistent with the policy nor is it consistent for the
Nation as we have varying times when various production levels
are available. Again, the basic policy is to assure consumers
of adequate and dependable supplies of pure wholesome milk
products from the least costly source.
I recognize that my Senate colleagues from the Midwest
have, and very understandably, raised the dairy issue to a new
level of concern and I welcome the opportunity to respond to
their call for productive changes in our dairy policy. There is
nothing I would like more to do than to join my friends from
the Midwest in common cause to improve our dairy situation. I
say I have worked over the years with the Midwest and time and
time again we have found common ground. It is time to work
together again.
But let me be frank with each other. The key issue that has
divided us in our time here and which continues to divide us is
the insistence that one part of the country should be seen as
the source of our nation's supply of milk beverage. This
insistence has been and still remains simply contrary to the
overwhelming will of Congress and contrary to the law. The real
issue, the very nature of our basic supply and demand, so
extends way beyond the mere interest of a single constituent
group, regionally and on behalf of the Nation as a whole, the
Congress simply will not yield to the destruction of our local
supplies of fresh wholesome drinking milk which is the basic
So I call upon my colleagues in the Senate, especially my
friends from the Midwest, to look elsewhere than to reformation
of the fluid marketplace for the solution of our problems that
dairy faces. I make this call in the spirit of cooperation and
with a positive spirit. One looks at the increase in milk
production and cow numbers in the western states, such as
California, Arizona, New Mexico, Idaho, Washington, and one
could determine that the fight is not regional supplies of
milk, but it is the production of cheese and other manufactured
products which when overproduced caused depressed farm milk
prices across the country and difficulties.
Let me go through what has happened in that regard and I
ask my members from the Midwest to take note. USDA's Commodity
Credit Corporation purchases of surplus dairy product
percentage by regions show that in fiscal year 1996-97 the
Midwest accounted for 56.8-percent of surplus dairy products
purchased, 43.2-percent from the West, 0-percent from the East.
In 1997-98, the Midwest percentage was 9.6-percent and the
West was 90-percent, and the East was .2-percent. As of April
1999, the West contributed 97.2-percent of the Commodity Credit
Corporation [CCC] purchases. It is clear that the
overproduction is not in the East; the solution may be in the
East, but it is the West that is the problem. I also have here
to show you what has happened for consumers in our area. The
price to consumers has gone down. It is just purely
coincidental that we picked Kohl's Market out in Wisconsin to
compare with, but I would point that in Vermont at this
particular time the price per gallon was $1.39 and out in
Wisconsin it was $1.79. So we have a compact which has cut the
cost to the Government, which has cut the cost to consumers,
which has aided our farmers, and it is something that ought to
be looked at as a solution because it is not the problem. Thank
The Chairman. Thank you very much, Senator Jeffords. I call
now upon Congressman Kind of Wisconsin. We are glad to have you
at our hearing this morning.
STATEMENT OF HON. RON KIND, A U.S. REPRESENTATIVE FROM
Mr. Kind. Thank you, Mr. Chairman. I am delighted to be
here and thank you for the opportunity of having not just
myself but a couple of my colleagues from the House side
testifying in regards to this very important matter, and let me
just begin by coming to the defense of my esteemed Senator from
Wisconsin that some of the best consumer purchases that can be
made in the country can be found in Kohl's department stores so
I hope you are not under any illusions with that last graph
that was just put in front of you.
But, Senator Lugar, I represent a district in western
Wisconsin that is one of the largest dairy producing districts
in the Nation. It also happens to be home of a very fine city
called Eau Claire. And I am sure the Chairman is aware of the
significance of that geographic location. I have over the last
3-years representing that district found it incredibly
difficult trying to explain to the family farmers back home why
we have a milk pricing system that discriminates upon them
merely because of geography and location. And the bottom line
is that there is no real economic justification for it anymore.
What may have made sense back in the 1930s to ensure an
adequate supply of fluid milk in certain regions of the country
that had deficient milk supplies no longer holds true today,
not with the interstate highway system, the ability for us to
transport milk to all regions of the country with relative ease
overnight. There is no economic justification anymore today.
The dairy industry is the largest industry in the state of
Wisconsin. It is a very proud industry. We have approximately
22,000-dairy farmers that produce close to 23-billion pounds of
milk yearly. Gross milk receipts for 1998 were approximately
$3.5 billion. Roughly 160,000-people are employed in our
state's dairy industry. 85-percent of Wisconsin's milk is
processed into cheese and other manufactured products and
Wisconsin cheese is recognized nationally and internationally.
What does not exist in the state of Wisconsin, and this is
true for the Upper Midwest, are our family farmers who are
looking for any particular advantage. All they are asking for
is the ability to compete fairly in our own domestic market
with a level playing field and to end the regional competition
that now exists in this country. What also does not exist in
Wisconsin, and it is true in the Upper Midwest, are large
corporate dairy farms. In fact, there have been some fallacies
perpetuated out here with some members of Congress in the
national media who think that the representatives from the
Upper Midwest are here going to bat for large corporate
interests back home. Just the opposite is true. The average
dairy herd size in Wisconsin is 59-head, compared to Vermont
which is 85-head; New York has 81-cows. In Wisconsin, just 2-
percent of our farms have over 200 cows. In Vermont, it is 7-
percent of their farms over 200-cows. In New York, 6-percent
over 200-cows. So it is not as if we have a lot of large
corporate dairy interests that are demanding change. What we
have are a lot of small family farmers who are just asking for
an opportunity to make a decent living, compete domestically,
so they can provide for their families. It is a very proud
One other point I would like to make to the Chairman here
today, there are, I believe, international trade implications
with our dairy policy in this country and we saw the results of
the World Trade Organization [WTO] talks in Seattle. One of the
greatest obstacles we have in a new round of international
trade talks is in the agricultural sphere. Agriculture is our
number one export market industry in this country and yet if
our trade representatives are to have any credibility going
into a new round of trade talks, we need to get it right at
home first.
In fact, I along with Senator Pat Roberts, a distinguished
member of this committee, and a handful of other
representatives had a chance about a year ago to go to Brussels
to meet with members of the European Commission and members of
the European Parliament in regards to the changes or proposed
reforms of their common agricultural policy. We all know that
the European Union [EU] has a heavily subsidized export dairy
program in place right now and as we discussed with them in
gentle terms the desire for change, their response was quite
illuminating. Basically they responded do not come over here--
and I am paraphrasing, of course--and lecture us on our dairy
policies and our state subsidies to the dairy industry when you
cannot even get it right at home.
And I think we are going to run into this difficulty in
future trade talks with other nations as long as we are quick
to point the finger of blame on other countries who refuse to
negotiate in good faith and practice good fair trade policies
in accordance with WTO policies, so long as we pit region
against region, continue this 1930 antiquated milk pricing
system in our country, and I just leave that with you today,
Mr. Chairman. I have a more fully and detailed written
statement that I will submit for the record, but thank you
again for the opportunity to testify. Thank you.
[The prepared statement of Representative Kind can be found
The Chairman. Well, thank you for coming. Your statement
will be published in full. I take the point that you have made,
Mr. Kind, that WTO apparently yesterday made a late
announcement that they are going to attempt to revive
agriculture, and not the large agenda that was in Seattle that
crashed and burned. But now the embers are being blown on
again. Perhaps some negotiations starting in March with no
promise of when they will conclude, but certainly your point is
well taken and I appreciate your interest in this.
Let me just now call upon your colleague from Wisconsin,
Senator Feingold. Russ, it is good to have you as always. Would
you please testify?
STATEMENT OF HON. RUSSELL FEINGOLD, A U.S. SENATOR FROM
Senator Feingold. Thank you very much, Mr. Chairman. And I
want to thank the entire committee for holding these hearings
and I especially want to thank my colleagues from both the
Senate and my friends from the House and Governor Thompson for
all joining together to testify today. And I would ask that my
whole statement be placed in the record.
The Chairman. It will be published in full.
Senator Feingold. Mr. Chairman, I am here to simply
underscore the simple point that the current Federal dairy
policy is not helping anyone. In fact, to put it very simply,
Mr. Chairman, it is destroying farmers. It is hurting consumers
and it is hurting taxpayers. Over the past 70-years, we have
witnessed a tragic transformation of America's dairy industry.
Year after year, consolidation and consolidation and
concentration have run rampant through our dairy industry and I
certainly agree that in nearly every region, whether it be the
Northeast, Midwest or west coast, we have seen the
disappearance of small and moderate size family farms. But
nowhere in the United States has this trend been more glaring
than in America's dairyland, my home state of Wisconsin.
Let us just again look at the effect of the Federal dairy
policy on Wisconsin dairy farmers. Mr. Chairman, in 1950,
Wisconsin had over 143,000-dairy farms. After 50-years,
Wisconsin is left with only 20,000-dairy farms. During the
1990s alone, Wisconsin lost more than 39-percent of its dairy
farms. In other words, the number of farms we started the
decade with, by the end of the decade we had 39-percent less.
That is three dairy farms a day being lost for a total of over
13,300-dairy farms. So Wisconsin has lost over 39-percent of
its dairy farms in the past 10-years.
Now my colleagues can imagine the impact that this has on
communities across Wisconsin. When dairy farms that have been
in a family for generations are forced out of business, rural
communities are truly devastated. Unfortunately, it seems that
the main result of America's dairy policy is its depressing
effect on prices. If these policies continue, our farmers will
soon be paid 1930s prices for their milk.
Instead of collectively addressing the challenges facing
our dairy farmers, Congress has played political games with
America's dairy policy. The most significant changes over the
past few years, the Northeastern Dairy Compact and the
implementation of Option 1-A, failed to ever pass the Senate as
a discrete issue on which the Senate voted yes or no. In fact,
the only Senate vote explicitly on the Northeast Dairy Compact,
and which I was very much involved, resulted in a clear
rejection of the dairy compact.
So I have to take this opportunity to take exception to the
continuing assertion that compacts are an answer to the
problems facing America's dairy farmers. Despite its original
intent, I think dairy compacts have hurt small independent
producers. Since the Northeast first implemented its compact in
1997, small size family dairy farms in the Northeast have gone
out of business 41-percent faster than they had in the two
previous years. In fact, compacts often act simply as a device
to transfer wealth to large farms. Compacts afford large farms
a per farm subsidy that is 20-times greater than the meager
subsidy afforded to small farmers.
However, compacts only exacerbate the regional inequalities
inherent in our current system. So my message is simple. Just
as the compacts ought to end, I think these regional arguments
have to stop. We need to restore equality, stop regional
bickering, and work to ensure that our nation's dairy farmers
can get a fair price for their milk. The simple fact is that
our Federal dairy pricing policy is failing to protect our
nation's farmers. In fact, one of the greatest forces driving
Wisconsin dairy farmers out of business and off the land, Mr.
Chairman, is the current structure of the Federal dairy
program. And I am not going to go through the whole history of
that again as my colleagues have done.
Let me just say that Congress has to recognize that
America's dairy market is truly national and that we are in
need of a national solution or, to put it more personally, I
look forward to the day when I can think of the name of Eau
Claire being associated with the fact I hope my daughter is
studying hard at the University of Wisconsin Eau Claire today
rather than a pricing system that is putting a knife in the
heart of Wisconsin dairy farmers.
Finally, Mr. Chairman, I do want to mention one other trend
that has gone unchecked and substantially unaddressed and that
is the increased concentration in America's dairy industry
which is causing farmers to receive a declining share of the
retail dollar. In 1981, dairy farmers were receiving a national
average of $13.76 per hundredweight, while fluid milk at the
grocery store was selling for about $1.85 per gallon, while in
August of 1997, dairy farmers were receiving a national average
of $12.70 per hundredweight and retail fluid prices were at
$2.76 per gallon.
While we have heard a great deal about the merger mania in
the grain and livestock industry, market concentration in the
dairy industry has gone unnoticed for far too long. We need to
address the potential problems raised by the vertical
integration of cooperatives, mergers of cooperatives and
retailers, and possible price manipulation by retail stores.
Mr. Chairman, since you were kind enough to allow me last week
to present some of the specifics of this merger mania, I will
not go over it again, but I believe this is part of the problem
for us in the Upper Midwest and I would say to Senator Jeffords
for farmers across the country.
So instead of dealing with an important issue like that of
market concentration, Congress has instead been playing
political games with America's dairy policy. So again the
message is simple. The backdoor deals, Mr. Chairman, have to
stop. American dairy farmers deserve a fair and truly national
dairy policy and one that puts them on a level playing field
from coast to coast, and again thank you very much for
following through on your commitment to hold these hearings. I
do appreciate it.
The Chairman. Thank you very much, Senator Feingold, and
thank you also for your testimony on the agricultural
concentration issue. These are both very serious issues and
that is why the Committee in its first 2-weeks has tried to
tackle both and we appreciate your testimony on this occasion
likewise. Senator Wellstone.
STATEMENT OF HON. PAUL WELLSTONE, A U.S. SENATOR FROM MINNESOTA
Senator Wellstone. Thank you, Mr. Chairman. I have a
complete statement that I would like to submit for the record.
The Chairman. It will be published in full in the record.
Senator Wellstone. And I want to just mention that Mark
Furth from the Associated Mike Producers of Minnesota, I think,
will be also testifying later. Let me thank you, Mr. Chairman,
and Senator Conrad, for holding the hearings. Let me thank all
my colleagues and I think rather than going with any prepared
statement--you will just have that on the record--let me just
highlight a couple of things that have been said.
First of all, I mean probably the informal way for me to
say it is that the extension of the Northeast Dairy Compact, I
think, as much as what it means substantively to us, and we
have a different interpretation than my colleague from Vermont,
is the way in which it was done. I do not think any of us think
it was appropriate that it was put on to the omnibus bill. I
think there is a lot of anger about it. I think that is what
Senator Feingold meant when he talked about a kind of backdoor
Second of all, let me also mention this milk marketing
order system which is just irrational and very discriminatory
toward the Midwest, and we thought Secretary Glickman was
taking a step in the right direction, and again what sort of
adds salt to the wound is that his, I think, proposal, which
was constructive and helpful, was basically blocked.
Third of all, I want to mention this whole issue of forward
contracting and where I think--you know, I just have had the
most poignant meetings and conversations with hog producers,
and they just basically have pretty much lost their right to be
entrepreneurs. And, you know, what happens you get low prices,
which, of course, with this unbelievable fluctuation in dairy
prices is happening to our producers, and then they forward
contract with these processes and it becomes vertically
integrated, and before you all know it, it just becomes a very
corporatized agriculture with conglomerates kind of muscling
their way to the dinner table and the kind of family farm
structure of agriculture that we all cherish is gone. And I
want to signal to you that I think that is an incredibly
important issue.
And then finally, I just want to say that ultimately I
would like to be up here working together with Senator Jeffords
because I think the other issue that we are faced with is that
we were at 16.26 and then we went down to 9.63-per
hundredweight. I mean producers just cannot survive this kind
of wild fluctuation. We need some kind of a stability. We need
some kind of decent price. We need some kind of price targeted
toward our midsize producers and ultimately I will just tell
you if we do not do that, then we are just going to lose our
producers.
Finally, I want to emphasize what my colleagues from
Wisconsin said, which is, you know, our typical dairy farm is
60-cows. We are the fifth largest producer in the Nation. It is
a $1.2 billion business for those farmers and that dollar
multiplies over and over again, and if I was to add to what is
happening to dairy farmers with what is happening to some of
our crop farmers with what has happened to some of our
livestock producers with what is happening to our small banks
and our small schools and our hospitals and our rural
communities, I would say that you have an absolute economic
convulsion taking place in rural America.
And I just hope we do not sort of go about our business as
usual because I think we need to respond to it. I know that
there is a wonderful effort being planned, led I think by the
religious community and farm organizations and AFL-CIO and
environmental organizations, to come to Washington with a focus
on rural America, around March 20, March 21, and I think lots
of people will be here with really good meetings with Senators
and representatives, and I think that will be good because we
just cannot put into parentheses or put aside what is happening
in our rural communities.
I really appreciate your holding these hearings, Mr.
Chairman, and while I do not always agree with you on some of
your positions, I always respect your integrity and I never
doubt your word. I thank you.
[The prepared statement of Senator Wellstone can be found
The Chairman. Well, thank you very much, Senator Wellstone.
I appreciate your leadership in rural America and wish that you
were a member of our committee so you could be a part of this
dialogue day by day, but thank you for coming again this
I would like to call now on Congressman Green.
STATEMENT OF HON. MARK GREEN, A U.S. REPRESENTATIVE FROM
Mr. Green. Thank you. Thanks, Mr. Chairman. Thanks for the
privilege of being able to appear and offer some thoughts. The
disadvantage of going so late in the process is perhaps you are
already confused by all these contradictory details and bizarre
details of milk marketing orders. The advantage, however, from
my standpoint is I will only summarize my testimony and not
have to repeat much of what has been said.
Mr. Chairman, I would ask that my written testimony be
submitted in full to the record.
Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, as you
have heard, farmers all across America are hurting. You have
heard that not only here but obviously back home and dairy is
no exception. When members of this house and the House of
Representatives voted to overturn the very modest reforms
proposed by Secretary Glickman, many did so with the best of
intentions, responding to the pain, the suffering that they are
hearing in their home states and their dairy sector. But
perhaps what they did not fully appreciate is the depth of the
crisis and suffering in the Upper Midwest. You have already
heard it from Senator Feingold, but in Wisconsin by this time
tomorrow we will have lost at least three dairy farms, three
per day.
Over the last 10-years, we have lost more dairy farms than
every other state save Minnesota ever had. That is the depth of
the crisis that we are facing. The farmers, the observers back
in my home state, have a number of frustrations. I will
summarize five frustrations that they see.
The first frustration is that many of those who voted to
overturn the proposed reforms who voted to restore the current
system, have argued that they need this system because of
fluctuating prices and instability. Let us not forget those
fluctuating prices and instability are under the current
system, not under the reforms that the USDA has proposed.
Second, the reforms that the USDA, that Secretary Glickman
proposed, were so very modest, they would not have had a huge
effect. In fact, they probably would have benefitted just about
every district in this Nation, congressional district, just
about every state. My consumers are frustrated because if we
cannot get these very modest reforms, what hope is there for
the more fundamental reforms that we need? When I testified
before the counterpart to this committee in the House, Governor
Ventura of Minnesota said that in his state people become so
frustrated that they have concluded it would be easier to
physically relocate the city of Eau Claire to the west coast
than to actually get relief within Congress.
My third frustration, frustration we are hearing back home,
is that overturning the very modest reforms that have been
proposed ignores history. It as if the supporters of the
current system are part of the flat earth society. They are
locked in a time warp. We all understand why this system was
created in the first place back in the 1930s. Since then,
technology has changed things. We have refrigeration. We have
an interstate highway system. My dairy farmers can get their
milk product to your consumers almost as fast as the dairy
farmers in your home state.
Now I will not go over it in detail, but Mr. Chairman, you
have before you a chart. Actually it is a cartoon from the
Pioneer Press that poses the question which of these is Federal
policy? All computers are price adjusted according to their
distance from Seattle? All oranges are price adjusted according
to their distance from Florida? All country music price
adjusted according to its distance from Nashville? Or all milk
is price adjusted according to its distance from Eau Claire? We
know the answer unfortunately.
Fourth frustration. The system that we have now is out of
line with current economic and trade policy. And you have heard
that. We have in our compact system mini-cartels. We have trade
barriers between our own states. At the very time that we are
going to every Nation around the world and saying lower your
trade barriers or else, we have trade barriers between the
states. At the very time when we have missionaries of
capitalism from this country going from the tip of Africa to
Southeast Asia, telling those nations that their economy does
not make sense, that they have to introduce capitalistic
forces, in our dairy sector, we are going the other way. That
is crazy.
And the final frustration that I would point to in direct
contradiction to my colleague and friend Senator Jeffords is
the reforms that we are looking for are reforms supported by
looking not just at our home state but around the Nation. The
coalition which has come together on our side of the issue
ranges from the teamsters to Americans for Tax Reform to the
Congressional Black Caucus to the National Restaurant
Association. The system that we have in place costs taxpayers
$149 million per year in tax dollars. It is a tax on milk that
artificially drives up the cost of milk to consumers. That
chart that the Senator pointed to, those prices are under the
current system, the system that we want to change and reform.
And finally, this system weakens WIC and other poverty
relief programs by driving up the cost of milk to consumers and
weakening the benefits that they receive from the Federal
Government. So this is not only current law, bad for our dairy
farmers, but more significantly it is bad for taxpayers. It is
bad for consumers. It is bad for those who we are trying to
help through our poverty relief programs. It is time to end the
flat earth society. It is time to recognize modern technology.
It is time to restore some basic ideas of capitalism and free
trade into our system. Thank you, Mr. Chairman.
[The prepared statement of Representative Green can be
found in the appendix on page 92.]
The Chairman. Thank you very much, Congressman Green, for
coming and for offering your testimony this morning.
Congressman Ryan.
STATEMENT OF HON. PAUL RYAN, A U.S. REPRESENTATIVE FROM
Mr. Ryan. Thank you very much, Chairman Lugar. I appreciate
it. Thank you, Senators Harkin and Conrad. It is a pleasure to
be here. I ask that my full written text of my comments be
inserted into the record.
Mr. Ryan. Thank you. And I too know that at the end of the
hearing, you do not want to read your long full statement so I
would like to just paraphrase. And I know that my colleagues
talked about the issue. I would like to talk about the politics
of the issue. What happened this last year shows me as a new
member of Congress that it is very difficult to get dairy,
modest dairy reform from Congress. We have entrenched regional
political differences, not based on fact, not based on the
merits of the case, not based on core principles that we as
elected officials aspire to achieve, but based on regional
politics. Basically it is the rest of the country versus the
Upper Midwest. That is really what it boils down to.
I will not rehash all the arguments. We in Wisconsin
between 1990 and 1998 lost 11,000-dairy farmers. As Mark said,
we are losing three a day. This time tomorrow another three
dairy farmers we will lose. In my district, which is the
southern part of the state, we have lost 3,000-dairy farmers
this decade. Why are we losing it? Because we are held at a
competitive disadvantage. Rather than going into the facts and
the reasons why we are held at a competitive disadvantage, why
we are operating under this sort of horse and buggy economic
system, let us look at the politics of this.
1996, in the 1996 farm bill that you, Chairman Lugar, did
so well to help achieve was a very momentous time for
agriculture. In 1996, that farm bill attempted to decouple and
give farmers the freedom to farm. That was the case with a lot
of our commodities. However, in dairy, because of the
difficulties of this issue and because of the regional politics
tilted against the Upper Midwest in this issue, we had a
problem. So what we solved and tried to do--I was not in
Congress at that time--was to get the USDA to come forward with
reforms after the 1996 act. The USDA did do that. They came
with very, very modest reforms in an attempt to try and
equalize and liberalize the dairy markets, try and give more
equity to all dairy farmers. So that their success will be
determined upon their ability not so much as their proximity to
Eau Claire, Wisconsin.
Well, that was what we face this year. Yet, those very
modest reforms, which arguably put other regions of the country
in a better position or a very similar position such as the
Northeast and other parts of this country, were rejected out of
hand. What I am convinced is necessary is a strong
administration that will push this issue all the way to the
end, a USDA that did its work that we saw last year, but an
administration working hand in hand with principled members of
Congress with midwestern members of Congress to see this
through so that at the end of a budget cycle when you are going
down the road and you have a big appropriations battle, winding
up in October we do not see the capitulation that we saw.
What we saw this last year was a capitulation on the part
of the administration and leaders in Congress to bend to the
prevailing political forces meaning the plurality of the vote
from the Northeast and the South. We need to stand against
that. We need a strong administration proposal, an
administration that is willing to back its proposal to the end,
and leadership in Congress that will see this through to make
sure that farmers can prevail based on the merits, farmers can
prevail based on the markets, not based on how far away from an
arbitrary location in this country they live. Thank you.
I want to summarize it with basically that, but I just want
to tell you, Mr. Chairman, you have provided leadership on this
issue. Everybody here on this committee understands the issue.
We do not have to rehash it, and I think if you talk to our
colleagues from the Northeast, some of them in confidence have
told me you are right, we agree, but the politics are too
strong. I believe that if those members of Congress went home
and actually discussed what was included, what were the details
of the USDA's proposal, I think that we could have made some
momentum.
Lastly, one of my colleagues who was voting against us on
the floor--we had several amendments during this--told me that
they lost 20-dairy farmers in the last 5-years in their
district. We lost 20-dairy farmers in the last week in my
district. So I think that the proportionality of this problem
has yet to be realized. I think that we have members of
Congress who are sticking with their region, not necessarily
with their district or with their consumers, who purchased milk
pricing. This committee can help educate the rest of Congress.
It is an issue that most members of Congress do not know about.
It is an issue that most members of Congress, unless they
represent dairy districts, have no conception of what is
actually happening.
This committee by having this hearing can elevate these
issues. I encourage you to continue to do so. I thank you for
this and what we need is to work together to push the
administration to stand firm behind their proposal and work
with our leaders in Congress to see that we do not undercut
them. Thank you very much, Mr. Chairman.
[The prepared statement of Representative Ryan can be found
The Chairman. Thank you very much, Congressman Ryan. Let me
just comment because you have offered a historical note about
the 1996 farm bill. Obviously, great leadership was given by
many members of our committee and the House Agriculture
Committee, but the compromise that was reached in the
conference, and which I think most of us at this table were
present throughout that night, early morning, and so forth
because dairy was decided last, was essentially, as you have
stated, that USDA would offer proposals to try to take the 38-
marketing orders or however many there were at that time down
to a much smaller number to rationalize the system more along
market principles and that the New England Dairy Compact would
terminate what amounts to a year ago of October, I guess, the
first of October 1998.
Senator Leahy, the distinguished former chairman of the
Committee, ranking member at the time, a strong proponent of
the dairy compact. Many were likewise backing that position and
many thought we ought to rationalize the system. So the
compromise was a new marketing order business in America and
the dairy compact concluding. Now, both of these situations
have been frustrated, and so we are at this point, as you have
suggested, through legislative process other than direct action
by our committee through its authorizing procedures or through
the farm bill at this pass.
So I understand the dispute vividly, having experienced for
many years, but nevertheless that is the purpose of the hearing
today. Our committee is a part of American democracy. We have
many members with strong views. If there is a consensus in our
committee to act upon any of a number of legislative proposals,
we will attempt to do so, and I presume the House will act
correspondingly, and the parliamentary procedures will be as
they always are in the Senate, in which we have unlimited
debate and considerable leverage, particularly when the session
runs long, when appropriations bills are not passed and
literally everything is up for grabs including dairy policy.
At that point, our committee is no more effectual than any
of you individually, but this is one reason for acting in
February to hear this. And we appreciate all the members of
Congress taking time this morning in your busy schedules to be
with us to offer this testimony.
The Chairman. I want to conclude this panel by asking for
our final governmental witness, at least governmental in the
sense of Congress, and something other than the USDA and the
industry, the Commissioner of Agriculture of New York, Nathan
Rudgers. And we appreciate your coming, Sir.
STATEMENT OF NATHAN L. RUDGERS, COMMISSIONER, NEW YORK STATE
DEPARTMENT OF AGRICULTURE AND MARKETS
Mr. Rudgers. Thank you, Senator Lugar, and I appreciate
very greatly the opportunity to address this panel in the final
position this morning. My comments this morning are going to be
somewhat different than my written testimony. I would ask that
you submit that for the record.
Mr. Rudgers. I appreciate that. You are to be commended as
well as the rest of your committee for having these hearings.
Governor Pataki and my department have been both very involved
in dairy policy and we witnessed first hand some of the
challenges that Congress has had in working through this
complex issue, and we appreciate the opportunity to address you
In New York, we value our antiques and we recognize the
opportunity sometimes to take them off the shelf and dust them
off, and Congress is to be praised for having the vision and
fortitude to direct USDA to change the rules by which price
discovery is accomplished in the dairy industry and effectively
consolidating a still vital and relevant Federal milk marketing
order system. Simply put, milk remains a perishable product
which is difficult to value and orderly market. The Federal
milk market order system accomplishes those tasks. Effective
price discovery mechanisms and the orderly marketing of milk
are two essential components of a healthy dairy industry
nationwide and certainly in New York.
Milk and dairy products are New York's leading agricultural
commodities and are processed by leaders in the cheese and soft
dairy products industry. Production in 1998 totaled 11.7-
billion pounds with a value of $1.8 billion and that was 56-
percent of our total farm gate sales which are just over $3
billion. We have 8,000-dairy producers and 140-dairy processing
plants. These statistics hopefully show you the importance of
dairy to New York's economy.
Besides being the third largest producer in the U.S., New
York is a part of a regional block of producers that provides
the east coast with dairy products from Maine to Washington,
DC. That percentage is about 20-percent of the Nation's milk
supply. Our resources are plentiful as they are in the Midwest:
water, good soils, and a cool climate. Our farmers are
progressive and our industry is well positioned for the future.
We have an advantage in our proximity to major markets. The
richest market in the world is a 750-mile circle centered in
New York state. Within this region, you will find half of the
United States and Canada's population, personal income and
wholesale and retail trade.
The state of dairy farming in New York is one of a dynamic
industry, one that is poised to use these advantages
competitively in the new millennium. Our dairy farmers tell me
that the regional future looks very promising. However, they
need some short-term help while they position themselves in the
new volatile dairy environment. Policy tools exist that
Congress can provide to help our family farms transition and
react to changing conditions in what is a very competitive
marketplace.
One of those tools is obviously the dairy compact and it
should be expanded to reflect the regional nature of our
market. The low prices our farmers are currently facing is the
most pressing issue ahead of them right now as prices are at
their lowest level in 20-years. The Class III price, the new
benchmark price, was announced on Friday at $10.05 a
hundredweight. Now forecasters predict that, that price will
increase slightly later in the year. However, I do not believe
that some more of our dairy farmers can last that long at those
price levels.
On January 1 of 2000, the long awaited Federal reform was
finally implemented. The three northeastern orders were
consolidated into one and after careful review USDA determined
that the northeast region should extend from New England to
Washington. It would be appropriate for Congress to follow in a
similar manner by permitting the Northeast Compact to be
extended to cover that region.
Additionally, with regard to the compact, some issues have
been articulated about the declining share of the retail price
that farmers have. In the compact region, the compact provides
a tool for increasing that share of the farmer's price. Some
concerns have been articulated by this panel this morning about
fluctuations in price. In the compact region, those
fluctuations in price have been blunted.
At this panel this morning, there was some concerns about
the compact being a trade barrier. My state is not a member of
the compact currently. However, a thousand of my dairy farmers
participate within the compact region. Clearly, there is no
trade barrier for those producers.
With regard to additional tools that could be offered, we
would call on USDA to use their authority through the Commodity
Credit Corporation to directly assist and increase purchases of
cheese and other commodities for school lunch programs.
Additionally, it would have been thoughtful for the USDA to use
the 125-million appropriated by this committee to address the
butter-powder price tilt to support nonfat dry milk at a higher
level. This also would have supported the price nationwide.
I additionally applaud you and Congress for directing USDA
to hold hearings on the Class III pricing formulas under
Federal milk market orders. This is an important and time
sensitive issue that impacts all dairy farmers nationwide. I
would also ask that Keith Collins, if possible, enter into
testimony the information collected by USDA on the mailbox
price survey for prices paid to farmers from all over the
Nation. What I think that survey will show is that the price
disparities articulated at this table this morning might not be
so profound and actually might be a little bit different than
what has been articulated.
We continue to need Congress' help in providing tools as we
transition our dairy industries, and in closing I should
mention that I was raised on a dairy farm. I have two brothers
still operating farms in western New York. Dairy farming is
something I am close to and it is a part of me. It is also an
intrinsic part of the rural landscape culture and heritage of
New York state. It is because of this importance that Governor
Pataki and I have worked so hard and so closely with our
congressional delegation in New York to see New York join the
Northeast Compact.
If New York is not permitted to join the compact, then our
continued efforts to transition farmers to be more market
oriented and able to succeed in the new dairy economy will be
much more difficult. I hope these discussions today can lead us
to the goal of helping our farmers succeed and we can have
healthy prospering dairy operations throughout New York and the
United States. Thank you again, Senator Lugar, and the rest of
the Committee for inviting me here to testify today and I look
forward to working with you as we address the issues that face
our dairy industry.
[The prepared statement of Mr. Rudgers can be found in the
appendix on page 102.]
The Chairman. Thank you very much, Commissioner Rudgers.
Let me just say that in structuring the hearing this morning
because of a large number of our colleagues from the Senate,
the House, as well as the distinguished governor of Wisconsin
and the commissioner from New York, the Chair made an arbitrary
decision that I hope was fair and that was that we not get into
cross-examination among yourselves. That is a mini-Senate
debate as you were offering direct testimony quite apart from a
mini-Senate debate with us at this point.
Often when we do have congressional witnesses, and there
are a few of them, and they are the major cause, why we have
had dialogue back and forth, but it seemed to me given the
importance of the issue, the number of witnesses in addition to
all of yourselves that we want to deal with, we thought we
would ask you to testify for 5-minutes each, offer your full
testimony for the record that we will digest, and it could very
well be that members of our committee will want to interrogate
you personally or by correspondence as they have further
questions. The issue clearly will not be resolved today. We
will all be back together, I suspect, in one form of another.
But I very much appreciate your coming and giving us this time
Senator Jeffords. Mr. Chairman.
The Chairman. Yes.
Senator Jeffords. Could I have 30-seconds on a couple of
things that were raised?
The Chairman. Of course.
Senator Jeffords. Now, first of all, the compact was put in
sort of as a demonstration program. At least, as you know, I
was the one that worked this deal out.
Senator Jeffords. To see whether it worked. Well, it has
worked. So I think to say it should end now because it was that
kind of a program when it works you ought to be improving on
it. second, OMB was requested to do a study of the compact by
the Midwest and they came back and found there were no increase
in the cost of Federal food programs. There is some testimony
to the contrary on that. I wanted just to bring that up.
And second, New England is a negative producer as the last
witness pointed out and Wisconsin could ship milk down to there
now. Of course, as we saw with the evidence we put on, it would
end up probably having over $2.00 a gallon a milk versus $1.39.
So just thank you, Mr. Chairman.
The Chairman. All right. Well, we will have at least an
equal rebuttal then from, yes, Mr. Green.
Mr. Green. Thank you, Mr. Chairman. The Senator is pointing
out that dairy producers within compact states are benefiting
from the compact. We will stipulate to that. That is not the
issue. The issue instead is how it is benefiting producers and
consumers all around the Nation. I think the evidence is pretty
clear that we are suffering as a result. And with respect to
whether or not there are trade barriers as a result of the
compacts, I suppose it was legally true that OPEC nations could
purchase oil from the U.S. However, I would doubt that would be
the case given the advantage that their cartel had given them
and the same thing is true with compacts: maybe not a legal
barrier to the entry of our products but clearly with the
forces and restrictions within those compacts, it put outside
states' producers at a tremendous disadvantage.
The Chairman. Thank you. Having announced the rule and now
having violated it twice------
[Laughter.]
The Chairman.--still that was a useful exchange and I just
trust the members will know that we will try to weigh as
carefully as possible.
Senator Jeffords. I would like to go back------
The Chairman. Thank you very much for coming. Before I call
Keith Collins, our next witness before us, let me ask the
distinguished Ranking Member if he has any opening comment or
statement?
STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM IOWA, RANKING
MEMBER, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
Senator Harkin. Mr. Chairman, thank you very much. I have
been reading the testimony and am delighted to listen to the
witnesses. I am sorry I was late. I had a couple of prearranged
meetings I had to go to this morning. But I just want to note
for the record that from I believe 1980 to 1984 I was chairman
of the Livestock, Dairy and Poultry Subcommittee on the House
Agriculture Committee. All I can say is I am sure glad we got
this dairy thing worked out at that time so we are not having
any problems with it today.
But some of these problems have been around for a long
time. I also want to say, Mr. Chairman, in case I have to leave
I know the Indiana Professional Dairy Producers are up. I was
reading their testimony and Mr. Yoder here had this statement
here. He said it is no secret that how milk is priced is the
second-greatest mystery known to man. I take issue with that.
It is the greatest mystery known to man, not the second.
And I also wanted to, for the record, note that--well, now
I lost his testimony--one of the individuals from Wisconsin put
the formula in the back of his statement. I recommend it to
everyone--to work out--again, I forget who that was. Anyway,
one of the congressmen from Wisconsin had the formula in the
back for how you get the basic price for milk.
Mr. Chairman, I did want to correct one other--just say one
thing about some of the statements that were made that, well,
would you price computers how far they are from Seattle or
oranges from Florida or beer from St. Louis, Anheuser-Busch?
Well, milk is different. I mean, you know, if you are producing
too many computers, you can slow down the line, you can lay a
few people off and slow it down a little bit. You do not have
to produce that many. You cannot slow down a cow, you know, it
just produces milk, and you just cannot quite slow it down. I
suppose you could feed it a little bit less, I suppose. But you
really cannot slow it down.
And what the heck, I might as well state again for the
record that last summer I bought some beer. I stored it in the
refrigerator. I opened one the other day and it is still good.
You know so beer can stay for a long time in your basement and
milk cannot.
And third, there is a value to the consumption of milk for
healthy bodies and for kids. Like I said, we have been through
these debates before. Looking back, I think what should have
been done a long time ago was two things. One, basic formula
price for milk should have been based on solids, not fat. It
should have been done a long time ago. Dairy industry was way
behind the eightball in this, way behind it. Consumers are
moving ahead. They did not want to consume so much fat. And
they wanted a more high protein product and yet we continued to
base it on butterfat content. Well, now they have changed it a
little bit. They now include proteins and lactose and some
other things in the price, but way too late.
And second, we should have had a two-tier pricing formula a
long time ago. Congressman Gephardt and I proposed that in the
mid-1980s. I proposed it earlier on. We fought for it. We never
got it. But I think if we had had a two-tier pricing formula in
existence for the last 10-years, 15-years, I do not think we
would be where we are today. The marketing orders are outdated
in many ways. We can transport milk more rapidly. I do
understand that there is a problem. Senator Jeffords said it
appropriately. I mean if you are transporting it halfway across
the country, obviously it is going to cost more for consumers
in one part than it is in another part.
Well, maybe yes, maybe no. Again, it depends upon how you
price it and just how far you have to transport it. But it may
be a little bit more costly, but there are ways of getting
around that, too. So, Mr. Chairman, there are a lot of cross-
currents in this whole dairy policy, and it has become one of
the most bitter regional conflicts that we face today. We do
need some common ground. I hope we can find an equitable, fair
and sustainable national dairy policy, one that is good for
farmers and fair to consumers and processors, and so again I
still believe there should be an adequate safety net.
There is in the Northeast now. There is a safety net for
the dairy farmers in the Northeast. But there is not out our
way. So there should be a better safety net. So I hope that we
can find some way to end the unfair regional preferences that
we have in dairy policy today and move ahead with some
equitable system. Like I said, I think there are some things in
the past that we could take a look at that might be more
equitable than marketing orders are today. And there may be
some way of taking care and addressing the problem of
transportation of fluid milk to deficient areas and that might
be cheaper in the long run than keeping this outdated,
antiquated marketing order system going.
So Mr. Chairman, I congratulate you for calling these
hearings. This is a byzantine area and it is, as I said, it
just has provoked, as you know, just a lot of regional
conflicts in the Senate and it cross-currents. It is not
Democrat or Republican. It just flows across all kinds of
different lines, and I hope through these hearings we could
hopefully find some equitable solution. Thank you, Mr.
[The prepared statement of Senator Harkin can be found in
the appendix on page 108.]
The Chairman. Thank you very much, Senator Harkin. Senator
Santorum, do you have a comment?
STATEMENT OF HON. RICK SANTORUM, A U.S. SENATOR FROM
Senator Santorum. Very briefly, Mr. Chairman. Just let me
thank you for holding these hearings. There is probably no
issue in my state that, as Senator Specter, I am sure,
testified to, has gotten more concern and more angst not just
among dairy farmers but among all of us in rural Pennsylvania.
As I always say here on the ag committee and rural affairs
committee, we have the largest rural population of any state in
the country in Pennsylvania and we are the fourth largest dairy
producing state. Agriculture is the number one industry in
Pennsylvania and dairy is the number one industry within
agriculture.
And so this is an incredibly important issue, not just to
our dairy farmers, but to all of rural Pennsylvania, and I
listened with great interest to what Senator Harkin just
referred to as these incredible cross currents as we see in
this industry. And listening to some of the congressmen from
Wisconsin talking about how much their dairy farmers are
hurting, I will match my hurt in my dairy farmers with your
hurt in your dairy farmers any day, and it is not just in
Wisconsin or the Midwest. Our folks are hurting, too. And we
have on top of that the problems with drought last year which
has made it even tougher for our folks and I will remind my
colleagues we did not do very much on drought relief last year,
as my farmers are going into the FSA office and being told they
are going to get 30-cents on the dollar when some folks across
the country are getting double Agricultural Market Transition
Act [AMTA] payments and gosh knows what else in support, and my
folks have no crops to sell, have low dairy prices, and are
getting a pittance for relief.
So I think we have some more work to do on that front, but
obviously on the fundamental look at dairy and how we can
structure a system that can provide stability as well as a
solid price is something that we should strive to attain. I
thank the Chairman for looking into this.
[The prepared statement of Senator Santorum can be found in
The Chairman. Thank you very much, Senator Santorum.
Keith Collins, always good to have you, a fount of wisdom
and good counsel for the Committee. You have heard already a
number of distinguished witnesses. So you may take almost any
position you want and at least find some support here today.
But thank you for coming and we will give you 10-minutes or
whatever is reasonable because I know Senators will have
questions of you after you conclude. We are glad to have you,
Mr. Salathe, with Keith Collins. Please, proceed.
STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF
AGRICULTURE, WASHINGTON, DC., ACCOMPANIED BY LARRY SALATHE,
SENIOR ECONOMIST, USDA
Mr. Collins. Thank you very much, Mr. Chairman and Mr.
Harkin and Mr. Santorum. On behalf of USDA, I want to thank you
for again inviting me up here to participate in this review of
dairy policy--always a challenge, a challenge that we welcome
today. My task this morning, my invitation asked me to explain
and to review the major Federal dairy programs concentrating on
their economic effects and also to offer a couple of thoughts
on the coming year for dairy to provide a context in which
dairy policy will operate.
Dairy policy has had a lot of objectives over the years.
They have ranged from ensuring adequate supplies of milk to
protecting farm income to expanding demand, just to name a few.
Well, when you have many objectives, sometimes the consequence
of that is many programs and we have many Federal programs that
affect dairy which I think should be considered when you think
about the Federal role in dairy policy. We have the price
support program. We have the marketing order program. We have
the compact, dairy export incentive program, checkoff programs,
and the the loan and payment programs. I would point out that,
for example, in the year 2000, we estimate that the average
dairy farm business in the United States will receive about
$6,000 in direct government payments from these programs.
We also have import controls. We have food and nutrition
assistance programs. We have research and extension programs
and all of these things have to be considered as a package when
thinking about Federal dairy policy. Having said that, because
you were kind enough to give me 10-minutes, I am just going to
focus on two of these programs, which are mainly the price
support program and the Federal milk marketing order program.
Well, prior to 1981, we had milk price support levels tied
to parity and generally they trended up. In the 1980s, late
1970s, and early 1980s, we started to see very strong
productivity gains in milk combined with the firm price support
floor. The result of that was we saw increasingly imbalanced
and unsustainable dairy markets. Congress, as a result of that,
trying to restore balance to these markets, did several things.
They implemented supply controls in the 1980s for milk. They
implemented producer assessments and they lowered the price
support level. In fact, between 1981 and 1990, the price
support level was reduced about 25-percent.
The result was that when you look at the price support
program in the 1990s, you see a program that has operated very
differently than had operated during the 1980s. In the 1980s,
we had year after year after year of billion dollar costs in
the program. The record was $2.5 billion in 1983. But by the
time we get to the mid-1990s, 1995, the cost of the dairy price
support program is basically zero. Government stockpiles, the
legendary caves were gone, and disposal programs had largely
disappeared.
However, one consequence of this is that producers have
faced greater price variability as the lower support level has
permitted market forces to operate over a much wider price
range. The price support program thus has gone from being quite
distortionary in the 1980s with very pronounced economic
consequences to being pretty benign by the mid-1990s. Over the
past couple of years, however, we have seen the role of price
support start to pick up, as we have started to buy more nonfat
dry milk, and most recently the price of cheese has fallen to
near support.
If we look out to the year 2001 when the price support
program is expected to terminate, we think that without the
program, the annual average all-milk price would decline 35- to
55-cents a hundredweight or about three to 4-percent. Because
of the income support the price support program is now
providing, the administration has proposed extending the price
support program through the year 2002.
Tomorrow we have a couple of USDA staff that will be
reporting to you on Federal milk marketing orders. They run the
program. So I am not going to say too much about orders, but I
want to give a couple of thoughts on their general effects. And
I think it is helpful to contrast the price support program
with the Federal milk marketing order program. The price
support program reduces the available market supply of butter,
cheese and nonfat dry milk because the Government purchases the
product and takes it off the market.
Now that pushes up the price of those products. It pushes
up the price of the milk that is used to manufacture those
products. The price is higher than it would otherwise be. This
also pushes up the price of fluid milk because, of course, the
minimum Class I price, the Federal order price of fluid milk,
is tied to the price of manufacturing milk. So the price
support program at least temporarily raises the whole spectrum
of dairy product and milk prices, and it does it in all regions
of the United States.
Federal orders have very different effects. If Federal
orders raised prices above competitive levels in one use or in
one region of the country, prices would decline in another use
or another region of the country. This has to happen because
Federal orders do not have supply controls. So the national
supply and demand for milk must balance. Orders establish
minimum prices for milk in four uses with Class I being the
minimum for fluid products. And the Class I prices, of course,
vary by location.
Now suppose that USDA does not have it right. Suppose we do
not have the right Class I differential, and by that I mean
suppose in an order we set a differential that is higher than a
differential that would prevail in a freely competitive market.
Then the price of fluid milk is being supported in that region.
The higher fluid price reduces fluid consumption which makes
more milk available for manufactured uses and reduces the price
of milk for manufactured uses.
If an order has a higher proportion of its milk going into
Class I use, then the average producer price would be higher
than in a freely competitive market. And that would encourage
milk production. If a low proportion of milk is going into
Class I use, then the average price, or the blend price, would
be pulled down by the lower manufactured price, and that would
discourage milk production relative to a freely competitive
market.
So the whole debate about Federal milk marketing orders and
its economic effects and whether they are distortive or not, I
think, really comes down to whether the Federal order minimum
Class I price is supporting the Class I price or not in markets
across the United States. Well, what do economists think about
that? I think they think this occurs to some degree, not a huge
degree, but that it occurs. A review of economic studies
suggests that nationally farm level milk prices would decline
by 1- to 3-percent in the absence of Federal orders with U.S.
farm income and consumer expenditures on dairy products falling
by a parallel amount.
However, producers in markets where Class I use is high
would see larger price declines and producers in areas where
Class I milk is low could actually see a price increase. In the
last year the Secretary reached the same conclusion and
concluded that Class I differentials were unduly high in some
regions and too low in others and proposed lowering the Class I
differential on average in the United States from $2.57 per
hundredweight down to $2.28 per hundredweight. That was a 29-
cent per hundredweight decline that was proposed. Well, we all
know the fate of that proposal.
I would like to point out that despite widespread concern
that the Secretary's proposal was going to reduce the average
blend price to producers, we have gone back and calculated what
that price would have been over the last 18-months using the
data which is available starting in September of 1998. And the
Federal order blend price would have averaged about 20-cents a
hundredweight higher under the Secretary's proposal had that
been in effect since September.
Well, a comment on dairy compacts. I think they essentially
have the same general effects as Federal orders. They raise
farmers' incomes by trying to raise the price of milk used in
fluid products. Studies have indicated that resulting higher
production in a compact area leads to more milk production and
higher retail prices for fluid milk consumption. This makes
more milk available for manufacturing uses, pushes down prices
for those products and prices to producers marketing outside
the compact. And the adverse effects on producers outside the
compact would be amplified as more states were to join a
compact.
Let me conclude with a couple of comments about the
financial condition of dairy farmers. We have seen quite a
price collapse in the last couple of months with the Basic
formula price [BFP] in November and December reaching 21-year
lows. Fortunately, record high milk prices this past marketing
year and low feed costs have put most dairy farmers on a fairly
solid financial footing going into the year 2000. We estimate
that 11-percent of dairy farm businesses were having debt
repayment problems by the end of 1998. That compares with 22-
percent for all farm businesses. Lower milk prices this year we
think could increase those debt repayment problems to about 17-
percent by the end of this year.
Structural adjustment in the dairy industry continues with
no end in sight. In 1999, the number of operations having milk
cows dropped 5-percent from 117,000 to 111,000. That continues
the long-term trend. Over one-half of all dairy farms have
fewer than 50-cows and their numbers dropped by 8-percent. Two-
percent of all dairy farms have more than 500-cows. And their
numbers increased by 6-percent. And milk production continues
to expand rapidly in the West supported by favorable weather
and forage availability.
It is hard to see how dairy programs or market conditions
will have much effect on these structural trends over the next
few years. And that concludes my comments. We would be happy to
take any questions.
[The prepared statement of Mr. Collins, can be found in the
The Chairman. Thank you very much, Mr. Collins. Let me just
pick up where you left off. You point out in your testimony
that in the past decade, milk production increased about 1.2-
percent a year. Production per cow increased about 2.2-percent
a year during the decade while milk cow numbers declined about
1-percent per year. And you point out that this year we are now
in, however, would be the second largest percentage increase in
milk production during the decade of the 1990s surpassed only
by last year's 3-percent increase, a sizable increase last year
and this year, as distinct from pretty level lie for the
previous years in the decade.
Having said that, you also point out that dairy farms
improved their financial positions in 1998 and 1999 and that
concentrated expenses dropped 10-percent in 1998 and further in
1999. A drop in feed costs likewise. So this has led, by and
large, and this is always the problem of average statistics
because the problems of those who are in trouble are not
average, but you point out that farms with gross sales of
50,000 or more averaged--the income, cash income--averaged
95,000 in 1998 and in 1999 compared with 1994-98 average of
64,800.
Now the net cash income of dairy farms this year, you think
may fall by 21-percent to 74,900. But as you are pointing out,
in comparison to all of agriculture, the debt structure
problems for dairy farms appear to be substantially less,
although given this year 2000 situation they might increase.
And as you pointed out, the number of dairy farms total has
been in decline throughout this century, perhaps for two
centuries, as has been the case with corn farms, soybean farms
or whatever. Thus, confirming a higher degree of concentration.
You pointed out the larger cow situation has gone up by 6-
percent and other situations declined by 8. That is the
smaller. Now taking a look at this whole situation, the Cato
Institute, to be the devil's advocate for a moment, suggested
that about $400 million is transferred from the general public
consumers to the dairy industry, whatever the size might be of
the farms or whatever the configuration of our programs, by the
marketing orders or the supports that you have described.
In other words, a transfer payment of consumers to
dairymen, however many there are, 400-million a year. Now
earlier this morning we heard a contention that within this
$400 million of support from taxpayers, about 145-million
transfers to the New England situation away from everybody else
so that, as you pointed out, it is a fairly stable pie,
whatever it may be, but the pieces are redistributed through
the politics and the polls of this situation.
First of all, do you believe that the Cato Institute's idea
that essentially the rest of the taxpayers of the country are
supporting dairymen by 400-million is correct, and is the
transfer to New England from the rest of that size, and if not,
can you give us any idea of the proportions of these shifts?
Mr. Collins. First of all, I would say that the Cato
Institute study was really a summary of other people's work and
it is consistent with the one to 3-percent I mentioned.
The Chairman. In other words, the programs themselves
probably increased dairy income by one to 3-percent?
Mr. Collins. Right. I indicated that the national average
all milk price might be 1- to 3-percent lower without orders,
sort of a summary conclusion from lots of studies. One to 3-
percent would be about a--the midpoint would be about a $500
million increase in consumer expenditure or a $500 million
increase in farm income.
The Chairman. Stated another way, if you had no programs,
no dairy programs, we had free market, consumers would pay 1-
percent to 3-percent less for milk on average throughout
America?
Mr. Collins. Yes, that is sort of a general finding. So
that would be consistent with the Cato study. Apart from that,
there are also the effects of the dairy price support program,
which actually right now and over the next year or so would
probably be greater, I think, than the effects of the milk
marketing order program.
The Chairman. In other words, they increase production?
Mr. Collins. They will increase production. They will have
a larger effect on the all-milk price than the Federal milk
marketing order program would in the aggregate across the
Nation.
Now regarding the compact, I cannot really tell you. I have
not done a calculation on what the distribution of the gains
are by different regions of the country due to the compact
over-order price. That, of course, varies from month to month.
Since the compact was first implemented, and they established a
minimum $16.94 per hundredweight price on Class I milk. That
was a fair amount above the Federal order minimum Class I
price. Then as time went on and milk prices got stronger, of
course, that difference dissipated. As the difference
dissipates, then there is no differential effect of the
compact. So the effect sort of depends on looking at prices
over a period of time and I have not done such a calculation.
The Chairman. Has anyone done so? Obviously, this is a part
of our debate as you heard this morning. It was described as a
regional dispute with winners and losers.
Mr. Collins. I would let Dr. Salathe respond, who I might
say has assiduously spent a career at USDA decoding Federal
dairy programs for their effect on consumers, producers and
taxpayers.
The Chairman. Well, give us the benefit of your wisdom.
Mr. Collins. So I will let him take a shot at that.
Mr. Salathe. Well, I will try to live up to that. But I
would refer back to the OMB study that was done and looked at
the period from July 1997 through the end of 1997. That study
basically indicated that if you looked outside the compact, the
effect was fairly small at that time. And the all-milk price
outside the compact was probably reduced about 2-cents a
hundredweight which if you multiply that by milk production
outside the compact would come to on the order of about $30 to
$40 million. Now that is just for that second half of 1997.
The Chairman. So the losses to the people outside the
compact you think were 30- to 40-million------
Mr. Salathe. Yes.
The Chairman.--on an annual basis?
Mr. Salathe. Right.
Mr. Collins. And then there would be whatever consumers in
New England had to pay for higher fluid milk as a result of the
compact. That would be another transfer.
Senator Leahy. Well, wait a minute. Consumers, the record
will show, Mr. Chairman--I do not want to let that one just
slip through here--in the compact, consumers are paying a lot
less for their milk in New England than they are in Minnesota
and Wisconsin and these places that object to the compact. I
mean that is, as GAO has found, that is an absolute fact.
Mr. Collins. There is no disputing that. I think the
question for economic analysis is what would the price of fluid
milk be in New England with and without the compact? Not so
much how it compares with other regions of the country. And I
think there have been studies that have shown that there is an
effect, an increase in the price of milk in New England as a
result of the compact.
Senator Leahy. Mr. Chairman, I find this--and I am sorry to
butt in on your time--but I mean these are the kind of
misstatements we keep getting on this. There is an objective
report done requested by the, primarily by those who were
opposed to the compact, and it came back that milk costs less
in the compact area than it does in places like Minnesota and
Wisconsin where they do not have a compact.
The Chairman. Well, that point apparently is not in
dispute, you know, without trying to mediate between the
Senator and the witness.
Senator Leahy. I understand. I apologize.
The Chairman. But the question is even low as the prices
are in New England, would they be lower still without the
compact, at least as I understand the issue with economists? So
that is my understanding. Now, let me just ask one final
question and that is policy wise why do we have a dairy
program? In other words, last year a distinguished colleague in
the House, Congressman Boehner, offered legislation, as I
understand, simply to terminate all of this so we would not
need to have any more debate. People just simply would sell
milk in a free market situation without need for either
compacts, marketing orders, supports, Eau Claire and distances
or all the rest. As a matter of policy, why do you support, or
if you do, a program at all?
Mr. Collins. I try not to support or not support anything,
just to comment on their effects. I would say that the answer
to that question obviously is an economic, political, and
social collection of reasons for having programs. From the
economic point of view, you trade off the effects on consumers
or economic efficiency against the gains you are providing to
producers. And the political system has decided that those
benefits to producers outweigh those other effects and so that
is why we have the program. Effectively, the gains to produce
from a price support program would be higher prices than would
otherwise be the case when markets are weak, some measure of
stability provided to prices for producers. It prevents prices
from falling to unduly low levels that might not prevail in the
longer term and therefore keep people from going out of
business that might be able to persist in business if the
prices were prevented from falling to those levels that we know
they are not going to stay at. So I think that is a strong
reason for the price support program that the political system
has recognized.
I think with respect to milk marketing orders, part of its
rationale goes back to Senator Harkin's comment about
distinguishing between the perishability of fluid milk plus the
durability and the storability of manufactured products and the
need to ensure an adequate supply of fluid milk in fluid milk
markets, understanding that there is seasonality in production
and seasonality in demand that do not match up.
The free market system would provide a pattern of
differential prices across the United States: higher prices for
Class I use because much Class I use takes place in
metropolitan areas like Boston, New York, Philadelphia and so
on. The milk obviously is not going to be produced there; it is
going to be shipped in, there are going to be transportation
costs. As economists say, the elasticity of demand for Class I
milk is very inelastic and so there is going to be a higher
value to that milk and that would occur in a free market. And
so the order system in imposing minimum differentials is in
some sense mimicking what might occur in a free market system.
So then the question becomes, well, if the free market
would provide this pattern of differentiated prices and provide
the incentives to move milk, why do you have to have the
Federal Government ensure that minimum? And I think there the
question gets into very difficult issues to evaluate such as
balance of competitive power and negotiation between dairy
producers and dairy processors.Does the order system help
producers compete with concentrated processing markets?
Another example I think that is probably more cogent is
this question of balancing fluid needs. Because the seasonality
of production, and the seasonality of demand differ, you are
going to have a draw for milk into fluid uses for fluid
processors at certain times. Needs are going to swing up and
down. If you happen to be a producer that lives close to the
fluid bottling plant, then maybe all of your milk 100-percent
of the time will go to that fluid bottling plant, but if you
live further away, then when the fluid plant needs extra milk,
your milk will get pulled in. When the fluid plant does not
need extra milk, then your milk is going to go to some
manufacturing plant for a much lower value. And so this person
that lives a further bit away is, in effect, paying the costs
of balancing the fluid milk market.
So the order system is an attempt to have everyone share in
those costs and have everyone share in the higher value that
comes from the Class I use. So that Class I differential that
is paid by a processor goes into a pool and is paid out to
everyone including the person who is performing the balancing
function. So there is a lot of things going on in Federal milk
marketing systems that have to be weighed, and I think it is
because of this whole constellation of effects that take place
that the administration and Congress have continued the system.
The Chairman. I thank you for that comprehensive answer. It
is a very important part of our testimony and I appreciate that
excellent summary. Now I am going to ask each Senator to try to
take only 5-minutes in the first round and if there are
additional comments and questions, we will have a second round.
I call now upon my distinguished ranking member, Senator
Harkin.
Senator Harkin. I thank you, Mr. Chairman. And I
appreciated that last question you asked and the response from
Mr. Collins. Those of us who have been through this for the
last, as you have been, for I do know not how many years
recognize that there is an imbalance. I mean most milk
production is in the spring, the spring flush. The biggest
demand is in the fall and the winter. Most people buy their
milk on the weekends, but cows do not just wait till the
weekend to produce the milk. They do it everyday and so you
have got not only weekly fluctuations, you have got annual
fluctuations.
And the dairy price support program if it does cost one to
3-cents more, 3-percent more as the Cato Institute said, I
figured that would add to half a gallon of milk probably about
a penny, maybe 2-cents at the most, $1.89, about 2-cents maybe.
How much then would that milk fluctuate to the consumer if we
did not have such an order and in the springtime, yeah, a
consumer might buy milk pretty cheap in the spring, but wait
till next winter. You are going to get stuck for higher prices.
So I am just saying that on an annualized basis, the consumer
is probably spending less under the system of orders than they
would if we had this sort of total free market.
I am just saying that. I do not know. Because you are going
to get spikes in prices in the wintertime even though you might
have lower prices in the spring. I just think on an annualized
basis. Plus it is a more stable price. You could see this if
you just opened the doors and did away with everything, you
could see milk in the spring. You could probably buy it for
almost nothing. Wintertime you would pay through the nose for
So I think there is some need for stability in the system.
Having said that, do I believe that we do not need to change
the system. I am not saying that at all. I think perhaps the
recent action of reducing the number of orders was probably
well overdue. It perhaps could be reduced even further. I do
not know. We could look at that. In terms of the compacts, with
all due regard to my good friend from Vermont, I am not certain
that the compacts really are benefiting the entire Nation in
terms of milk production and milk pricing. And it could lead to
a whole regionalization of the whole milk thing and we will be
back where we were before.
While my good friend from Vermont is right that the price
is cheaper than it is in Minnesota and in Wisconsin, I am not
certain that the consumers in that area of the country would
not be better served without the compact in terms of their
overall prices. And the steady price at which they pay on an
annualized basis. Mr. Chairman, thank you very much.
The Chairman. Well, thank you very much, Senator Harkin.
Senator Craig.
STATEMENT OF HON. LARRY E. CRAIG, A U.S. SENATOR FROM IDAHO
Senator Craig. Mr. Chairman, let me ask unanimous consent
that my statement become a part of the record.
Senator Craig. And I thank you very much for building a
record on this issue. I think it is continually important as
the Northeast Compact has stayed in place for a time, I think
we are going to get a better evaluation of the market and how
the producer and the consumer reacts to it than we have had.
And gentlemen, let me thank you for your testimony.
Mr. Collins, when you examine inside the Northeastern
Compact the stability of the producer, is the attrition or the
change in production any different than it was prior to the
implementation of the compact? I mean dairies going out of
business, size of dairy scopes, that kind of thing. Have you
spent any time looking at that?
Mr. Collins. I have not, but there has been a recent study
that was done and issued in November of 1999 that looked at
that. Unfortunately, I do not recall the result. Do you, Larry?
Mr. Salathe. Well, we have looked at the number of farms
with milk cows in the compact area since 1997 through 1999, and
basically it shows a similar pattern outside the compact as
well: declining number of small farms, farms with 50-cows or
less, and increasing numbers of farms with 200-cows or more.
Senator Craig. Yeah. Well, that has been my understanding.
The mantra here was to save the family dairy farmer and while
those larger dairy farms may be family or family business
oriented, my guess is you do not save the small farmer by
creating artificial kinds of marketplace involvements and my
guess is it is not happening from what I understand in the
Northeast. And I think that my colleague from Vermont and I can
debate price, but we also cannot compare apples and oranges
when we debate price as it relates to what prices would have
been for producer and consumer with or without the compact.
There are clear records of reality forces that deal with the
price in the northeast and what it is today versus what it was.
And I think that is what we can argue if that becomes an
argument. There are plenty of studies out there that I think
justify that.
The reason obviously I am sensitive to dairy--a lot of
people do not think of Idaho as a dairy state. We think of
Wisconsin and we think of the Northeast and Minnesota. Well, we
are now sixth, headed for fifth, in production in the Nation.
Obviously, the dairies of my state are large dairies and
growing larger. We now have 5,000-cow units out there. We milk
around the clock. We produce cheese and manufactured products
around the clock. There is a whole dynamic in the West that is
significantly different than the East and so the marketplace is
important and policy program here is important.
Let me thank you for your testimony, and Mr. Chairman, let
me say that I wanted to recognize--I think I will be able to
stay, but in your next panel, we have Dennis Vanderstelt, who
is president of the Western States Dairy Producers Trade
Association from my state of Idaho, a producer from the Kuna
area. I am pleased that you have allowed us to help you shape a
broad base of those who come to testify because I think it is
clearly important that as we look at this industry and our
policy that we hopefully will emerge out of regionalism into
the reality of a marketplace and our policy will reflect that.
The Chairman. Well, I thank the Senator for his suggestion
of the witness. We look forward to hearing from the
distinguished citizen from Idaho. Senator Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM VERMONT
Senator Leahy. I would say to the distinguished Senator
from Idaho, if you would to have it totally on the market, does
that mean that we in the East would no longer have to subsidize
water and all throughout the West as we have for------
Senator Craig. Well, it is our water out there. We do not
need you to subsidize it.
Senator Leahy.--for decades. And, of course, they have paid
every cent of the dams, the river changes and all the rest, but
that is theirs. Mr. Collins, of course, continually ignores the
fact that if we get rid of the compact, 30- to 40-percent of
the farmers in Vermont and New England would probably go out of
business, which, of course, would raise the prices very
substantially.
But it is a good thing, though, to have this hearing, Mr.
Chairman. I am a person who believes in inclusive, and it was
so great to see all the people you brought together here. These
poor folks from some of the dairy processors, you know, just, I
mean they have to spend all the money to take a cab or a
limousine or whatever to come here to the Hill. I do think one
thing about the compact. It does bring people together. It is
the one thing that Mrs. Clinton and Rudy Juliani both agree on
and so I think possibly there is hope for both of them in that
But in dairy farms, dairy families, it is a serious topic
and I do not want dairy farmers in Minnesota, Wisconsin, and
Mississippi or Iowa, North Carolina or Idaho or Vermont or
anywhere else to go out of business. I will say this to
everybody. I will support, I will vote for, as I have, a
reasonable legislation that helps the dairy farmers in each of
those places and I will work with any region of the country.
But back in my office I have got this huge stack of diatribes
against the dairy contract. Scores of charges were made before
the compact legislation was passed the first time.
Notwithstanding the official view or even the official view of
neutrality from the USDA and the administration, there are
those in the Department of Agriculture who worked every single
day to try to defeat it even though they are told to do
otherwise by their bosses.
But they were wrong and the compact has gone on to do just
what we said it would do. So let me just talk about some of the
myths, some of the euthanistic language. Here is number ten:
Compacts are designed to bar dairy products from outside the
state or region. Well, anybody can sell into the compact area.
In fact, New York, which is not part of the compact area gets
about a quarter of all the compact's payments. So it shows that
it does not bar anybody.
One of they myths: the compact is more terrifying than the
Blair Witch Project. I have not seen the Blair Witch Project,
but I understand it made a lot of money, as do the lobbyists
who now use it. But it adds 50-cents to one dollar to the price
of milk. Well, the only thing more terrifying I guess than the
Blair Witch Project is milk prices in Minnesota and Wisconsin,
which the GAO reports are often much higher than the Northeast,
and as they show the Northeast prices are on the average less
than other parts of the country.
Or they say the compact is a milk tax. And thus it hurts
the School Lunch Program and WIC. Well, in fact, the School
Lunch Program and WIC are exempt from the compact. They are not
exempt from the high milk prices in the Midwest and maybe, Mr.
Chairman, we should find out why it is in the Midwest that the
WIC programs are paying so much more than we are. I hope we are
not going back to the kind of price fixing we saw on the WIC
program a few years ago, but it something we can look at.
They say the compact has dramatic effects and impacts upon
price of farmers in other areas, especially in the Upper
Midwest. Well, OMB reports that the compact region which
produces only 2.9-percent of the fluid milk in the Nation has
little effect on dairy markets outside its region or national
prices and trends. In fact, once it was put in place, Wisconsin
had about a 2-percent increase.
Production is expanded beyond the compact region's fluid
needs, they say. Well, production in New England is tied to our
needs unlike in the Midwest where there is about 85-percent
overproduction and has to go to other needs.
And this, Mr. Collins, I just thought I would mention to
you. We have been told the Secretary of Agriculture opposes the
compact. Could have fooled me. He twice approved the compact
and he signed its charter. I do not know if that word has
gotten down throughout out beyond his office and sometimes the
reaction of some--I am not going to name them--but some who go
contrary to what their boss says, they should know that.
The compact helps large dairy farmers more than small ones,
we are told. The average--I do not know what the size of a
large farm is, but the average size in the compact is 80-cows.
The higher prices--they say consumption goes down and children
are the biggest losers. Well, milk prices in the compact region
are considerably lower than Wisconsin or Minnesota and
consumption of milk has increased in the compact area which
should be good news for every parent.
And despite what some have argued, the Northeast Dairy
Compact has not even helped small northeast farmers, we are
told. Well, the Farm Bureau Federation reports significantly
below average losses of farms in New England with some compact
states reporting actual increases. Just the opposite of the
claims that have been made.
And then last, let me tell you about this. We had--I am
sorry, Mr. Chairman, I am taking more of my time, but I will
just close with this. We had two ice cream socials here last
year. International Dairy Foods Association [IDFA] had their
social and were opposed to the compact and showing their usual
subtlety, they were then quoted in the press as saying
basically that any milk from Vermont or ice cream from Vermont
ought to have the name of cow manure. You know it is a kind of,
they wanted to make sure that subtly we got the point. Well, I
asked our biggest producer of milk, Ben and Jerry's, because I
said after all the Ben and Jerry's ice cream social had
outdrawn IDFA, and asked them if that was sour grapes. Ben
Cohen told me they are always looking for new names, but he
found that Chunky Monkey, Fish Food and Jerry Garcia probably
sells a little bit better. And so I just wanted to get that on
the record.
The Chairman. I thank the Senator.
Senator Leahy. Thank you, Mr. Chairman.
[The prepared statement on Senator Leahy can be found in
The Chairman. Senator Santorum.
Senator Santorum. Thank you, Mr. Chairman. In your
statement, you talked about several things you wanted to review
but you did not review in your testimony and that is the Export
Incentive Program. And one of the things I always talked about
to my farmers is, well, there are several things we have to do
to improve your prices and one thing is this battle with
exports. And up in my end of the country we hear a lot about
Canada and the problems we are having there. Can you give us a
little bit of a refresher on how we are doing in the export
market and whether the Dairy Export Incentive Program [DEIP]
program is being helpful or not, and what are the prospects of
us expanding our markets in the dairy area?
Mr. Collins. I would be happy to, Senator Santorum. On the
export side, we are largely not competitive with other
countries in the world. Most of world trade is occupied by the
United States, Australia, New Zealand and European Union.
Together we account for 80-percent or more of trade in each of
the major dairy products. Our trade basically exists because of
the dairy export incentive program. We do have some specialty
cheeses and products like that, that we can export without
subsidies, but by and large our subsidy rate under DEIP is
roughly 50-percent of the market price which shows you that our
prices are way above the world price. So without DEIP we would
not be exporting. So DEIP is very important to us exporting.
Under the Uruguay Round agreement, the volume and value of
subsidized exports has to decline between 1995 and 2001 with
value coming down 36-percent, volume coming down 21-percent. We
underutilized our maximum permitted export subsidies in 1996
and 1997 and as a result of that, using the flexibility
provisions of the Uruguay Round agreement, we increased our
exports the last couple of years. This past year, 1999-2000, we
will probably DEIP something on the order of 100,000-tons of
nonfat dry milk. Under the terms of the agreement, we can
subsidize no more than 68,000-tons next year, the 2000-2001
year, which is the last year of the implementation period. So
there will be a substantial dropoff in subsidized exports of
nonfat dry, milk which is the principlal DEIP product, if we
are to meet our WTO commitments.
Senator Santorum. What do you see? How does that impact the
price? I mean can you give me a------
Mr. Collins. I think somewhere in my statement I had
indicated that the total amount of subsidized DEIP exports have
about a 30-cent per hundredweight effect on the price of milk.
So we are talking about a one-third drop, something in the
order of a 10-cent per hundredweight drop in the price of milk
nationally as a result of going from where we are this year to
where we will have to go next year.
Senator Santorum. You made a comment that we have to DEIP
our products to sell them because we are 50-percent above the
market price?
Mr. Collins. That is a rough estimate, yes, somewhere in
that neighborhood. I could give you exact figures, but they
were quite high.
Senator Santorum. How can we be that uncompetitive in the
world market?
Mr. Collins. Well, we have very rigid tariff rate quotas
holding out imports. That helps keep up our price. We have a
price support program and the rest of the world consists of the
three countries that I mentioned of which Australia and New
Zealand are very efficient, low cost producers. I might mention
that Australia's production went up 8-percent last year. New
Zealand's production we think this year will go up something
like 10-percent. These are huge increases when you compare them
to our trend growth of 1- to 2-percent. In addition to that,
the world is dominated by the European Union which subsidizes
enormously to get into world markets.
Senator Santorum. My question is we are not uncompetitive
vis-a-vis production. We are competitive vis-a-vis subsidies.
Is that now------
Mr. Collins. Well, I would say studies that compare the
cost of production between New Zealand and Australia with the
average in the U.S. would show them to be lower, not true for
the European Union.
Senator Santorum. How much lower?
Mr. Collins. Several dollars a hundredweight at least. With
respect to other countries that have been significant
exporters, like Canada over the last couple of years in cheese
and the European Union, they are heavy subsidizers. So there
are sort of two factors going on. There are some efficient
producers in the world and there are some heavy subsidizers in
If the other competing countries did not subsidize, clearly
that would raise the world price of dairy products closer to
ours. And just because we are a high cost producer relative to
say New Zealand does not mean we would not enjoy exports. You
know you can export based on the size of the world market that
is out there. A strong and growing world market would
accommodate lowest cost producers and highest cost producers,
as you move up to fill the needs in the world marketplace. So
if we were to ultimately eliminate export subsidies, that
would, I think, enormously help our competitive potential in
the world market place, but we are a long ways from doing that.
So as we stand here today, our exports are pretty much
contingent on the Dairy Export Incentive Program. We are
talking about something on a milk equivalent basis for the DEIP
program of exporting something like three billion pounds of
milk, something in that range, out of the 160-billion that we
produce each year. So our exports are not very prominent, but
nevertheless they are helpful and they do help support prices.
Senator Santorum. But I understand. You recommend getting
rid of the DEIP program as a way to improve our opportunity to
trade?
Mr. Collins. Only multilaterally. I would not recommend it
unilaterally.
Senator Santorum. OK. Thank you.
The Chairman. Thank you very much. Senator Fitzgerald.
STATEMENT OF HON. PETER G. FITZGERALD, A U.S. SENATOR FROM
Senator Fitzgerald. Thank you, Mr. Chairman. Mr. Collins,
thank you for your good testimony before our committee.
Mr. Collins. Mr. Fitzgerald.
Senator Fitzgerald. Senator Leahy mentioned or pointed out
that the Women, Infants and Children's program and the School
Lunch programs are exempt from the compact and he therefore
said that it was not costing the taxpayers money by adding to
the cost for those programs. But it seems to me that there are
other Federal nutrition programs out there such as the Food
Stamp program. And somebody who is on food stamps, I would
imagine when they go to the grocery store, they are just using
their electronic benefits card to buy their milk like everybody
else. The higher prices that people in those compact states
have to pay at the retail level for milk would be passed on to
participants in the Food Stamp program. Would that not be
correct?
Mr. Collins. Absolutely correct, Mr. Fitzgerald.
Senator Fitzgerald. So part of that transfer that we were
talking about earlier that the Cato Institute cited, money
being transferred from consumers in general to the producers in
an effort to make more money for the producers, part of that
transfer is occurring from some of the absolute most needy
people in our society. Would that not be correct?
Mr. Collins. That is correct. I would also point out that
there have been studies that looked at the extent to which the
compact has offset the higher cost of milk for WIC
participants. I would point out one study by the University of
Vermont concluded that the WIC participants in Boston were
fully compensated for the price increase due to the compact.
However, in Hartford, Connecticut they were not. So it depends
on where you are and what the effect is on the retail price of
milk and to what extent the compact commission provides money
back to WIC participants to make them whole. It does not always
line up one for one.
Senator Fitzgerald. And in addition to WIC and food stamps,
there are other Federal nutritional programs, I think the Child
and Adult Care Food Program, the Nutrition Program for the
Elderly. My understanding is those programs are not exempted;
Mr. Collins. That is correct.
Senator Fitzgerald. So we are looking at a transfer from
some very needy people to the producers of the milk in those
compact states. It is also my understanding that our United
States Constitution in the commerce clause forbids compacts,
essentially trade barriers, amongst the states unless they are
approved by Congress; is that right?
Mr. Collins. I believe that is the case. Not being a
lawyer, but I think that is the case.
Senator Fitzgerald. And so Congress had to come in and
approve this compact because really what we are getting into
here is trade barriers amongst the states. I guess my feeling
would be leaving aside, let us say, for example, that
everything that Senator Leahy and the advocates of the compact
say is true and that it does not cost consumers more, but yet
somehow the producers do better, and that nobody comes out the
loser here, everybody is a winner. Let us stipulate for a
moment or assume for a moment that, that is true. I would be
concerned about the precedent here because really what we are
allowing here is trade barriers between states where we are
protecting producers within certain states and when you think
of our whole world economy going toward more globalization,
more free trade, here in the United States we are actually
setting up balkanizing our country and allowing trade barriers
between states. And so I would be very concerned about the
adverse precedent that the dairy compact sets.
And certainly if it were to come to any other part of our
economy, I think you would hear a lot of people up in arms
about this. I think of this as a classic case of what Milton
Friedman wrote about in his book Capitalism and Freedom, where
he talked about how it is easy for someone who is going to
benefit from a program or a subsidy to go and lobby Congress to
get that subsidy or that protectionist legislation that is
going to make them a whole lot of money real quick. And the
rest of us, the general public, it only costs us a dollar or a
couple of dollars a year so we are not impelled to go to
Congress to lobby to fight against this new subsidy program.
This seems to me to be a classic case of what Milton Friedman
was talking about. Thank you very much.
The Chairman. Well, thank you very much, Senator. Mr.
Collins, let me just preface this question by saying that at
the time that USDA came forward with its so-called 1-B policy,
the reform policies, last year, I studied that as an individual
Senator and I wrote a public letter published in the
Congressional Record commending the Secretary and supporting
that idea. I did so simply because I appreciated that it
undoubtedly was going to be controversial. Members of our
committee, however, agreed or disagreed, but not strongly, and
as a result, and I just say for the record, we did not have a
hearing. We did not take legislative action to countermand what
you were doing or to improve upon it.
Essentially we recognized that the farm bill we passed in
1996 advocated that you do just what we had asked you to do.
Some of us felt you should have done more and some maybe less,
but nevertheless this was clearly consonant with the law that
we had passed. Now the House of Representatives did take action
specifically in opposition to what you had done, but it did not
pass two houses, was not debated by the Senate. And so the
point has been made how could this possibly in a democracy come
to pass? It happens in a democracy because some decisions are
made when appropriations bills are not passed, when there is a
large big casino at the end of a situation, where people who
are around the table have an opportunity to write law without
benefit of this committee or the Senate or what have you. That
is the situation we are examining and one reason why those who
disagreed with that procedure demanded these hearings today
which we are giving.
Now I have no prediction of what the Senate will do this
year, even what this committee will do. But I appreciate your
laying before us the facts and we may inquire of you for some
more as we have this morning, as well as Mr. Salathe, who has
been very helpful to us. Even as we have been talking about
this, your testimony includes lots of other things and I would
commend everyone to read it because it describes monies paid by
the Congress or through legislation to dairy farmers, largely
because of emergency relief both last year and a signup period
that is proceeding now for additional payments this year.
These payments are fairly substantial and we have talked--
whether the Cato Institute is right that $400 million is
transferred from the public to dairy farmers, it is very clear
that at least two or $300 million are going to be transferred
in these programs. Now, dairy farmers will say, well, that is
only justice because of weather conditions or other problems
that we faced and, indeed, they would say what about the corn
farmers and the soybean people and the folks in rice and cotton
who the Congress at least in total has awarded after all the
payments they finally made and you worked out the regulations
maybe almost $9 billion last year.
Now, in part the rationale for that came from some other
statistic that you furnished. Even though these are in agate
type, people were reading carefully last year what net farm
income was throughout the 1990s, the last 10-years, the last 5-
years, the last year, and your prediction for this year, very
relevant. Now without your trying to remember off the top of
the head any better than I can, but roughly you have said in
your publications that the farm net income for about a 10-year
period is somewhere, as I recall, in 45 to $46 billion range,
and that was roughly true for 5-years plus or minus a billion
either side.
But last year you predicted ominously in 1999 that this was
going to dip to maybe 43-billion. Now that was not nine billion
underneath the average. It was arguably two or three billion.
Congress could have said, all right, we want to make farmers in
America whole in the aggregate without picking states or
classes or crops so somehow we will provide two or $3 billion
more. But instead we provided nine, dairy farmers as a part of
that. Our part was really very small, you know, leaving aside
the economics or the social justice or movement to consumers.
We really got our part of it and maybe not as much as someone
said today, the AMTA payment people, who were out there in
other fields.
Now this year preliminarily as I read, you come up with
something like $40.5 billion prediction for net farm income, at
least right now. Now you probably will revise that as the year
goes on up or down. I don't know how market prices will go. For
the moment, future prices, hog and cattle prices, other things
seem to be moving in a pretty good trend. You hate to say that
for fear that, that will jeopardize that progress, but it is
probably substantial. But can you give us any idea of how often
will you revise the forecast? And I make that request because
my guess is that before long a debate will ensue in the
Congress and people will say, well, we are back to trying to
make things fair again and level and Mr. Collins and his
associates have said they are going to go here if we do not do
something. Do you have any overall comment about this?
Mr. Collins. Yes, a few comments. We try to revise these
forecasts every month. We publish price and supply and demand
forecasts every month for commodities and then we use those to
scale up and estimate farm income for agriculture as a whole. I
would say that if you look back over last year, those numbers
were used quite a bit to justify the size of the emergency
package. One of the things that we also do is to sort of take
that figure apart and look at crops versus livestock. And that
is one of the reasons that I think a lot of people justified
the larger package last year because the drop in income to
principal crop producers was greater than the drop in farm
income to agriculture in its entirety.
As we look out for the 2000-2001 marketing years, we see a
similar development. We expect to have stronger livestock
revenues, but we will have weaker crop revenues and so for the
moment, we are looking at a year over year decline of something
in the order of $7 billion or so for principal crops. Likewise,
milk revenues will come down because we are going to see a
several billion dollar drop in milk revenues, understandably
coming off of a record high milk price in 1998-99.
So these are numbers that can be used, I think, to look at
a benchmark and make some judgment about the appropriate size
of a package. Last year's package when we go back and look at
it for the 1999-2000 crop year, the $6 billion component of it
which was for major field crops, that brought net cash income
for the major field crops, in fact, higher for the 1999 crop
than it was for the 1998 crop.
Mr. Collins. But it did bring it about where it was for the
previous 5-year average, again understanding that, that
previous 5-year average had some very high years in it. So in
that sense, you could argue that (a) it was too high because
you moved up above the previous year's income or (b) it was
about right because you were at the previous 5-year average. So
we will be happy to provide all of the benchmark data you would
want for agriculture as a whole for crops by themselves on a
calendar year, or on a marketing year basis, so we we'll give
you all kinds of numbers from which you can justify almost
anything that you would want to justify for the year 2000. I
say that a little bit facetiously, but the numbers will show a
fairly sizable drop because markets are extraordinarily weak,
particularly for crops. They are coming back for livestock, but
for dairy, as we have talked about here at this hearing today,
they are also extraordinarily weak for dairy. So I think that
can be a guide when you think about what might be done
legislatively this year.
The Chairman. When will the next report come out? Do you
have a------
Mr. Collins. Well, we publish our numbers every month in
Agricultural Outlook magazine.
The Chairman. Yes. When will the next issue of that?
Mr. Collins. It normally comes out about the third week,
third week of the month so in another couple of weeks here we
will have the February numbers come out.
The Chairman. But you would at least preliminarily see that
the crop situation is in decline, livestock situation going
upward, and dairy in decline?
Mr. Collins. Well, the numbers for net cash farm income are
in my head. For 1999, net cash farm income was about $59
billion. For the year 2000, our forecast is $49.7 billion which
is a 20-percent drop and that would be the lowest level since
the 1980s. You would have to go back to the 1980s. Of course,
that projection does not include any emergency supplemental
payment program, but it does include $17 billion of government
payments we would expect to make in calendar year 2000 even
without an emergency supplemental.
The Chairman. Often comment is made about the lack of a
safety net, but, as you say, there are 17-billion which is a
fairly sizable net plus whatever else we may want to talk about
at that point.
Mr. Collins. At USDA, we say that it is not parsimonious.
The Chairman. No. Do my colleagues have other questions of
the witness? We thank you as always. We look forward to your
testimony and opportunities really to gain information from you
at each juncture of this debate. Thanks for coming.
Mr. Collins. Thank you.
The Chairman. The Chair would like to call now a
distinguished panel that will include Gregg L. Engles, chairman
and CEO of Suiza Foods Corporation, Dallas, Texas; Mike Yoder,
President, Indiana Professional Dairy Producers from
Middlebury, Indiana; John Wilson, Corporate Vice President,
Marketing and Economic Analysis, Kansas City, Missouri; Dennis
Vanderstelt, president of the Western States Dairy Producers
Trade Association from Kuna, Idaho; Gordon Hoover, a dairy
farmer from Gap, Pennsylvania; Dick Gorder, Wisconsin Farm
Bureau Federation Board member; and Wayne Bok, a dairy producer
from Geddes, South Dakota.
Gentlemen, we appreciate your participation in our hearing.
As many of you have listened to portions of the testimony that
has preceded your appearance, we will ask each of you to
summarize your comments in 5-minutes. I will just say for the
record that each of your testimonies will be put in the record
in full so you need not ask permission to do that. That will be
automatic for a full record what you have to say and then we
will have questions of members, a round of 5-minutes and more
if more is required. Mr. Engles.
STATEMENT OF GREGG L. ENGLES, CHAIRMAN AND CEO, SUIZA FOODS
CORPORATION, DALLAS, TEXAS
Mr. Engles. Thank you very much, Mr. Chairman and members
of the Committee. I am Gregg Engles. I am chairman and the CEO
of Suiza Foods which is the largest fluid dairy processor in
the United States. Let me thank you for the opportunity to
testify about dairy policy from the perspective of a fluid
processor. First, let me make clear that as the number one
dairy processor in the United States, Suiza Foods is absolutely
committed to the economic viability of our nation's dairy
Dairy farmers are our partners. They must have a fair and
steady stream of income. Without them and a safe and reliable
raw milk supply they produce, we simply cannot operate our
business. The Dairy Farmers of America, which is the largest
dairy cooperative organization in the United States, now owns
34-percent of Suiza's fluid dairy operations. America's dairy
farmers, therefore, now have a very significant and common
interest in the growth of demand in sales for fluid dairy
products and share in the processing of profitability of the
dairy processing sector and because of that we have a common
interest in strengthening the growth of fluid dairy sales in
the dairy industry generally.
But fluid milk consumption is not increasing. It is
decreasing and has been steadily decreasing for the past three
decades. During that time, per capita consumption of fluid milk
has fallen from approximately 250-pounds per year to around
200-pounds per year or a 20-percent decline. Why is fluid milk
consumption declining? Certainly fluid milk faces increasing
competition from other beverage sectors, particularly the soft
drink manufacturers whose gigantic corporate competitors
constantly bombard the consumer with marketing, distribution
and product innovation investments.
This is clearly one factor driving consolidation in the
fluid processing industry.
Suiza Foods and other fluid dairy processors are working
very hard to bring product innovation and marketing to life to
reverse this trend of declining fluid milk consumption, but as
an industry we are constrained by what we believe is an archaic
and inequitable milk pricing system that Congress has allowed
to continue. As you all know, our existing Federal milk pricing
system was developed in the early 1930s in response to market
conditions existing during the depression era.
Low milk prices required emergency legislation that created
the first Federal milk marketing orders. Although the milk
market pricing system has been modified periodically, its
fundamental purpose has always been to maintain viable economic
condition for dairy farmers which we fundamentally support. Its
fundamental mechanism has always been to tax the consumption of
fluid milk by forcing milk processors to pay higher prices for
milk that manufacturers of other dairy products including
cheese and butter. This we do not support.
I would like to introduce into the record a recent
editorial by Dick Groves, who is the editor of the Cheese
Reporter, a cheese industry publication. Mr. Groves points out
that at inception of the Federal program, fluid milk sales
greatly outweighed cheese sales and thus the logical place to
tax milk usage to support the farm sector. Because of that tax,
however, over the last 60-years, fluid milk sales have
consistently declined while cheese sales which are subsidized
have grown dramatically. Yet the tax is still levied only on
fluid milk sales, now by far the smaller part of total milk
usage in the United States.
Mr. Engles. The historic rationale for fluid milk premiums
is out of touch with today's reality. Fluid milk production and
processing are no longer local in nature. Technological
improvements have resulted in milk with a longer shelf life.
Improvements in refrigeration and distribution systems and our
national highway system have brought milk freely into all areas
of the country. New technologies such as ultrafiltration and
reverse osmosis are rapidly blurring regional production
differences even further. Milk now regularly travels coast to
coast.
Notwithstanding these significant changes in the dairy
industry, Congress has been unwilling to move the industry to
an unregulated status or materially change the regulatory
scheme. Congress seems content to allow the current system to
continue to charge fluid milk processors higher premiums than
those charged to other dairy processors. As we know from
experience in many areas, consumers will avoid paying even
hidden taxes reflected in artificially high prices by choosing
substitute goods.
The higher price charged to fluid milk processors increases
costs to consumers and drives down consumption. The declining
consumption will, in turn, reduce dairy farmer income unless,
of course, Congress is willing to authorize additional
subsidies to support the price. Regional dairy compacts are at
their core an amplification and continuation of the traditional
approach to dairy support. That is Class I premiums, albeit on
a regional basis today.
The Northeast Dairy Compact has only one purpose: to raise
the price of raw milk used for bottling above the prevailing
Federal price. Mind you this increased price applies only to
bottled milk, not milk used in the manufacture of cheese,
butter or other dairy products. As of January 2000, raw milk
processed for bottling in New England Compact states cost
$16.94 per hundredweight, while that used to make cheese cost
$10.05. That is a 69-percent premium for identical raw
material. This premium raises the price of fluid milk to
consumers. Therefore, is it any wonder that consumers view
cheese as a better nutritional value for their dollar, driving
growth in cheese sales, while fluid milk sales have declined.
If we continue to try to enhance dairy farm income by
taxing fluid milk sales alone, we will ultimately drive the
category down to the point where we have insufficient volume to
support farm incomes. Not surprising, at the same time that
fluid milk consumption is declining, New England dairy farmers
who are receiving more money for their milk under the compact
system have increased production. Milk production in the New
England states has grown far faster as a whole than in the
United States since the compact began. This increased
production together with decreased consumer demand has resulted
in excess production. Some of this excess production has been
absorbed in neighboring states, driving down the prices at
which dairy farmers in those states can sell their products and
some has been purchased by the Government as surplus
production.
Understandably, all dairy farmers would like to receive the
higher premiums paid in the compact states for their products.
What rational businessperson would not choose a higher price
for his product. If, however, that is a course that you choose
and you authorize compacts for other states, dairy farmers in
those states will also increase production. It is human nature.
It is good business. Then on an even larger regional or
national scale, the cost of milk to consumers will increase and
consumption will decline. This imbalance of supply and demand
is a deadly downward spiral that ultimately must result in you,
Congress, getting back in the business we have struggled as a
Nation to put behind us. That is being excess production.
To extricate yourself from such a cash subsidy which in the
early 1980s exceeded $2 billion per year, you might then take
taxpayer money, pay dairy farmers to slaughter cows, which we
have done before, which would in turn lower beef prices and
bring the cattle ranchers to your door knocking for subsidies
to give them relief from excess beef supplies. Surely we have
learned from the mistakes of the past and must not let history
repeat itself.
Unfortunately, the purported benefit of the Northeast Dairy
Company, the protection of the small dairy farmer, has not been
realized. During the first year of the compact, dairy farms in
the New England states declined at a 25-percent faster rate
than during the previous 2-year period. Dairy farms in New
England and elsewhere in the country have been exiting the
business at a rate of approximately 5-percent per year. That
decline is due according to the American Farm Bureau Federation
not to milk prices but to the increasing age of farmers, the
unwillingness of children to take over the business of dairy
farming, and the attractiveness to farmers of market prices for
their land.
Our economy has created enormous opportunities and
alternatives for dairy farmers and their families. There are
many among us who believe that this represents progress and is
the intended result of a prosperous capitalist economy rather
than a case for continued government intervention.
What the Northeast Dairy Compact has done is benefit a
handful of very large farmers who receive by far the lion's
share of payments from the compact premium. But this marginal
benefit has come at the expense of consumers who have paid $85
million more for milk than they would have paid without the
compact and at the expense of the dairy industry as a whole.
In summary, the dairy industry is complex and so are the
issues surrounding it, but the solution does not have to be
complex. I believe that Congress should not expand the dairy
compacts to additional states and should allow the Northeast
Dairy Compact to sunset on schedule. We need to move to a
transparent and simple pricing system for raw milk in which the
users of that product compete in the market place for the
product and pay the price that the market will bear.
My vision for the future of the industry is quite clear. I
see a vibrant and growing industry. I see technological change
and innovation reducing cost to consumers. I see product
innovation and marketing new products, attracting more
consumers and increasing their consumption of dairy products.
And finally I see Suiza Foods 18,000 hardworking and dedicated
employees have a reason to fill secure about their futures and
excited about their industry and the opportunities to creates
for them and their families. We can make this vision a reality,
but we need your help in creating a playing field that is not
constrained by the heavy hand of government regulations.
Like every other successful industry in our country, we
need market forces to drive supply and demand and set prices
for the raw materials we use in our business and we need
Congress to have the wisdom and courage to take a stand and
seek market oriented solutions which address the needs of all
constituents in our industry, our dairy farmers, our dairy
processors and our consumers. Thank you very much.
[The prepared statement of Mr. Engles can be found in the
The Chairman. Thank you very much, Mr. Engles. I allowed
you to continue beyond the red light for awhile because it is
important to complete your thoughts, but to the extent that
each of you are able to stay within the 5-minutes or a little
bit of leeway, we would appreciate that. Mike, it is good to
have you here today, always a fount of common sense from
Indiana, which I know you will share with this committee. Mr.
Yoder.
STATEMENT OF MIKE YODER, PRESIDENT, INDIANA PROFESSIONAL DAIRY
PRODUCERS, MIDDLEBURY, INDIANA
Mr. Yoder. Thank you, Mr. Chairman. By way of introduction,
I would say that my comments today are, as you asked to be,
presenting what we view as the status of the dairy industry,
but also my comments represent not just my views but my entire
board of directors, and they have okayed my comments today.
Nonetheless, I am the only one here today to take the heat.
From our view, dairy farming has been one of the United
States agriculture's bright spots, especially the last 2-years,
which have been great in terms of prices received and because
of low feed prices pretty good profits. We believe that for the
most part dairy farmers are operating from very healthy
financial positions and are well situated to deal with a short
period of low prices. Although some would say that the current
prices are disastrous, I guess I would differ with that point
of view.
If we examine the current low milk price compared with some
actual costs of production, I can demonstrate that the two
numbers are very close together for most dairy farmers. For the
year 2000 on my farm, we are projecting that our cost of
production will be in the neighborhood of $13.45 per hundred
pounds of milk produced. This correlates well with data from
universities that benchmark these types of cost production.
They indicate a range for my dairy farm to be somewhere between
13.20 and 13.60. As near as I can determine, our price for milk
that we will receive for January's milk will be approximately
12.50 to 12.75 per hundredweight.
In addition to that mailbox price, we will add on average
another dollar per hundredweight through the sale of surplus
dairy cattle. So although the gross dollar income that we
expect to receive in January will be between 13.50 and 14.50, I
have here that while it is not as much fun as the $18 we got
last year, it is still a far cry from disaster for our farm and
I think for most farms.
The last 2-years, the industry has experienced a
significant volatility in prices which is something I think we
are not accustomed to managing in the dairy industry. I do
believe, however, that dairy farmers can learn to manage a more
volatile market with a few provisions. First of all, I think
confidence in the futures market that has recently been
developed needs to be restored. It is our perception that last
year, some of the volatile, the dramatic swings in price were
the result of some inaccurate reporting of stocks. And I think
that we need to somehow improve that reporting of dairy
inventories.
I think expansion of the Dairy Options Pilot Program would
be helpful as well. I know that in my particular case, we are
going to take advantage of that program this winter. Perhaps
some of the volatility has already been taken out or has been
taken care of with the new Federal orders structure although I
really do not know because nobody has really received a milk
check from this new structure yet and so I think it is a little
too early maybe to make that judgment.
Also, we are a little concerned about the rumor of changing
the nature of the support price to one that is tied to a cost
of production. We are very much opposed to anything like that.
In Indiana, dairy farmers believe that a support price more
closely reflects a very low safety net. Closely related to
dairy prices is the issue of dairy imports. Over the last year,
we have seen significant amount of imports, an increase in
imports, a number of these imports are used for cheese
production. And a number of these imports are imported that are
not classified in such a way that they are subject to any
import quotas. So we are concerned that the United States has
become the sponge of choice when there is a need to soak up
surplus dairy products produced elsewhere in the world.
During times of excess production in the U.S., we do not
believe it makes sense for the United States government to be
purchasing surplus dairy products, domestic dairy products,
especially cheese, that are manufactured using foreign-produced
surplus dairy components. This amounts to using our tax dollars
to help solve other countries' dairy surplus problems.
I would close with just a comment on dairy compacts. In the
state of Indiana, we took a look at that last year. We had a
committee that represented dairy farmers from across the state.
We did not like what we saw. We felt that if the dairy compacts
were allowed to expand, that the dairy industry in Indiana
would be--that would be a detriment to our industry. Our
conclusion was we would like to see the dairy compacts die or,
at least, at the very least, contained to where they are now in
the Northeast. Thank you.
[The prepared statement of Mr. Yoder can be found in the
The Chairman. Thank you very much for your testimony. Mr.
Wilson.
STATEMENT OF JOHN WILSON, CORPORATE VICE PRESIDENT, MARKETING
AND ECONOMIC ANALYSIS, DAIRY FARMERS OF AMERICA, KANSAS CITY,
Mr. Wilson. Thank you and good morning, Chairman Lugar and
committee members. My name is John Wilson. I am corporate vice
president of Marketing and Economic Analysis at Dairy Farmers
of America. I am speaking on behalf of the 24,200-dairy farmers
who own our cooperative. DFA is a dairy cooperative that is
owned strictly by dairy farm families. Our purpose is to market
all the milk produced everyday by our members at a fair return.
DFA's owners operate dairy farmers in 45-states and will
produce about 21-percent of the U.S. milk supplied during the
year 2000.
DFA is structured to assure dairy farmers control the
organization. To ensure that the cooperative serves its local
members, DFA maintains a grass-roots structure made up of seven
geographic areas. Each area's marketing strategies and policy
development is set up and controlled by an area council made up
of dairy farmer members who are elected by the area's farmers.
Each area council elects representatives to the corporate board
which oversees the policy development and direction of DFA. To
ensure even more grass-roots participation, each area council
has district leadership, delegate and resolution structures
that allow for many voices to contribute to the direction of
their cooperative.
On behalf the members of DFA, I want to express my
appreciation for the action Congress took to correct the
Federal order final rule. As you recall and as has been
mentioned earlier today, USDA did attempt to lower dairy farm
income by lowering Class I differentials that processors are
required to pay dairy farmers. This action was reversed by
Congress with the passage of the Consolidated Appropriations
Act of 2000. Congress sent a clear message that it was not
their intent to lower farm income when it called on USDA to
reform Federal orders.
DFA strongly supports Federal orders for three basic
reasons. One, Federal orders establish minimum farm prices.
They assure consumers of a steady supply of fresh milk and they
provide for orderly marketing. An unregulated milk market would
be extremely disorderly with investor owned processing plants
taking advantage of dairy farmers during times of excess
supplies. Federal orders cannot completely solve the problem,
but they do play a major role in equalizing the imbalance of
bargaining power between producers and purchasers of milk. For
these reasons, DFA strongly supports Federal orders.
The economic environment in which today's dairy farmer must
operate is a tough one. Price volatility is the name of the
game. Within the last 2-years, the Class III price has been as
high as $17.34 and as low as $9.63 back in December of 1999.
The last time the Class III price was that low was July of 1978
which is over 21-years ago. So obviously dairy farmers are not
very happy about current price levels.
Cheese and nonfat dry milk is currently trading at or very
near the price support level. Without our dairy price support
program, it is likely that cheese and nonfat dry milk would
fall significantly to lower levels. Some would say we should
let our dairy prices fall to world levels and thus become
competitive with the world trade.
Currently the world price for milk used to produce butter
and nonfat dry milk is calculated to be $7.03. The comparable
price for milk used to produce cheese is $6.68. I cannot
imagine the impact on our commercial dairy industry if our
prices were allowed to go that low. The safety net provided by
our dairy price support program is real. We strongly advocate
its indefinite continuation.
DFA and others will be asking Secretary Glickman to modify
the make allowance used in the price support calculation to
equal the effect of make allowance in the Federal order prices.
Today if you calculate the new Federal order Class III price
using the commodity prices established under the price support
program, the resulting price is $9.74 per hundredweight, not
the 9.90 that Congress has mandated. It would be only fair that
Secretary Glickman make the appropriate adjustments to the
price support make allowance to reflect the intent of Congress
which is to floor the price of milk to dairy farmers at $9.90.
The Dairy Export Incentive Program is a very important tool
for the dairy industry. Without this benefit, our dairy farmers
cannot afford to export their product in the heavily subsidized
world trade. If we expect our dairy farmers to be players in
the world dairy trade, we must continue to maximize the use of
the Dairy Export Incentive Program.
Another issue of concern involving world trade deals with
cheese standards of identity. We understand the National Cheese
Institute may petition the United States Food and Drug
Administration to allow the use of imported milk protein in the
manufacture of domestic cheese. Like other dairy commodities,
the world case in price is well below our price due to foreign
subsidies. As a matter of fact, the world price is so low,
there is essentially no case in produced in the United States.
The quantity of imported foreign milk protein would directly
displace milk produced by the U.S. dairy farmer. This would be
a tremendous slap in the face of the farmer if FDA approves the
cheese processor's request.
Governmental intervention is important to assure dairy
farmers get a fair and equitable price for their product.
However, the Government cannot provide dairy farmers with
everything they need. They need market security. They want to
control their own destinies. They are fearful they will be
swallowed up like the poultry farmer who has become a piecemeal
worker. They look at their neighbors who used to raise hogs and
no longer have the ability to compete with the vertically
integrated corporations which control the pork industry today.
They see the beef industry controlled by a handful of buyers.
These fears have caused dairy farmers to create our
cooperative called Dairy Farmers of America. Our cooperative is
the farmers' answer to a quickly consolidating industry that
threatens the livelihood of dairy producers and their future as
independent business people. As we look around other segments
of agriculture, we see significant vertical integration from
the processor back toward the farmer. Dairy farmers use DFA to
vertically integrate from the farm toward the consumer. This
gives them market security and perhaps a bigger share of the
consumer's dollar.
We believe the United States needs a secure domestic food
supply and the best source for that food is from the
independent business people that we call farmers. We are doing
what we can to perpetuate the farming tradition that has made
this country the best place to live in the world. On behalf of
our over 24,200-dairy farmer members of DFA, I thank you for
your time.
[The prepared statement of Mr. Wilson can be found in the
The Chairman. Well, thank you for coming, Mr. Wilson, and
for that testimony. Mr. Vanderstelt.
STATEMENT OF DENNIS VANDERSTELT, WESTERN STATES DAIRY PRODUCERS
TRADE ASSOCIATION, KUNA, IDAHO
Mr. Vanderstelt. Mr. Chairman and members of the Committee,
thank you for this opportunity to appear before you today to
discuss dairy policy with you. My name is Dennis Vanderstelt
and I operate a dairy in Kuna, Idaho, 20-miles south of Boise.
I appear before you today on behalf of the Western States Dairy
Producers Trade Association and the Idaho Dairymen's
Western States is an organization of ten western dairy
producer organizations which came together in May of 1996 for
the purpose of identifying mutual problems and finding common
solutions. Our membership which represents approximately 35-
percent of U.S. milk production including all three dairy
producer groups in California--Western United Dairymen, Milk
Producers Council and California Dairy Campaign--and then dairy
producers of New Mexico, Idaho Dairymen's Association, Oregon
Dairy Farmers Association, Texas Association of Dairymen, Utah
Dairymen's Association, and Washington State Dairy Federation.
In addition, we have been working with United Dairymen of
Arizona. We actively promote a competitive, market driven and
price discovery system for pricing milk.
I also represent the Idaho Dairymen's Association which is
at trade organization that represents all 932-dairymen in the
state of Idaho. The industry in Idaho has grown in the double
digits for the last 5-years and will continue this pace if the
atmosphere continues to be positive for the dairy industry.
Cheese is the main use of milk in Idaho, accounting for
approximately 90-percent of utilization.
We need to ask why do we need to have dairy policy? The
nature of our product determines that we should have an orderly
marketing system. The shelf life of most dairy products is
short because of our product is perishable. We would also be in
trouble if there were not the mechanism for uniform testing and
pricing of the components of milk. There also is the need for
price transparency in our industry. Producers need to be
assured that they are getting the same basic price as everyone
else and processors need the assurance they are paying the same
price as their competitors.
Three things have made our industry successful in the past:
the Federal milk marketing orders, the coop system, and the
increase of milk production per cow, which has doubled since
Diary looks at some of the other agricultural commodities
and is thankful that we are not vertically integrated, but the
main reason that the dairy policy and the Federal order system
needs to be maintained is to assure an adequate supply of milk
for the consumer. You can go into any supermarket and most
convenience stores and get your supply of milk at a reasonable
price. The price, by the way, is usually below soft drinks,
juices and bottled water, our competition in the marketplace.
Market forces are driving the price for milk on the farm. We
are truly in a supply and demand market. With only 1-percent
overproduction, we see prices that fall dramatically.
At the last meeting of the Western States several policy
positions were adopted. First, we are in favor of national
programs, not regional programs. Second, we believe that price
stabilization such as the support program needs to stay in
place. Third, we believe that the market access program such as
the Dairy Export Incentive Programs need to remain. Fourth, we
are opposed to direct payments to producers.
What policies do we want? We need the Federal order system
to continue but would like some corrections in the Class III
and IV formulas. This should happen in the next several months.
The Federal order system does not create surplus milk, nor
discourage privately owned cheese companies from locating in an
area. Idaho is proof of this. Order 135 was established in the
early 1980s. Major cheese companies 10-years later did a major
expansion in Idaho. They could have located in Montana but did
not because it does not have a Federal order. However, they did
come to Idaho instead.
There should also be a mechanism to stabilize our market.
The price support program now at 9.80 should be left in place.
The cost of this program is very small to the taxpayers. In
fact, the GAO scored it at zero cost when Congress extended the
program until 2001. Most of the time it is far below the price
of milk, but in times such as these it helps stabilize the
market. Without the price support system, the volatility in the
marketplace would be even greater.
There are also needs to be a way that the industry can
access the world markets at prices lower than our domestic
prices. DEIP has helped enhance our markets. We would like it
to remain in place. In fact, if the direct government payment
of 125-million was added to the DEIP, it would at the present
bonus price of $690 per metric ton of cheese just about use up
the surplus of cheese in the market. The DEIP program also
helps with the marketing of dry milk powder which is used in
most areas as a balancing product. We have our work cut out for
What policies do we not want? Direct payments to producers
that are unfair and ineffectual in helping producers are a
waste of money. Put the money where it will enhance our market
such as DEIP program. Under the present distribution, a certain
Midwestern state produced 14.5-percent of the milk last year,
but received 22-percent of the $220 million Market Loss
Assistance Program payments. Is this fair or is this suggesting
that the western dairymen are a different class of dairymen?
In Idaho, virtually all of our dairies are family owned and
operated. Some are large; some are small. But this is America.
The last issue is trade. Let me ask you is there greater
danger to opening our markets than there is to expanding
exports? All you have to do is look at some of the other ag
products in our country and you will have to say emphatically
Should the dairy industry export more? It has to be viewed
as an additional market. However, it is a market that says we
can only sell at an amount that is less than our domestic
price. We still have reservations about fairness in trade and
are unwilling to increase our production just to become
exporters. We are not willing to export at a loss. The third
world countries would like to develop their own agriculture.
The question is how do we compete without lowering our domestic
price below the cost of production? It is our belief that if
our companies are given a chance to develop foreign markets,
our industry can find ways to meet the lower prices demanded
but only if the world is truly a market price and not a dump
price from subsidized product.
If some of the major countries like China, Russia, India
and all of Indonesia decide to import rather than develop their
own dairy industry, then U.S. dairy producers need to be ready
to fill those markets. Once again, leave the DEIP program and
as the opportunities present themselves, we can supply the
product.
The other side of this equation is imports. This is
important. Do not trade away our domestic dairy industry for
some high tech considerations. Do not allow cheap imports to
ruin our industry. If in the trade negotiations the imports of
dairy are trade for something else, then the domestic industry
will have to shrink. The economic benefits derived from the
dairy industry will shrink and rural America will suffer again.
We have seen this happen in the sheep industry. Do not do it to
the dairy. This is not positive for our country. If we can
restrict imports to the current levels, then our industry will
survive and will grow.
In closing, just let me say that without these dairy
policies, I probably would not be here. The dairy industry
would be a fraction of what it is now and we would be importing
far greater amounts of dairy products. Without government
policy, we would have far fewer farmers and far greater imports
in all areas of agriculture. Yet U.S. consumers spend less on
food as a percentage of their income than any country in the
world. This is not an accident, but the result of many years of
strong government policies that have maintained a healthy and
efficient agriculture that is the envy of the world. Thanks
again for letting us share with you.
[The prepared statement of Mr. Vanderstelt can be found in
The Chairman. Well, thank you very much for coming, Sir. We
appreciate your testimony. Mr. Hoover.
STATEMENT OF GORDON HOOVER, DAIRY PRODUCER, GAP, PENNSYLVANIA
Mr. Hoover. Thank you, Mr. Chairman. In school, I failed
more tests and questions because I failed to listen to the
instructions. So I hope to be done before that red light comes
on. Good morning. My name is Gordon Hoover. I am from Lancaster
County, Pennsylvania. I am a dairy farmer. My family and I milk
120-cows. I serve on the board of directors of Land of Lakes,
the second largest dairy cooperative in the country, and I am
here today representing National Milk Producers Federation.
First of all, I would like to say that we believe that
USDA's final rule has complied with the congressional directive
in the farm bill. Moreover, we believe that USDA has
established a solid framework for the future of the Federal
order system, one that preserves the elements of the existing
system that historically has served consumers, processors, and
producers, and one that also makes significant changes to
reflect the realities of the marketplace in the future. It will
take time to assess all the impacts of these changes and we are
hopeful that we can allow this system to function without any
further tinkering.
Three other dairy policy issues I would like to mention are
continuation of the Dairy Price Support Program, proposed
changes to the U.S. cheese standards, and continuation of the
DEIP program. We believe that the Dairy Price Support Program
needs to be in place to act as a safety net for dairy
producers, especially in light of the catastrophic farm prices
such as were experienced by the pork producers in recent times.
We feel that the current support level of 9.90 per
hundredweight will accomplish this while not encouraging any
production increases. We urge this committee to endorse the 2-
year extension of the Dairy Price Support Program as outlined
by Secretary Glickman in the administration's proposed farm
plan for this year.
Another threat to our dairy economy at the present time is
a proposed change to the U.S. cheese standards that would allow
the use of dried milk protein concentrate in the production of
cheese. Due to insufficient quotas and tariffs, this could
displace billions of pounds of U.S. produced milk with highly
subsidized foreign imports causing depressed farm prices.
Lastly, we encourage the continuation of the DEIP program.
National Milk certainly supports all efforts to reduce
international dairy subsidies since they grossly distort the
world market and depress world prices. However, the DEIP
program allows the U.S. dairy to compete in a limited way with
the much more extensive support subsidy practices of some of
our export competitors.
Finally, Mr. Chairman, I would like to make two
observations as to how we in the producer community are
preparing and looking at the future dairy policies. First of
all, a larger percentage of dairy producers than ever before,
about 84-percent now, mark their milk through farmer owned
cooperatives. I believe by working together within our coops,
we can hope to balance the power and the marketplace of multi-
national corporate dairy produced processors and retailers. The
marketing power of the giant conglomerates of the world needs a
counterbalance in the form of strong healthy dairy cooperatives
owned by farmers for the benefit of farmers.
Second, National Milk Producers has taken the lead in
sponsoring a new initiative, the Dairy Producer Conclave, to
refocus the energies of the dairy producers and find areas of
agreement within our community. We have arranged five regional
grass-root sessions this spring to receive input on issues of
importance to the industry such as animal health, environment,
economic policy, product standards, trade and food safety.
After the regional sessions, our steering committee of national
dairy leaders will consider the input we have received and
attempt to build a consensus on issues for the future.
With that, I would like to thank you for the opportunity to
testify today and I would be glad to answer any questions.
[The prepared statement of Mr. Hoover can be found in the
The Chairman. Thank you very much, Mr. Hoover. Mr. Gorder.
STATEMENT OF RICHARD GORDER, WISCONSIN FARM BUREAU FEDERATION
BOARD MEMBER, MINERAL POINT, WISCONSIN
Mr. Gorder. Thank you, Mr. Chairman, members of the
Committee, for the opportunity to appear and to testify before
you today. I am Richard Gorder, a dairy farmer from Mineral
Point, Wisconsin. I am by today's standards a small dairy
farmer and when I say small, I mean by operation size, not
necessarily stature, farming 200-acres and milking 50-cows. I
am also a board member of the Wisconsin Farm Bureau Federation.
I am like thousands of dairy farmers in Wisconsin who are
faced with the decision of modernizing, expanding my dairy
operation, or exiting the business in the next few years. I
started dairy farming in 1979, rented land and facilities until
1988 when I bought my current farm. In 1979, I was one of over
46,000-dairy farmers in the state of Wisconsin. Today, a little
over 20-years later, less than 23,000-farmers remain. Wisconsin
continues to lose 3- to 4-dairy farmers a day, up to 1,500-per
year. Wisconsin loses more dairy farmers in 1-year than most
states have in total.
As I decide on how to update my dairy operation, issues
such as land base, facilities, technology, and financing are
all issues I must consider. One factor that should not be part
of my planning process is how the Federal dairy policy will
impact my business. Mr. Chairman, I am not a dairy policy
expert and if most are honest, few are. After years of debate,
today's dairy policy continues to be plagued by regional bias
and politics. In 1996, Congress ordered Secretary Glickman and
the USDA to reform and to modernize the depression era Federal
milk marketing order system. Farmers across the Midwest finally
held out hope that the antiquated milk pricing system would be
scrapped and a new marketing order system would take into
account today's technologies and transportation advances.
When the USDA reform hearings reached Wisconsin, over 500-
dairy farmers attended, more than all of the other hearings
combined. This is important, Mr. Chairman, as marketing order
reform has become more than just a business issue. It has
become an emotional issue across the Midwest. Farmers have
become apathetic and cynical as to whether reform would prevail
over politics, whether government had the ability to bring
equity and fairness to the industry. Last spring, the USDA
unveiled its long-awaited order reforms. We in Wisconsin were
not overjoyed by the modest reforms but realized that they were
a small yet positive move towards a more market oriented
pricing structure.
Throughout the previous year, the USDA heard opposition
from southern and eastern states to the intended proposal. So
the USDA diluted its original modest reform to what eventually
became the final rule. In the fall of 1999, farmers and coops
across the country voted on the reform package and by an
overwhelming vote, accepted the final rule. At that time we
were to see implementation of the final rule that would
consolidate the number of marketing orders and would bring
modest changes to the old Class I differentials that price milk
using Eau Claire, Wisconsin as a price basing point. We would
also see the sunsetting of the price fixing scheme called the
Northeast Dairy Compact. However, in November of this past
year, regional politics prevailed.
Members of Congress took it upon themselves to overthrow
the USDA's final rule that had been voted on by farmers and
their coops and instead imposed their own reform that was
little different than the system that Congress had originally
ordered to be changed. In doing this, Congress totally
disregarded farmers' rights when they mandated the new
marketing order rules without allowing farmers their rights to
vote on these reforms as stipulated by USDA's own rules.
Mr. Chairman, the question is now where do we go from here?
First, I hope that you and the Committee have the resolve to
help the dairy industry into the 21st century with an inclusive
comprehensive policy that knows no regional barriers; to
understand and accept that milk will be produced where it can
be most economically produced and where there is the
infrastructure that can service, process and deliver the
product; and most importantly to create a policy that will
allow a dairy farmer to profit because of their ability, not
because of where they live.
To achieve these goals, I believe that we need to have a
policy that has a single nationwide Class I pricing structure,
known as national pooling, and uniform rules that regulate the
manufacturing industry or uniform make allowances. Only then
will we be able to move beyond the regional price distortions
and the temptation of politicians to manipulate the system. If
this cannot be accomplished, I think Congress should consider
total deregulation, a position that has been endorsed by the
membership of the Wisconsin Farm Bureau Federation.
Members of the Committee, please let this hearing be the
beginning to meaningful change. Mr. Chairman, in all due
respect, I trust that this hearing is genuine and not just held
as a gesture to appease the Senators from the Upper Midwest.
Mr. Chairman, there are many challenges that need to be
addressed that can help all farmers across the country. The
need for Congress to continue to work on developing trade
dialogue that fosters free, fair and open trade; the need to
continue to examine tax reform issues that would include risk
management strategies; and a need to address environmental
regulatory issues that threaten every farmer today.
Mr. Chairman, Members of the Committee, thank you for the
opportunity to come before you today.
[The prepared statement of Mr. Gorder can be found in the
Bok.
STATEMENT OF WAYNE BOK, DAIRY PRODUCER, GEDDES, SOUTH DAKOTA
Mr. Bok. I too want to thank you, Chairman Lugar, and other
members of this committee for allowing me to participate in
this hearing. I am Wayne Bok of Geddes, South Dakota. I own and
operate a dairy farm in south central South Dakota as well as
serving as president of the Associated Milk Producers,
Incorporated [AMPI]. AMPI is a Midwest dairy cooperative
representing 6,500-members in seven Midwest states.
Before driving to the airport yesterday morning, I helped
milk my cows and while I am gone my sons will milk our 80-herd
of Holsteins. Statistics define my Midwest dairy as average. I
define our dairy as the sum of all I have worked for the past
34-years. When I began dairying, I milked 20-cows using what is
now considered antiquated equipment, but though milk prices
fluctuated, there was always a strong support price. And as a
Midwest dairy farmer, I was milking in America's dairyland,
marketing through our hometown coop.
I would not call my early years of milking the good old
days, but it is important for you to know where we have been in
this industry before discussing the future. Today I milk 80-
cows and that is not enough to support two sons and their
families. To add value to my milk, I am marketing through a
dairy cooperative which moves dairy products up the market
chain.
If the next generation of my family wants to milk for
another 30-years, we must invest in our family business. Before
we invest in state-of-the-art dairy facilities and technology,
we need state-of-the-art dairy policy under which I can operate
a multi-million dollar business. You cannot operate a 21st
century dairy with depression era dairy policy.
U.S. dairy policy must catch up with the dairy industry.
The scope and size of today's dairy farms and cooperatives
illustrate my point. We are moving from regionally based
dairying to the national and international scene. Today I am
competing with dairy farms on both U.S. borders for cheese, for
nonfat milk and for butter markets. In coming years, I may be
competing with dairy farmers on both sides of the ocean. We
face an environment of accumulated change accelerated and
caused by economic globalization, market volatility and intense
competition. We need to leave regional mind-sets and move to a
national approach for dairying, marketing and policy.
The dairy policies passed by Congress last fall merely
added another building block to dairy's growing domestic
barriers. Efforts to bring rational reform to dairy policies
failed as regions of this country that benefit from the status
quo continue to block those reforms. Regionally based dairy
policies such as Federal milk marketing orders and dairy
compacts are destructive.
How can I compete internationally when I am not allowed to
compete domestically? In a country where California cheese can
end up in a Minnesota cheese sauce plant or Iowa fluid milk in
a Florida milk carton, it makes no economic sense to build
trade fences for milk such as we have seen through regional
dairy compacts. Is this not the very reason that our
forefathers wanted a unified national economy?
As congressional leaders, you can tear down these regional
walls with nationally oriented dairy policies. When developing
a policy ask yourself does this policy hinge on regional bias?
And if the answer is yes, then discard that idea.
Allow me to offer three ideas that work together to yield a
program that helps every dairy farmer no matter where he milks
cows. First we need to maintain the dairy price support system
and for that to be successful, we need to protect our domestic
milk markets. And we also, I think, need to manage our
country's milk supply. We all know policy debates are driven by
economic backdrop. With mounting milk surpluses and subsequent
low prices, our industry is quickly joining other agricultural
commodities facing depressed prices. We need to think outside
of that dairy policy box.
Mr. Chairman and other members of the Committee, dairying
has gotten to be a big business. Since 1990, the size of the
average dairy herd is up about 75-percent. Dairy farms are
changing. Dairy cooperatives are changing. Markets are
expanding and dairy policy must adjust to this new environment.
If individual family farms commit hundreds of thousands, even
millions of dollars, to an on-the-farm business, you need to
adopt national dairy policies which support these efforts.
It is time to move beyond regional discriminatory dairy
policies that divide our nation's farmers and to work toward
national policies that work for the Nation as a whole. Thank
[The prepared statement of Mr. Bok can be found in the
The Chairman. Well, thank you very much, Mr. Bok. You
mentioned in your testimony a point that others have likewise
touched upon, and that is if you are going to proceed in the
dairy business for another generation or two, you suggested you
would need to make more investments and you already outlined
the fact that you have a lot of money in your business now and
this has become greater over the last 10-years. For this
investment to be rational, I am just curious for many of you,
as dairy farmers or as those who represent them, what kind of
return on capital do you anticipate from that investment? Has
anyone made a calculation as to the desirability of investing
in an increased dairy situation as opposed to buying United
States government 30-year bonds or high tech stocks or various
other ways in which some people are making money? What is your
calculation, Mr. Bok?
Mr. Bok. The average return on my investment in my dairy,
if I go back and average possibly the last 5-years, I am
looking at a 5-percent return.
The Chairman. Five-percent?
Mr. Bok. Yes. When I compare that to one of my sons who has
already left the farm and has purchased a small business, he is
very disappointed if he is not yielding 30-percent.
The Chairman. 30. He was making 30-percent on the dairy
business?
Mr. Bok. No, no, no. That is after he left the dairy
business------
The Chairman. I see. Yes.
Mr. Bok.--and went into------
The Chairman. I see.
Mr. Bok. But our farm is yielding about 5-percent.
The Chairman. Does anyone else have bookkeeping that would
yield any--yes, Mr. Yoder.
Mr. Yoder. Last year, we received a little closer to 18-
percent return on our capital, but, of course, that was record
high years. Some of my research indicates that dairy farmers
can sustain higher returns on their investment, but they tend
to be the larger dairy operations, 500-cows and above.
Especially if you get to the 1,000- or 1,200-cow dairy
operations, there are some very fine returns at that level. So
the smaller farms, 50-, 60- or 80-cows do suffer from a smaller
The Chairman. Well, how small? I mean can you give any idea
of how do the 1,000-head do as opposed to the 30?
Mr. Yoder. I do not have those figures right on top of my
head.
The Chairman. Are they out there anywhere? Has someone down
Mr. Yoder. Well, you know, you indicated before that when
you use statistics, they tend to be averages and I think in my
testimony I indicated that some of the cost of productions that
I found with dairy herds that are under 80-cows tended to be up
closer to 15 or $16 per hundredweight. Now I know of farms that
are less than that, but on the average, and this was from
Cornell University and I think it included about 200 actual
farms, their average cost of production was somewhat high.
The Chairman. Right. So that would mean that their return
on capital was low.
Mr. Yoder. Low. I do not know what the range would be.
The Chairman. But I am still trying to get some benchmark.
In other words, this is not the only hearing in which this is a
relevant question. Again and again, people are talking about
modernizing and staying in the business and what have you. Now
this implies that there is a gut reaction to what kind of
return on capital or it does not matter. In other words, you
have a lifestyle to which you become accustomed and regardless
of the return you continue doing it because that seems
preferable to doing something else, but then the question is
whether public policy should support this or not. Now, thus far
public policy has supported it.
In other words, this question is not often raised as to
whether anybody is making money in this field. Now you have
testified that you had a good year and you made 18-percent on
capital. Was this because you are a highly leveraged operation?
In other words, do you have a lot of borrowed money as opposed
to equity? Or is that a factor in this situation?
Mr. Yoder. I think it might be a factor. In our situation,
we are much more conservative in how we borrow money. Actually
Farm Credit Services requires me to be somewhat conservative. I
think they prefer it that way. I do not know. Maybe there is
other members of the panel here. We tend to measure--I do know
that some people would use a benchmark of gross profit on cash
revenues and indicate good dairies can achieve 20- to 25-
percent. Now I know that there are dairymen on this panel that
are really raising their eyebrows about that and doubt that,
but it can be done. We have done it on occasion.
The Chairman. That is their gross margin as opposed to once
again return on------
Mr. Yoder. Right. And, you know, Senator, that maybe it is
just a characteristic of the United States, but I think this is
probably the only place in the world where a farmer can lose
money 20-years in a row and still be in business.
The Chairman. I see. Another possibility. Anybody else have
a thought about this business, return on capital? Is it a good
business to be in? Is it something that--obviously all of you
are in it.
Mr. Gorder. I would only interject, Mr. Chairman, that I
think that you would find that the numbers vary as many as
there are farmers. There are just so many circumstances that
get weighed into that. I think very few farmers actually sit
down and have an actual calculation as to what their return on
investment is. There is just so many more factors that are put
in place here. And in my modernization plans, believe it or not
I am not really looking at my return on investment as much as
realizing that if I do not, I am simply going to have to exit
the business and that might be a choice.
The Chairman. And so that probably, as you say quite
honestly, that is determinative as opposed to a calculation of
other investments you might make or other returns?
Mr. Gorder. Correct. But I mean I also understand what the
interest rates are. So as the interest rates have started to
move up, I get considerably more cautious and I think that is
the general trend of consumers across the country
The Chairman. Because you have to earn more than the
interest rate.
Mr. Gorder. Correct.
The Chairman. Or the capital you are going to borrow?
Mr. Gorder. Right.
Mr. Vanderstelt. Chairman Lugar, in Idaho, rather than put
a number on what the return is, I do know that Bank of America
right now is offering 85-percent financing on a new large
dairy. And that would suggest there is a fair amount of
profitability in it.
The Chairman. Yes, Mr. Engles, do you have------
Mr. Engles. Well, I just think as an interesting
counterpoint that returns to our company, which is a large
dairy processor on invested capital last year was slightly less
than ten percent. So the pressure on this industry in terms of
margins extends really throughout the chain------
The Chairman. Very competitive industry.
Mr. Engles.--from the farm through the processing side of
the business, and partly that is driven by the fact that at
least in our segment of the industry, it is contracting, and
that is a difficult environment in which to operate. So we are
interested in policies that can start allowing the industry, I
think, as you have heard many of the people here say, to drive
growth because that solves a lot of problems in the business.
The Chairman. Let me ask in the area of exports and imports
which many of you have touched upon, earlier we heard the
testimony from Keith Collins, an economist at USDA, that costs
of production in New Zealand and Australia were significantly
lower on average than they are in the United States,
significantly lower, said several dollars per hundredweight.
Now, on the other hand, the EU, the European subsidies,
were extremely substantial. So you have it with dairy as well
as with other products in agriculture a dumping from time to
time and our national policy is to try to blow the whistle on
this. The future of this is sort of a mixed bag. As Keith
Collins said, on the one hand, you have dumping by the
Europeans, but here you have the New Zealanders who have done
away with all agricultural subsidies, decided as an ag policy,
their national destiny is being very competitive. And one way
to be very competitive is to have the Government out of it
altogether. People simply reduce costs and they become
competitive.
And the policies that some of you are advocating are, on
the one hand, watch the imports that are coming, particularly
into the cheese situation, because that may undermine us. On
the other hand, we are not really quite ready to compete
worldwide given the fact that there are others that do a whole
lot better. Ultimately, my guess is if we progress in the
agricultural round with WTO to progressively lower export and
import barriers, why our competitive situation in the world may
improve vis-a-vis the Europeans, not necessarily with regard to
others, and maybe they are a smaller factor. Maybe as Keith
Collins was suggesting, the overall world market is big enough
to pick up even all of our production which may not be the most
competitive. So that is an interesting idea.
But in any event, this is in play and it is an important
part of it. Now you have all suggested the continuation of
DEIP, even acceleration of that. I think Collins pointed out,
out of 160-billion, 3-billion might be affected in terms of
these export subsidies. So it is a fairly small issue, but
nevertheless one that probably others are going to take a look
at in the world. What are you doing? What kind of direct export
subsidies are you involved in? We point to the Europeans as the
worst offender.
But let us say we got all that chopped back in the due
course of time, how competitive is our industry likely to
become? Is it possible without the investment we were just
talking about in the first question for it to be more
competitive to begin with, to actually lower costs, or are we
at a point where the costs that we have are fairly stable, and
we just have to accept the fact that even if we are not going
to win the gold medal in the world olympics of this situation,
why we at least might be competitive with some. Anybody have
any idea about the future of that competitive situation?
Mr. Hoover. Mr. Chairman.
Mr. Hoover. I think one factor and you kind of alluded to
it is, and Mr. Collins alluded to it, in other parts of the
country such as New Zealand and Australia, their production
practices are different. They use grazing so there is a less
input cost there.
The Chairman. Yeah.
Mr. Hoover. In the United States, we have the ability to
supply as much milk. You increase the price and we will supply
you as much milk as you want in a minute's notice, whereas in
those countries, in order to capture more of the world's
market, they are going to have to start to implement more
higher cost production practices than we are already at. So for
them to capture much more of the world market than they already
have is going to bring them up to a playing field that is more
equal with our competitive prices.
The Chairman. Is there any possibility, leaving aside the
export market, and that is what we look to in many crops that
we talk about in the Committee, for increasing demand in the
United States? I think Keith Collins testified there had been
an increase in production of about 1-percent annually for the
last 10-years. Certainly there are a lot of advertisements--
some of you gentlemen are responsible for these--trying to
encourage people to drink more milk. It is healthy for them,
but this has not moved the market in a dynamic fashion. It is
what might be called otherwise sort of a mature market which
the extent of it is fairly well known plus or minus some
increases in population in our country. But is there any hope
out there in the industry that people will drink more milk,
that the demand side of this equation in the United States
might change? Yes, Mr. Engles.
Mr. Engles. Well, I think, in fact, there is some hope
there although clearly the political winds are blowing somewhat
in a different direction today based on some of the things that
I heard this morning, but I think that what you find is that,
first of all, we have growing demand for cheese in the United
States. There has been a significantly growing demand for
cheese. One of the reasons I think that, that is the case is
that Federal policy has, in effect, subsidized the price of
milk that goes into the making of cheese and that has allowed
the manufacturers of cheese to invest against their business
and brands and market their product quite effectively and they
have done a very good job of that.
In the fluid milk industry, we have been on the other side
of that equation. We are the side of the milk shed that
subsidizes because that is where the Class I premium is charged
and that is an uphill battle that we have had to face. The
fluid milk industry is, however, consolidating pretty quickly
and people have talked about that extensively in the political
context. But one of the things that is driving that
consolidation is the need to invest in the business in a
proprietary way that develops brands, innovates in the product,
and markets those products to the consumers. And you are seeing
the larger fluid milk processors because they have greater
collective resource being able to invest in product innovation.
Dean Foods, one of the large fluid milk processors has been
very innovative on the packaging side of the business end, and
you see small and flavored milk sizes being driven by virtue of
packaging innovations. Our company has recently introduced
three new milk products that are fortified with nutritional
benefits for children, active women and elderly people in the
northeastern marketplace and we are spending very heavily to
promote those and develop them as brands and we are seeing
increased consumption of fluid milk products by virtue of that.
But it takes that sort of investment in innovation and
spending in a very crowded consumer marketplace to get people's
attention, and if we are not able to do that as an industry, I
think you will see continuing declines in the consumption of
fluid milk. If we are able to invest back against this
category, both collectively as an industry and as proprietary
companies, I think we do have the chance to turn it around and
get this side of the category growing.
The Chairman. But you are suggesting you are doing this
really by differentiating the product, advertising a specific
attribute to your milk.
Mr. Engles. Absolutely. You have to differentiate the
product and you have to market it to people who perceive a
benefit to that differentiated product.
The Chairman. Because milk as milk is not going to have
more than 1-percent, but if you have La Suiza milk or some
product you have, conceivably you might do better than the 1-
percent growth; is that it?
Mr. Engles. Well, that is certainly our hope and we are
investing a significant amount of money to try and establish
the proposition. I think generic advertising has some benefit
when it comes to disabusing the public of the notion that milk
is somehow bad for you and I think that Milk PEP and those
sorts of things have been very effective in that regard. But in
terms of building that emotional bond with consumers, I think
generic advertising has a hard time being effective.
The Chairman. Yes, Mr. Yoder.
Mr. Yoder. I would just add to that, that I just recently
read a statistic on cheese that if we look at American cheese
consumption, we are only at the midpoint of what Europeans
consume. So if the American appetite for cheese would be
somewhat similar to European, I think there is reason to be
optimistic in that area as well as continued cheese growth.
You also asked a question about our competitiveness and I
think there was a good point made that maybe we assume that New
Zealand will continue to produce at that level and perhaps
their cost of production will increase especially if countries
like the United States would insist upon the same quality that
goes into their production as far as sanitation techniques that
we are required to produce milk under here in the United
States. I am not convinced that milk produced in other
countries is produced under the same sanitation requirements
that I am required to.
Also, as far as environmental regulations, which have been
asked or talked about, I would suggest that I have invested
substantially more to protect the environment from manure
spills or just from a nutrient management standpoint than
perhaps my counterparts in New Zealand. So those are issues
that affect competitiveness of American dairy product. If we do
not have any more unreasonable regulations, I guess, I think
perhaps we can--I am optimistic that we can be competitive in
The Chairman. Now Mr. Engles touched upon consolidation in
a part of his remarks, but let me just carry this in a little
different direction. As many of you have commented, this is an
area our committee has been looking at. We had a hearing on
concentration just last week and we are not unique because
people are organizing in the pork industry and this has brought
attention. We found this happened to a greater extent in cattle
and some of you have suggested even further in poultry.
But I think Mr. Hoover and Mr. Wilson both commented how
coops have been an effective bargaining situation for producers
and that has been suggested. We heard testimony last week, in
the pork industry to an extent which clearly has not occurred
there thus far. To what extent is there a reasonably level
playing field in terms of small producers and people who are
buying from you? How would you describe the market at this
point? Is more extensive coop organization required? Are the
coops the right size and location to do the job? Or does anyone
have a comment about the bargaining power in America? Mr.
Mr. Wilson. I would try that one. We are a large
cooperative. However, we are still a voluntary organization and
so just because we today have a large group of dairy farmers
together does not mean that we necessarily are able to just
establish the price. And we sell a lot of milk to Suiza in
partnership with Mr. Engles here, but we still bargin with them
with an arm's length. We still bargain every month on the price
of milk. We do not tell him what it is going to be. It is a
two-way street. We do have more bargaining ability than dairy
farmers individually certainly, but there is still an option of
dairy farmers going out, jumping outside their cooperative,
because really when we bargained for higher prices on Class I,
we are really differentiating between different uses of milk,
and saying, yes, we believe Class I milk is more valuable than
Class III milk. Well, you cannot get that spread very wide
because you have different utilizations of different milk
purchasers in the market. The higher utilization guy, the more
you spread that price, the more advantage he will have
competitively.
And so the cooperative, even though we may be large, there
are still limits on how much price differentiation we can do,
and consequently a limit on equalization of that bargaining
power. We still are dealing with the fundamentals of the market
that milk is produced everyday and the demand and the supply
rarely match up. The balancing piece of that market, that milk
market, is I think unlike any other agricultural commodity
because it is perishable, it is bulky to move, and the fact
that the supply and demand do not match up very well.
The Chairman. Well, it is interesting, though, you and Mr.
Engles, not the two of you, negotiating this month by month,
but your associates do this sort of thing. And you represent
24,000-farms, as I understand, which if 111,000 is what we were
dealing with in Keith Collins statistics, that is almost one
out of four. It is a pretty big cooperative.
Mr. Engles. It is a big cooperative, and I think just to
somewhat amplify on what John said, but also to give you a
somewhat different point of view, the whole notion of, first of
all, concentration between on the buy side and on the sell side
is one that needs to be understood here, and the second thing
what is the nature of negotiation with respect to price in the
dairy business today?
First of all, DFA is a much larger organization than we are
and we are the largest fluid processor. We represent somewhere
on the order of 20-percent of all fluid milk in the U.S., but
fluid milk is somewhere around 30-percent of total milk
utilization in the U.S. DFA, on the other hand, represents 25-
percent of all milk produced, whether it goes to fluid uses,
cheese, or whatever. So they are an enormous organization that
represents, I think, the supply side extremely well in terms of
price negotiation.
The other thing that is really important in this context is
to understand that, by and large, we do not negotiate the price
in this industry today. The Federal Government, USDA, tells us
what the price is, minimum price for classes of milk, and to
the extent there is any negotiation with respect to the price
is how much more than the minimum am I or other users of fluid
milk going to pay? So the fear of the users of milk taking
advantage of producers of milk in terms of long supply is, I
would say, virtually eliminated by virtue of the Federal
regulatory scheme.
On the other hand, when milk is short, you can be certain
that premiums go up substantially as to do class prices. So it
is a very interesting dynamic today in milk pricing.
Negotiation with respect to price is very limited and you have
powerful players on both sides of the equation. So I think
concern about balance in this area is unwarranted.
The Chairman. Let me ask a question of the panel. We were
discussing in this committee, in fact, we will have a markup
sometime in the next month on risk management. Some of you have
touched upon this. Mr. Yoder, you mentioned the forward
contracting, the pilot options program. This has not really
been available in the industry. It is something that I have
been a strong advocate of and supported by many members of the
Committee who believe that these instruments ought to be
available to dairy farmers. Many since the pilots have come
into play have not availed themselves of it because it is
complex, for the same reason corn farmers, bean farmers find it
difficult to figure out how to handle puts options or the
forward contracting process.
But nevertheless, many farm managers who do this are doing
better than those who do not. Sort of hope for the Lord will
provide as opposed to becoming more sophisticated marketers.
What has been your experience, Mr. Yoder? Are you just getting
into this business of forward contracting or how does it help
you as a dairy farmer?
Mr. Yoder. Well, actually I am a little red-faced because
as a good dairy manager, I should have contracted last year but
did not. My experience in talking with other dairymen, there is
a lot of skepticism in using the futures market. As I
indicated, last year's violent price swings, that were to some
degree due to some inaccurate reporting of stocks, I think sort
of built, I mean increased that skepticism. My particular coop,
which is foremost, does offer a forward contracting which is a
little more straightforward and a little easier to understand.
I guess I should have checked with them to just see how many
dairymen did take advantage of that last year.
My suspicion is, is that with time that will be utilized
more than just using a hedge or purchasing an option. We are
going to use the option, the Dairy Options Pilot Program, this
year mainly because I would just like to learn a little more
about what the connection is between the futures price and my
mailbox price. And that has been the primary reason that I have
not utilized those. We have utilized the futures market and
options hedging for grain sales in the past but just have not
taken those skills and transferred it to the dairy.
Mr. Gorder. Mr. Chairman.
Mr. Gorder. I, in fact, have used the--even on my small-
scale farm--have used the futures. I am not allowed to forward
contract because of the discrepancies that regulate between a
proprietary plant and a cooperative. Cooperative can forward
contract. As we are proprietaries, we are not allowed to. I
think that is supposed to at least change a little bit or at
least under some trials, but I have gone into the marketplace,
or into CME, and purchased contracts for this last fall. And I
did quite well. I will be honest with you. When I purchased my
put contracts in end of June when the prices started to
escalating and I really could not see a good rhyme or reason
for the reason that the prices were going to the degree they
were, I thought, you know, this is the time when you lock in
some prices.
One of the big problems is that, you know, you have to
simply look at it as an insurance policy and the idea is that
you really do not want to collect on insurance policy. You know
it is nice to get your premiums back, but you cannot look at in
that respect. Believe me when the prices were where they were
in July, I would have liked to had my $2,000 back, but as I let
them mature in October and November, I did pretty well. I not
only got my money back, but I think you need to continue. I
think that your dairy option program is so spotty that it
really does not do much of any good, and I need to do one other
aspect of this and I need to bring this in. And that brings it
back to the Northeast Dairy Compact.
Ask the people in the Northeast have many of those went out
and bought put contracts. When someone is guaranteed a floor,
what incentive is there for them to go out and use risk
management strategies? None. Thank you.
The Chairman. Well, there would probably be less. Yes, Mr.
Engles.
Mr. Engles. Well, markets work when they are large and they
are trusted and they are liquid. And the market in dairy
futures is not that today. And I frankly have a hard time
seeing how it is going to get there until you permit Class I
buyers of milk to participate in the forward contracting arena.
It is 30-percent of the market. It is that most immediate part
of the market, and today from the most recent legislation,
lower class utilizers of milk are allowed to forward contract,
but Class I users are not. So if you are getting a blended milk
check that has Class I utilization in it, and you can only
forward contract on the basis of lower classes of milk, which
obviously pull that average down, you will find it almost
impossible for that forward contract to meet your expectations
in terms of price. So for these markets to be fully developed
and used, they have to be open.
Mr. Engles. And I think that we can say as a fluid
processor, we would be active participants in those markets if
we were able to do so because certainty is important to us and
our customers and volatility is a very damaging thing for our
business as well.
The Chairman. Well, and a lot of discussion has gone on
today about the volatility of price, and we all know tracing
December, January, February prices, then through July and so
forth, if we have this hearing in January and February, it is
always a pretty dismal time. You know better to have a dairy
hearing in the summer when the situation has changed. My own
view, and I always hesitate to get into anecdotal personal
circumstance in these things, but, you know, our USDA
economist, Keith Collins, has testified, for instance, that the
corn price for the coming year, given the overhang of supply
and general conditions thus far, might very well be somewhere
in the range of $1.90 to 2.10 a bushel. This is for all prices
the whole season, which is not very high.
The LDP is about $1.96 and so that sort of sets the floor
for the corn farmer, but sort of balancing off of that. Now the
week before last, in checking with my elevator there, Beech
Grove, just outside of Indianapolis, I found even given the
basis situation and so forth that I could get $2.45 for corn.
So I sold some. Now for those who are not in the farming game,
they said you do not even have that corn planted yet, quite
apart from harvested. How do you know that you are even going
to have something to sell? And that is always the problem of
forward pricing, but if you have a crop insurance policy to
cover 65-percent of your crop or 75 or whatever else we are
reaching for now in that situation, why you know that you have
got something to sell. So there is sort of a twin situation.
And 2.45 is different from $1.96 or 2.10 or whatever is
going to happen. Now, why does not everybody in America go out
and sell corn at 2.45? In some cases, the basis is different in
other parts of the country, but my point is that, just as Mr.
Gorder is pointing out, you notice there are fluctuations. It
is a volatile market, sort of things change. Now to the extent
that we can get a more active forward contracting market, and
your point is well taken with regard to the larger players and
more of the situation involved in it, we have more
possibilities.
But we also have also possibility for people to fail more,
too. You know what if you are not a sophisticated person up to
date on the futures markets, puts options, or you just think
this is ``Las Vegas West,'' or something of this sort, you have
got a problem. And the whole dilemma of this committee trying
to help agricultural America through our extensions or through
professional groups, through coops, anybody, sort of get into
the ball game is imperative even as we try to keep these
floors, safety nets, various other situations, that are
important. Yes, Mr. Wilson.
Mr. Wilson. I would just like to add a little bit. We
support at DFA the concept of forward contracting. We have a
program within our cooperative. Roughly 3-percent of our
membership participates, which is not a big participation rate,
but that is getting more interest as time goes along. But I
think we need to be very careful that we do not rely on forward
contracting and futures markets as the savior of the dairy
industry from the producer side, that hogs and cattle and
grains have had futures markets for a long time, and they are
probably worse off today than the dairy farmer on average. And
so while it is a tool, I think we need to be very careful not
to rely on that tool solely and that we still need Federal
orders and price supports and all these other issues more
importantly than we do a futures market.
The Chairman. Yes, Mr. Vanderstelt.
Mr. Vanderstelt. And if I might add to that, Senator Lugar,
you know, my banker knows I am a good dairyman, but he does not
know if I am a good gambler. And we did the milk futures
through the fall, summer-fall, and we do a lot of grain
futures, and we do what you are suggesting, but when you are a
larger financed operation, you do get asked that question. OK,
that banker--he knows the numbers, too, and he looks at them.
And he expects certain performance. He would--like I say, he
knows I am a good dairyman and when we did the milk futures
this summer, it is really difficult because what if they do not
work out and how I am going to explain this? And so there is
that mental thing to it.
And I do not know how far we are going to see dairymen
pursue the futures. There are a lot of them playing with it,
lot of them did quite well actually this last summer and late
fall, actually November-December. Several of my neighbors were
pretty happy through Christmas actually. But there is that
drawback that can this get me in trouble? But I do like having
them available.
The Chairman. Well, I think your point is well taken. I
would not want to get anybody into difficulty. And I was just
saying that probably my banker would be happier than I made the
sale at 2.45 than I was waiting for the LDP to clear it away at
$1.96 later in the season. I would think that was a healthy
move to sort of wicket it in. Now the other side of this is the
crop insurance, you know, so the banker knows that I have got
something to sell, that I am not out there selling something
that is not going to be produced. Then he really would be
worried.
I think this whole area in dairy in terms of risk
management is something that the Committee and the Congress
needs to work with the industry more on so that there are the
same elements that are available maybe for some other points of
agriculture. And there may be more available than I know about
and this is why I am trying to elicit some advice or comment
from each of you as experts today because I suspect we are
going to have dairy programs of one form or another. All these
may go up and down. Congresses come and go and sort of public
sentiment. But to the extent that farmers are better prepared
really, whatever these markets are, to meet the volatility that
we are talking about, why then probably we are better off.
Well, I appreciate very much your patience. This has been a
hearing now going on close to 4-hours and you have lasted
through all of it and we are grateful to you for your
testimony. As you have other ideas, why please furnish them to
the Committee. We will keep the record open for a moment or
more than that, for a day or two, so that Senators who were not
able to attend who may have questions of any of you might be
able to submit those and if you can respond to that. Thank you
again for coming and the hearing is adjourned.
[Whereupon, at 12:40 p.m., the Committee was adjourned.]
A P P E N D I X
[GRAPHIC] [TIFF OMITTED] T7541.001
DOCUMENTS SUBMITTED FOR THE RECORD
room 328A, Russell Senate Office Building, Hon. Richard G.
Santorum, Fitzgerald, Grassley, Grams (ex officio), Harkin,
Leahy, Conrad, Daschle, and Lincoln.
Committee is called to order.
We appreciated all of the witnesses in our hearing
yesterday. A number of statements were made by Senators
preliminary to the hearing and during the hearing, which
proceeded for about 4-hours, as you will recall. I have no idea
or prediction of the duration of this hearing today, but it
will be equally thorough in questioning the witnesses and
trying to gain information.
The question has been asked, at least of the Chair--so let
me try to express this informally--as to what will follow after
the hearings. And I will consult, obviously, with our
distinguished ranking member, Senator Harkin of Iowa. But I
suspect that we will try at least some straw votes of members
of the Committee as to their disposition.
Among issues that might be discussed are whether members
favor the so-called Policy 1A or 1B with regard to dairy, one
policy being a policy suggested--in fact, more than suggested--
by the USDA last year and countermanded really by action of the
Congress at the end of the session to go to the status quo or
the so-called Policy 1B.
So having heard--and we will hear a lot more today--about
both of these policies, we will ask whether members have a
disposition to confirm, change course, or are so divided that
no consensus appears to be possible.
Likewise, with regard to the compact issue, there are ways
that we could proceed there. One would be to authorize more
compacts, to confirm the status quo, that is, the New England
situation, or to wind up the status quo, namely, the New
England Dairy Compact. But that is clearly an issue that is
before the Committee and that is suggested by these hearings
and the friendly clash of personalities, States, and so forth
that we heard yesterday.
There may be other constructive policies that arise quite
apart from disposition of the status quo of the past and what
have you, and some of these were suggested yesterday by
constructive dairymen who are pointing out sophisticated ways
in which people are trying to make a living in this business
and could be assisted by the Congress, leaving aside these age-
old quarrels. So a lot of us are much interested in that
testimony. Hopefully we will have some more today.
But in lieu of an opening statement, I thought I would go
into this monologue to try to at least bring everybody up to
speed that there was a thought expressed here and there that
the hearing yesterday and today were simply a gesture by this
committee to alleviate the panic that ensued when the
distinguished Democratic Leader and our Republican Leader were
trying to get the Congress stopped last November. We found that
very difficult given the number of people that wanted to
discuss dairy, and we are prepared to do so for several more
So as a part of that situation, I was asked to come to the
floor, make a statement that Senator Kohl in particular and
other Senators from Wisconsin and Minnesota could hear and
confirm and commend. And so these hearings we are holding
promptly as a result of that, as a pledge to that.
But some have suggested, having done that, that is the end
of the affair. Not necessarily. It is if the members of this
committee want it to be, and although I stated yesterday
candidly my own preferences--and I think they are known--they
are not determinative.
So having said that, let me turn to the distinguished
Democratic Leader who was here at 9 o'clock, let the record
show, for this important hearing. Tom?
STATEMENT OF HON. TOM DASCHLE, A U.S. SENATOR FROM SOUTH DAKOTA
Senator Daschle. Well, Mr. Chairman, thank you for your
leadership and for following up with the commitment that you
made last year. I well remember those days and remember what a
vital role you played in bringing the session to a successful
completion.
These hearings are valuable, and as you say, your position
or my position may not be determinative, but your position
carries a lot of weight, and we are interested in pursuing the
matter, as you indicated, and I think the manner with which you
have outlined the way the Committee will address this issue is
a very constructive one and one that I think we should all
endorse.
I did not have the good fortunate to hear the hearing
yesterday, but I also commend you for your endurance if it
lasted 4-hours.
I am one who believes--and it is probably no surprise for
any of us in my region of the country--that the system is
outdated, it is archaic, and we do need to address the complex
array of pricing mechanisms that we have based upon a system
that was created generations ago. I am one who believes that it
is time for a national system and that we can't intervene in
the marketplace unnecessarily and in many cases unfairly.
I think the time has come for us to create that national
framework that doesn't benefit one region or the other, that
doesn't benefit larger producers at the expense of the small. I
am very hopeful that these hearings, as constructive as they
are, could lead, as you have indicated, perhaps to a third way,
a way that would allow for compromise and a way that would
accommodate the concerns of those in the Northeast and the
South, but also recognize the unfairness of the status quo.
So I certainly pledge to work with you, and no one works in
a more bipartisan and conciliatory manner than the Chairman
does, and I look forward to a constructive way with which to
resolve these matters, hopefully this year.
But, again, I thank you for the hearings.
The prepared statement of Senator Daschle can be found in
The Chairman. Well, thank you for those comments. I really
appreciate that because, as we found yesterday, this is not a
partisan issue. It became much more sectional or State by
State. So those are the more difficult issues to find
consensus, to find majorities.
We have three panels today: the first, administration
witnesses, and then two panels, one that will review dairy
pricing, and the third, do we have a need for a Federal dairy
policy at all.
I will ask that in the instance of the administration
witnesses--and they are Mr. Kenneth C. Clayton, Associate
Administrator of the Agricultural Marketing Service of USDA,
accompanied by Mr. Richard McKee, Deputy Administrator for
Dairy Programs of the Agricultural Marketing Service--that you
give a summary of your comments in
Ten-minutes or less, as the case may be, and we follow the
procedure of 5-minutes for each Senator. If there are Senators
who wish to be heard again, we will have another round with
regard to each of the panels.
With the other panels, I am going to ask, since there is a
large number of witnesses--and we are grateful that each has
come, some from a long distance--that each has 5-minutes to
summarize the comments.
Let me just make the statement in advance that all of the
statements will be published in the record in full, so it won't
be necessary for you to ask permission for that to happen. That
will occur because we really want a very full record of
prepared statements as well as the questions and answers.
So at this point I will ask you to proceed, Mr. Clayton. We
are very pleased that you and Mr. McKee have come to initiate
our second hearing.
STATEMENT OF KENNETH G. CLAYTON, ASSOCIATE ADMINISTRATOR,
AGRICULTURAL MARKETING SERVICE, U.S. DEPARTMENT OF AGRICULTURE;
ACCOMPANIED BY RICHARD M. MCKEE, DEPUTY ADMINISTRATOR FOR DAIRY
PROGRAMS, AGRICULTURAL MARKETING SERVICE, U.S. DEPARTMENT OF
AGRICULTURE, WASHINGTON, DC.
Mr. Clayton. Well, thank you very much, Mr. Chairman, and
good morning. It is indeed a pleasure for us to appear before
you today. We certainly appreciate your invitation to
participate in today's hearing.
Of course, yesterday Dr. Keith Collins, USDA's chief
economist, testified and provide testimony describing the
overall situation and outlook for the U.S. dairy sector and our
dairy farmers. Dr. Collins also briefly touched on the role of
the Federal Order Program within the larger constellation of
dairy policy as well as some of the other actions which have
been taken to support dairy farmers' incomes.
Today what I would like to do is to address the Federal
Milk Marketing Order Program in a bit more detail. My remarks
will briefly describe that program, steps we have taken to
implement the 1996 farm bill mandate, and to briefly touch on
some of the anticipated effects of Federal Order Program
changes on producers and consumers of dairy products.
Let me start then with the Federal Milk Marketing Order
Program and perhaps just a bit of perspective on that program.
Basically, the Federal Order Program is intended to promote the
orderly marketing of what clearly is a highly perishable
product, namely, milk. The Federal Order Program I think does
so by helping to prevent marketplace behavior that might
otherwise erode the price of milk at the farm gate and
ultimately drive producers out of business.
The significance of this protection, of course, depends on
the relative bargaining positions of dairy farmers and those to
whom they sell their milk, the number and size of processors
who are selling milk or bidding for producers' milk, the market
strength of cooperatives that are selling farmers' milk, and
other factors come into play, I think, when assessing the
respective bargaining positions of dairy farmers and
processors.
Of course, under Federal orders, the proceeds from the
sales of farmers' milk are pooled within a market area with an
average price or value being returned to producers. The prices
at which processors must account to that pool are based, of
course, on the end value uses of milk. To allow pooling to
work, a set of classified prices are established under the
Federal Order Program. It is important, I think, to note that
these are minimum prices that processors must pay for milk
corresponding to its value in several end-product categories.
It certainly is the case that from time to time, and depending
on markets, we see premiums that are paid beyond these
minimums.
Class I milk, as you heard yesterday and as you already
know, is the milk which basically goes in the bottle. It is
fluid milk. It earns the highest minimum price basically for a
variety of supply and demand characteristics that I think tend
to make fluid milk more valuable in the marketplace.
Class II products have somewhat lower minimum prices. Class
II products are the so-called soft dairy products. They are
manufactured, but still have a fairly high degree of
perishability, things like ice cream, yogurt, and the like.
And then, of course, we have got Class III and Class IV
manufactured dairy products, things like butter, dry milk
products, and cheese, which tend to have the lowest minimum
prices under the Federal order structure.
Importantly, I think, these products tend to be traded in a
national market, and because they are more easily stored than
fluid milk or soft dairy products, they serve really as the
residual claimant for milk under the Federal Order Program,
residual claimant for milk that is not going to be used in
Class I or Class II products.
Basically it is these manufactured products or the prices
of these manufactured products then which provide the basis
upon which these differentials are added to arrive at prices
for Class I and Class II products.
As already noted, producers selling milk under a Federal
order receive a uniform or weighted average price, called the
blend price, that reflects all the uses of milk in a given
market area. Thus, under orders, all producers in that order
area benefit from the higher price on milk that is marketed for
fluid consumption. At the same time, all producers share in the
lower prices for milk that is diverted to manufactured
Under this arrangement, equity is preserved with producers
not needing to engage in behavior that may be contrary to their
interests, such as bidding the price of their milk down to its
manufacturing value, even though it may be used for fluid milk
consumption. In the same vein, under Federal order pricing,
handlers are not in a position to play producers off against
each other and drive that price down. And as I noted earlier,
the important caveat there, I think, is ultimately the
importance of all this does hinge certainly on the respective
bargaining power of farmers and those to whom they sell their
milk.
Let me turn now quickly to the process that we undertook to
meet the congressional mandate, the 1996 farm bill mandate. As
you well know, Congress first directed the Department to reduce
the number of milk marketing order areas--in essence, to redraw
the geographic boundaries to reflect the larger marketing areas
in which milk is now sold, distributed, and consumed. And,
second, I think clearly Congress directed the Department to
consider changes to the pricing structure which is utilized
under the Federal Order Program. Both the system of classified
prices was examined as well as relative levels of Class I
prices within and between marketing order areas.
The Department's final decision, which was issued in March
1999, detailed the changes that the Department thought
appropriate to the Federal milk order program. Basically, the
program provided for 11 consolidated milk order areas, down
from 31. It established a nationally coordinated Class I price
structure that provided greater efficiencies in milk assembly
and distribution, also established new methods for pricing milk
that is used for manufacturing purposes, and made minor changes
to the classification of milk provisions, as well as
standardized a variety of provisions and definitions and terms
that over the years had become somewhat dissimilar across
orders, and this was an opportunity to true all that up.
In August 1999, referenda were conducted to determine
producer approval of the revised Federal milk orders. Dairy
farmers approved the 11 orders and a final rule to consolidate
and revise the orders was issued on August 23, 1999, with the
revised orders to become effective October 1, in compliance
with legislative mandates, certainly.
A bit of history intervened, and by November 29th, the
Consolidated Appropriations Act of 2000 was signed, which, of
course, required that both the revised orders become effective
on January 1, 2000, and also that those orders utilize the so-
called Option 1A Class I differentials. The Act further
directed the Secretary to establish a temporary forward
contracting pilot program and to hold a hearing on Class III
and Class IV milk pricing formulas. The Department does expect
to issue a notice soon on the pilot program for forward
contracting, and on the just past January 31st , the Department
put out a notice inviting proposals to be considered at a
hearing, which we would hope to hold late April, early May on
the Class III and Class IV pricing issue.
Finally, of course, on January 1 of this year, the final
rule was implemented, and the new order program began.
With that bit of chronology, let me quickly then turn to
the expected impacts of these changes on dairy farmers, and on
consumers in particular. More specifically, as requested, I
will focus on the differences between the Department's final
decision and milk orders with the so-called Option 1A Class I
price differentials. And in the interest of time, I will just
cite a few of the summary impacts contained in my written
testimony.
For dairy farmers, the all-milk price across all Federal
orders is expected to average less than 6-cents per
hundredweight or about 0.4 of 1 percent higher under Option 1A
compared to USDA's final decision, between 5-and 6-cents per
hundredweight. Annual gross receipts, the total rack-up of
receipts to producers across all Federal orders, are expected
to average on the order of $107.7 million, or about 0.6 of 1-
percent higher, with the Option 1A differentials than would
have been the case in the Department's final decision.
In considering the impacts of milk order changes on
consumers, we have assumed that all changes in fluid processor
milk costs and wholesale manufactured dairy product costs are
passed through immediately to the retail level without any
changes in processor retail or wholesale retail margins. Those
margins in the real world will move. Some of them are
percentage-based, but for purposes of analysis, we have assumed
an immediate and complete pass-through.
Accordingly, consumer expenditures on fluid milk products
in all Federal market order areas combined are estimated to
average $116.8 million per year higher under the Option 1A
differentials than under the Department's final decision. This
is an increase of about 1.5-percent, given average annual
consumer expenditures of $7.6 billion on fluid milk products in
Federal market order areas.
Average annual consumer expenditures on manufactured dairy
products--the numbers I just cited were for fluid milk, the
impact in terms of manufactured dairy products across all
Federal market order areas--are estimated to decrease by about
$9.1 million per year under the 1A differentials as compared to
the Department's final decision. To put that in perspective,
annual expenditures on manufactured dairy products at the
consumer level total about $9.3 billion, so this decrease of
$9.1 million in the cost of increased costs to manufactured
products means for consumers about a 0.1-percent decrease in
terms of prices paid for things like cheese and cottage cheese
and yogurt and so forth.
Mr. Chairman, that concludes my statement. My colleague and
I will be happy to answer any questions that you or the
Committee might have. Thank you.
[The prepared statement of Mr. Clayton, can be found in the
appendix on page 279]
The Chairman. Thank you very much, Mr. Clayton.
Let me ask you, first of all, about the referenda that were
conducted last August. These were conducted by USDA, and were
the voters dairy producers in each of the 11-districts? Or how
were the votes arranged? And were there majorities in each of
the 11-districts, if that was the demarcation line?
Mr. Clayton. Well, first, yes, the way that the vote
actually works is order by order. So in order for the 11 orders
to pass, that vote had to be a two-thirds super majority vote.
The Chairman. Two-thirds majority in each of the 11-
districts.
Mr. Clayton. That is correct.
The Chairman. How much participation was there by dairy
producers in that referendum? Was this actively advertised and
most voted?
Mr. Clayton. Well, as to the advertising part, I can
certainly speak to that. The Department itself took great pain
to try to spread the word far and wide as to what was being
voted on. Our market administrators, who were located, of
course, outside Washington and throughout the country, have
newsletters, have many, many meetings with producer groups,
will go meet with co-ops or whoever it might be who is having a
meeting. So a lot of effort was taken to advise producers as to
what was at stake here.
The voting process under the Agricultural Marketing
Agreement Act of 1937 that this program operates under, does
provide for block voting by cooperatives. Therefore, depending
on how a cooperative would choose to determine the sentiment of
its producer members, that would have something to do with the
role that each individual producer played.
There were some cases where milk pooled under an order was
not associated with a cooperative. In those cases, individual
ballots were provided.
The Chairman. That is interesting. The cooperatives voted
and a few individuals.
The Chairman. Essentially.
Mr. Clayton. Yes.
The Chairman. But, in any case, well over a two-thirds
majority in each of the 11 situations.
Mr. Clayton. Yes, Sir.
The Chairman. You know, I thought this was the case, but I
wanted to just simply in your own words obtain the case,
because at least superficially it appeared that USDA's
compliance with our farm bill of 1996 was accepted and
supported by producers. Not everybody was pleased by this
result because, as you pointed out, chronologically, by the
time the Congress was concluding our activities on November
29th or thereabouts, what had been approved apparently by a
two-thirds majority in 11 districts was abruptly disapproved,
and we went back to something close to the status quo.
Describe from your standpoint, why was there opposition to
what you had done? And how could this have been resolved? Or
perhaps I am asking you to look into the vagaries of
congressional activity as to what we might have done or might
not have done. But something that appeared to be moving in this
direction with this kind of approval, obviously it didn't
happen. What is your analysis of where the opposition is, where
the argument is?
Mr. Clayton. I probably would start, Mr. Chairman, by
indicating I will not venture into the arena of suggesting what
the Congress ought to think about on this. But having said
that, certainly, as you point out, the votes that were taken
were overwhelmingly in support.
I would have to note, in fairness, that the alternative to
supporting it was elimination of the orders. So, clearly, by
virtue of the record as it unfolded, as you point out, there
were people who voted in favor but not necessarily were
enthused about some of the content, at least.
Clearly, there is also, I think, as you pointed out in your
opening remarks, there are great differences of view as to what
the most appropriate pricing structure for dairy ought to be.
The Chairman. More particularly, it appeared, as I visited
with dairymen around the country at that time, some said, well,
we are going to lose a lot in this. And other said, well, we
are going to gain modestly. But there were winners and losers.
When you went from the 31 to the 11, despite the fact that the
conglomerate majorities in each of the 11, within this there
were some subgroups who said under the 31 we did better. So,
presumably, they contacted their local Members of the House or
their Senators and said, you know, you have got to sort of
stick up for us, leaving aside whatever USDA was doing in these
referenda. And in a democracy all these factors are brokered
But, in any event, as you know, I publicly commended USDA
for work that you had done because it was consonant with what
we had done in our farm bill. The dairy thing was the very last
thing decided in the Congress.
But, for the moment, why, we are back to square one. And
prior to Senator Lincoln and Senator Conrad coming in, in my
dialogue with my colleague, Senator Daschle, I indicated that
at some point in the near future we will ask committee members
what their own views are with regard to 1A and 1B or some
other, 1C or D or so forth, as to how we proceed. But that is
why I wanted to elucidate these thoughts from yourself.
Now, you are making the comment, after all is said and
done, however, and you have got down to 11-marketing-orders and
simplified this thing, essentially you believe--well, stated
another way, the action that Congress took to adopt the 1A, the
status quo, resulted in about $107 million more revenue for
dairymen and about $116 million more expense for consumers.
That is sort of the nature of it, the 1-percent shift in terms
of the volume of what is being done. Is that a fair
characterization of the impact?
Mr. Clayton. Yes, I think it is, Mr. Chairman, and as you
point out, obviously the money to be provided to dairy
producers has to come from somewhere, and we are talking about
basically the marketing of a product to consumers. Clearly,
that money--------
The Chairman. I would have to trace back, but it seemed to
me Keith Collins yesterday intimated he had done some
computations of all of this and has come to conclusion that
dairymen would have been, say, $100 million better off with
USDA's policy. It is hard to tell, I suspect. The markets
fluctuate rapidly. You have to stipulate certain things
happening.
Mr. Clayton. And the overall size of the market clearly is
such that--not to minimize the importance of $100 million one
way or the other, certainly that is a lot of money--------
The Chairman. You are talking about a $9 billion market or
something of that sort.
Let me turn to my colleagues, and we will try to have just
5-minute rounds of questioning. Senator Daschle, do you have a
Senator Daschle. Thank you, Mr. Chairman.
Mr. Clayton, you said in your opening comments that you had
done an analysis of the impact that the 1A differential had on
dairy farmers and consumers in various regions of the country.
Did you do a similar study with regard to 1B and the
administration proposal? And if so, could you share with us
that study and the results?
Mr. Clayton. Yes, Sir. In fact, the final regulatory impact
analysis, which was published at the same time as we published
the Secretary's final decision, does include all of that
analysis.
Senator Daschle. Could you just summarize it for us for the
purposes of the hearing this morning, just briefly?
Mr. Clayton. Sure. From the standpoint of producers and
receipts to producers over the 5-year period that was a part of
the analysis, clearly the Option 1A was going to result in the
highest level of receipts, relatively speaking. The final
decision I guess would be next in line, and the Option 1B would
have been the lower of the three alternatives which were
examined in that impact analysis.
Clearly, the impact for consumers flips around and works
just in the reverse. But answering that question is a little
dangerous without getting into some of the detail, which I
don't think we have time to do here this morning, but certainly
one does need then also to look at implications in terms of
fluid milk consumption--or let me step back, in terms of
overall production levels of farm milk, of impacts in terms of
fluid milk consumption, impacts in terms of the manufactured
market. And those vary some across those three as well.
Senator Daschle. Well, I guess I still don't know if I have
as clear an understanding of the difference by region. Could
you elaborate more specifically with regard to regional impact
and contrast the two based upon your analysis?
Mr. Clayton. Let me ask Mr. McKee, who dealt in some
greater detail with the numbers--maybe he can help us with
that. I don't want to be evasive here at all, but there are a
lot of data.
Mr. McKee. There is an extreme amount of data available,
and we did do it by regions. We selected 36-points, basically,
and analyzed the impact of Option 1A, Option 1B, and the final
decision.
We looked at each of these major primary population points,
and as you can imagine, in about half of those areas you had
income increases generated, in about half of those areas you
had income decreases. And those depended largely upon the types
of milk that are produced and consumed in those areas and
largely, if you look at the map, there were winners and losers,
as the Chairman indicated earlier. They are certainly outlined.
If you have specific regions, we can certainly provide that
detail, but--------
Senator Daschle. Well, let's just take arbitrarily the
Midwest region and the Northeast region. No particular reason
why. I just--------
Mr. McKee. Under the Option 1B, there would have been a
decrease in the Northeast area, on a 6-year average on price
per gallon of milk, of around 6- to 9-cents on average over the
6-years. In the upper Midwest, you would have had an increase
of 2- to 3-cents.
Senator Daschle. In the interest of time, for the record if
you could provide us with it, I would appreciate a summary of
your analysis of the impact that the two plans have had. I
mean, we can work through the minutia of the data as well, but
it would be helpful--the data itself isn't as useful as your
analysis of the data, and I think if you could give it to us in
summary form within a few days, that would be very helpful. I
would like to see that. I am not sure that we can fully
understand the numbers, but you can and you can articulate them
in a way that would give us a far better appreciation of a good
comparison between the plans. And I would like that, and I am
sure some of my colleagues would as well.
Mr. Clayton. Mr. Daschle, if I could, just for clarity, are
we talking Option 1B or the Department's final decision?
Senator Daschle. Well, actually, it would be nice if you
could do all three: Option 1B, the final decision, and Option
1A, I mean, three columns, winners and losers. Just what is the
analysis?
I think as we try to figure out what is the fairest way to
proceed, I think it would be very helpful to know what the
impact of these proposals are. And to be honest with you, I
don't think that has ever been very clearly articulated yet.
And I think you could do us a real service by providing that
information in a way that goes beyond the data of that report.
Thank you, Mr. Chairman.
The Chairman. I would just underline Senator Daschle's
thought. I tried to touch upon this, but, you know, literally,
when you move from 31 to 11, this is what we asked you to do to
rationalize it. But as you pointed out, you have got 36-
populations that half won, half lost. And so as a result, even
though the Committee, the Congress said reduce these, when it
came down to the particulars, with 18-losers, they all weighed
in, and there is not much in it. It is hard to get consensus
with 18 pulling one way and 18 the other. But it is probably
best, just for the sake of accuracy, to know how much.
Now, if these are de minimis changes, why, we might reason
with our colleagues, now, come on, you know, 1-or 2-cents one
way or another, given the variety of prices for dairy, for
Class I milk or anything else, there is not much in it, and in
the best interest, we might rationalize this thing.
On the other hand, if we see huge changes--when I visited
with the Texas dairymen, for example, they saw a big change
there in how they may have overestimated their problem, but
they didn't think so. So as a result, they were dug in, and
there were others like this.
But it would be helpful for us all of us to analyze this
data because I think it is material.
Senator Grassley, I will pass on you for a moment. Your
turn will come right after Senator Conrad. You may question for
5-minutes. Senator Conrad, would you proceed with your
STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM NORTH DAKOTA
Senator Conrad. Thank you, Mr. Chairman, and I thank the
witnesses as well.
First of all, I think the basic system under which we are
operating here is really pretty hard to defend. It is pretty
hard to defend a system that started in the 1930s based on
presumptions that are no longer the case.
At the time this was all devised, the Midwest was the only
surplus area, and that is just no longer the case. And yet this
whole plan is predicated on a fact that is no longer a fact.
And we don't seem to be able to reform this system, even given
the best efforts of Congress and the best efforts of USDA.
First of all, I want to commend you for making the attempt,
but I think Congress has really failed to meet its obligation
and its responsibility. This is now an unfair system. It is
absolutely unfair to our region of the country, and the results
have been absolutely devastating. We have seen in the last
decade our dairy farmers cut in half. Actually, it is even more
dramatic than that, because that doesn't capture the most
recent losses, which are very sharp.
So we have a system that is unfair, and you came up--we had
three basic options before us: 1A, 1B, and the final decision,
which is somewhere in between. I would be very interested to
know--my understanding is that in the referenda the people
indicated they preferred Option 1B. Is that the case?
Mr. Clayton. No. They were presented with the final
decision, up or down.
Senator Conrad. And they supported the final decision.
Senator Conrad. And the final decision is between 1A and
1B.
Mr. Clayton. It is probably--yes. It is sort of built off
of 1B, but with some higher prices.
Senator Conrad. You said, as I heard you in response to
Senator Daschle, that 1A--this is how I heard you; correct me
if I am wrong--that 1A would have given the highest level of
receipts. Is that your--------
Mr. Clayton. Between the three options, yes.
Senator Conrad. But that doesn't measure, obviously,
regional differences?
Mr. Clayton. No. I was just speaking nationally.
Senator Conrad. And how much of a difference is there in
overall receipts between the three, between 1A, 1B--which was
the original Department recommendation, was it not? Option 1B
was the original Department recommendation?
You have to answer yes or no because nods of the head will
not be captured in the record.
Mr. Clayton. Oh, I am sorry. I thought you were going to
continue. That is all.
Senator Conrad. Option 1B was the original Department
recommendation, was it not?
Mr. Clayton. That is correct. Yes, 1B was the initial
proposal by the Department.
Senator Conrad. And those who are the advocates for the
status quo, the anti-reform group--I like that.
Senator Conrad. I have been watching this Presidential
campaign.
The anti-reform group, they wanted to stick with what is
that is based in the 1930s. Isn't that correct?
Mr. Clayton. I will not join in your characterization, if
that is okay.
Senator Conrad. And the final decision is somewhere in
between. Can you tell us the level of receipts between the
three?
Mr. Clayton. Yes, Sir. Option 1B would have resulted in
around $129 million less than what we would have projected if
the existing system had continued. Option 1A--------
Senator Conrad. $129 million less in overall receipts.
Senator Conrad. Overall receipts to dairy producers.
Mr. Clayton. Cash receipts to dairy farmers.
Senator Conrad. Cash receipts--okay. That is good.
Mr. Clayton. For dairy farmers who are marketing milk
through the Federal Order Program.
Senator Conrad. Right.
Mr. Clayton. Obviously, there are dairy farmers outside----
Senator Conrad. OK. I think it is just very important to
define these things for the record and for those who are
listening. OK.
Mr. Clayton. Option 1A, if we would like to take that one
next, we estimate will result in cash receipts of $104.9
million more than if the existing system had continued.
Senator Conrad. OK.
Mr. Clayton. And the final decision would have resulted in
$2.8 million less cash receipts to producers.
Senator Conrad. So, in terms of this one question, the
final decision really is right between the two.
Mr. Clayton. As it turns out, and, again, that is all
relative to the kind of baseline of the world continuing as
though we had done none of this.
Senator Conrad. Now, as somebody who has been deeply
involved in this process, how would you characterize the
numbers of dairy farmers around the country? What is happening
to the number of dairy farmers, active dairy producers?
Mr. Clayton. It has been declining.
Senator Conrad. And declining sharply?
Mr. Clayton. Yes. I would not sit here and profess to be an
expert on those numbers, but my reading of them would be that
the decline has been significant.
Senator Conrad. And can you tell us what kind of a price
would a dairy farmer in the upper Midwest get versus what a
dairy farmer in the Northeast would get? And let's put in the
South.
Senator Lincoln. Thank you.
Senator Conrad. I don't know how you divide up the South.
By the way, I have already filed a lawsuit on behalf of
Senator Lincoln against the Committee, and I am hoping that it
gets resolved quickly.
Mr. Clayton. Well, I would be happy to provide sort of
detailed information on that. I do have some examples of the
difference in the all-milk price under the final decision
compared to 1A.
Senator Conrad. If you could get that to me and other
members of the Committee--my time has run out.
Mr. Clayton. Sure.
Senator Conrad. I would appreciate that.
Mr. Clayton. It might be easier just to provide more
complete information, yes.
The Chairman. I thought it was very interesting. You have a
$100 million loss one way, a $100 million gain the other, but
your final decision was $2.8 million out of $9 billion--in
other words, de minimis. So that was what we were arguing.
Senator Grassley.
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM IOWA
Senator Grassley. I am not going to take much of my time
because I came to hear the producers and I want to move on. But
I think I share the frustration just expressed by Senator
Conrad and would associate myself with it, and add to it that
we have the ironic situation, for instance, in my State--and I
will bet it even applies to--if it is in northwest Iowa, it
applies to parts of Minnesota and South Dakota, and maybe even
North Dakota--where actually some times in the year you can
have a milk shortage. And so we have instances in which
processors, in some cases even our Iowa Department of Economic
Development, are trying to entice people to come to our State
from even California to produce milk so that we have got a
supply. And it all stems from an outdated marketing order
situation that was worried about surpluses in the Midwest. But
because of the lowest prices there, we have got a situation
where now we have potential unemployment in milk processing,
dairy processing.
It is an example that if Government still has a legitimate
role--at least as far as a safety net is concerned, they do
have a legitimate role. But it is a perfect example if
something isn't working, it has got to be fixed. This isn't one
of these things you look at and say, you know, it is working.
So I associate myself with those remarks and just urge
whatever can be done to be done to correct this situation where
Government has proven that it isn't better than the
Now, in this particular instance, if you are going to have
a safety net for farmers, you are going to have to have some
Government involvement. But it has got to be something that
betters the situation and not worsens the situation.
The Chairman. Thank you very much, Senator.
Senator Lincoln.
STATEMENT ON HON. BLANCHE L. LINCOLN, A U.S. SENATOR FROM
Senator Lincoln. Thank you, Mr. Chairman, and thank you
again for holding these important hearings.
I had hoped, as Senator Grassley, to be able to be here
with the producers when they testify, but I am going to have to
testify at another committee, and hopefully my entrance there
will be a little more graceful in the second committee.
The Arkansas dairy industry plays a tremendous role in our
State's agricultural economy, and it generates more than $270
million of economic activity every year for our State. Most
people don't think of Arkansas as a dairy State, but we do have
quite a few dairy farmers there. Unfortunately, Arkansas dairy
farmers, like dairy farmers from all other areas, are
struggling with volatile and low prices.
In the past 10-years, nearly 40-percent of our Arkansas
dairy farmers have gone out of business. There are nearly 500-
farmers left out of a number of well over 900 just 10-years
ago. Recognizing those concerns, our Arkansas General Assembly
approved the Southern Dairy Compact in 1997.
I am pleased to know that John Scarlett will be testifying
in the next panel, and I appreciate his representation of the
Southern dairy farmers. One of the comments that he makes in
his testimony--and I just would like to highlight that--is that
the program, whatever the program is, is only as good as the
quality of the information it gathers. We have talked about
shortages and other things, the importance of how we gather
that information, and certainly making sure that we do it
correctly and in a timely fashion is going to be very
I would like to ask this panel, seeing what has happened to
dairy farmers in Arkansas over these past 10-years without a
compact, what do we stand to see in the future? How long do you
see Southern dairy farmers existing without a compact? You are
here for your professional, and background in terms of these
issues. What do you think?
Mr. Clayton. Well, that crystal ball is a difficult one to
deal with.
Senator Lincoln. Sure.
Mr. Clayton. Clearly, as you point out, dairy producers in
lots of parts of the country are under financial pressure.
Clearly, one of the driving issues, as the Chairman has
indicated, is what we as a Government will choose to do to
intervene on their behalf. Every intervention has implications
which cut in a number of different directions, and probably not
my place to try to attach significance to the importance of
those impacts, be it on producers or on consumers. That is
something that the public debate ought to sort out.
Clearly, there is a lot of change going on: fewer farms, as
has been pointed out already, to some extent larger farms,
larger farms in parts of the country where we haven't seen that
before. To some extent, producers have to do what is necessary
to be efficient, and I don't intend that as an indictment of
anybody. But, clearly, at the end of the day we do operate in a
market economy, and one has to operate efficiently to do that.
I realize I haven't answered your question, but--------
Senator Lincoln. I was just getting ready to say, that is
almost the same as a nod of the head. Completely unrecorded.
Mr. Clayton. I am not going to, obviously, take a position
this morning in terms of the appropriateness--------
Senator Lincoln. So you have no opinion as to--whether or
not Southern dairy farmers exist can without a compact?
Mr. Clayton. Well, they have existed. I would guess that
they can. But under what circumstances? We do not know, what
the future will bring. We do know that there are going to be a
lot of pressures there.
Senator Lincoln. Well, I would just highlight Mr.
Scarlett's testimony, and he points out, the very basics of
transportation cost and what is involved in the South, where
probably half the U.S. dairy farmers reside. When we run into
those shortages that were mentioned earlier, the cost of
transportation and what is involved and being able to make sure
that there is a supply of milk. And let me tell you, I am
pretty big consumer. I have got twin boys that are 3\1/2\, and
we go through at least 4-gallons of milk a week.
So it is important, in areas, like the Mississippi Delta
and the Southern part of our country, to have that supply and
have it in a cost-effective way for consumers.
I will just highlight that, and I will tell the Chairman
once again how much I appreciate his involvement in this issue,
and certainly having the Committee to focus on it. Thank you,
gentlemen. And I do appreciate the second panel, although I
won't be able to stay.
The Chairman. Thank you very much, Senator Lincoln.
If there are no more questions, I think we will proceed to
the second panel. But I want to thank both you, Mr. Clayton,
and Mr. McKee for your testimony. Please furnish the Committee
the information requested by Senators because you can tell from
the intense interest on the figures that this is a subject that
we are going to be into, and we really want to have the data to
make sound decisions.
[The information referred to can be found in the appendix
on page 287.]
Mr. Clayton. Yes, Sir. We will get that back to you.
The Chairman. Thank you very much.
The Chair would like to call now a panel composed of: Mr.
Arthur S. Jaeger, Assistant Director of the Consumer Federation
of America; Mr. Mark Furth, General Manager, Associated Milk
Producers, Incorporated, in Minnesota; James Vanblarcom, a
dairy farmer from Pennsylvania; Mr. James Tillison, Alliance of
Western Milk Producers, from Sacramento, California; Mr. Larry
Jensen, Senior Vice President of Supply, Distribution and
Business Development of Leprino Foods, Colorado; and Mr. Dennis
Meyer, member of the Board of Directors of Family Dairies, in
Iowa.
Gentlemen, we thank you all for assembling here with us
this morning. As perhaps you heard at the initial part of the
hearing, we would ask that each one of you summarize your
comments in 5-minutes. The green, the yellow, and the red
lights are an indicator of how you are doing in this respect.
And if you would do that, that would be helpful because then we
will have another 5-minutes per Senator a round of questions of
you following your testimony.
I will ask you to testify in the order that I introduced
you, and that would be, first of all, Mr. Jaeger. Would you
offer your testimony?
STATEMENT OF ARTHUR S. JAEGER, ASSISTANT DIRECTOR, CONSUMER
FEDERATION OF AMERICA, WASHINGTON, DC.
Mr. Jaeger. Thank you very much, Mr. Chairman. I am pleased
to be here this morning, and I am very pleased the Committee
chose to hold these hearings. I think they are important
hearings, and I think they were very instructive yesterday and
so far this morning.
Last year's dairy controversies over the Northeast Compact
and market order reform were most often portrayed and they were
portrayed this morning as regional battles, New England versus
the upper Midwest, the upper Midwest versus the rest of the
Nation. I want to make the point that they were also consumer
battles. My organization, the Consumer Federation of America,
fought in favor of market order reform, the USDA's plan, and
against compacts.
We were joined in opposing compacts by both Consumers
Union--I think that is probably the Nation's best-known
consumer organization--and the Center on Budget and Policy
Priorities, a respected research organization that focuses on
low-income issues.
Now, why are these programs problems for consumers? It is
pretty simple. As a number of witnesses have pointed out, they
raise retail prices to consumers. There was a lot said
yesterday about prices in the New England versus the upper
Midwest. I brought along a couple of charts which point out
what the Northeast Compact did. This is milk prices in Vermont,
and where my colleague is pointing--that is, June 1997--that is
where the compact kicks in, and you will see a big increase in
prices there. You will see prices, after the compact kicks in,
stay pretty much at the $2.75 per gallon level.
This, by the way, is the same GAO report that Senator Leahy
likes to cite.
Now, in the next chart, we have New Haven, and you will see
essentially the same thing. It is not quite as dramatic. And
there the prices tend to stay up at the $2.70 level after the
compact kicks in.
In the next chart we have Chicago. That is getting out
towards the upper Midwest, and you will see there is no compact
in Chicago, and so the price bounces around. It does not go up
in June 1997, and you will see prices in Chicago peak out at
about $2.65.
And then the final chart is Milwaukee, and there, again,
the prices bounce around, but, again, they peak out at about
$2.65.
It is that problem in New England that concerns my
organization, and we don't want to see the same thing happen in
the Middle Atlantic States and in the Southern States.
It is interesting. A recent study commissioned by the
Northeast Compact's own governing body basically reached the
same conclusion, that there were dramatic increases in milk
prices when the compact kicked in, and that it has continued to
cost consumers a substantial amount of money in the 2\1/2\
years--well, that study only looked at the first year, but in
that first year, it continued to cost consumers a substantial
amount of money.
In terms of Option 1A, you heard estimates this morning,
that Option 1A is costing consumers about $116 million more for
milk this year. That is why we opposed Option 1A.
These price increases hit low-income consumers the hardest.
That is because low-income families spend more of their income
on dairy products. These higher milk prices cause a decrease in
milk consumption. Again, there was some dispute over that
yesterday, but Keith Collins, the chief economist at the
Agriculture Department, certainly ought to know, and he said
the Northeast Compact is decreasing milk consumption in New
England. A slight decline in milk consumption, and that is what
you are seeing. It may seem trivial, but the public health
effects here may not be trivial. Milk, of course, as we all
know, is an excellent source of calcium, yet something like
three out of four of us don't get enough of it. Raising the
price of milk will just make it that much harder to turn that
situation around. And, of course, anytime you increase the
price of milk, you do increase the cost of Federal nutrition
I think we heard the USDA witnesses say this yesterday.
Last summer USDA said Option 1A would increase the cost of the
four major nutrition programs nearly $10 million per year. It
is true that the Northeast Compact, to its credit, has acted to
insulate WIC and the School Lunch Program, but there is not a
lot it can do about food stamps. Estimates are that the compact
is costing food stamp recipients nearly $10 million in lost
purchasing power.
Supporters of the compact and Option 1A say they are needed
to shore up struggling dairy farmers. My organization includes
small dairy farm organizations and is very concerned about the
decline in the number of small farms in this country. But we
think compacts and Option 1A are not an efficient way to
address this problem.
Why not? First, not all dairy farms--again, as we heard
yesterday--in this country are struggling. Keith Collins
mentioned that the basic Federal price for milk recently
tumbled, but it tumbled from record-high levels. He also said
that feed prices have been very low. He said about 2.5-percent
of dairy farms are financially vulnerable right now, and that
is about half the percentage for all farms nationwide. So
compared to all farms, dairy farms are actually doing better.
Now, next, who are the farms that are struggling? They tend
to be the small farms. Since 1982, three out of four dairies
going out of business in the Eastern United States had less
than 50-cows. Of course, when you change the farm level price
of milk under either Option 1A or under compacts, you increase
income on a per-gallon basis; that goes to all farmers. That
means those with the most production get the most benefit. It
gives the largest subsidies to those who least need the help.
Some of these dairy farms have net worths of more than a
million dollars. At the same time, the smallest farms, the ones
that tend to need the help, get very little.
What if you ran the Food Stamp Program on the same basis--
the more you earn, the more food stamps you would get? That
doesn't make for an effective assistance program, and likewise,
we think raising milk prices across the board for all farmers
is not an efficient way to assist those farmers who are in
Now, what is the solution? Yes, there are farmers in
trouble. My organization is worried about them. We think
Congress would be better off to enact a permanent, targeted
assistance package for those small dairy farmers who need help
to survive. We think there is a value in keeping those farmers
on the land. And Congress has started down this road with the
emergency assistance packages it approved in the last 2-years.
These programs don't just cover the Northeast. They cover the
South, where there are problems. They cover the upper Midwest,
where there are problems. They cover any region where dairy
farmers are struggling.
These programs are capped in an attempt, at least, to
target the benefits on the small-and medium-size producers who
should need the help, and they do not increase prices to
consumers. They do, of course--this approach does involve
Government cost, but at least if this approach is done right,
at least taxpayers know they are providing help to the small
farmers who need the help, not to farmers who are doing fine.
I had a number of other points in my statement, but I will
cut it off right there. I see my time is up.
[The prepared statement of Mr. Jaeger can be found in the
The Chairman. Thank you very much, Mr. Jaeger.
It is a pleasure to have Senator Grams with us again today.
He is a regular at the dairy hearings, and I am grateful that
is so. But you have a witness that you would like to introduce,
Senator.
Senator Grams. Thank you very much, Mr. Chairman and
members of the Committee. Thank you for giving me a distinct
privilege this morning to be here to introduce to you Mr. Mark
Furth, who is the chief executive officer and general manager
of Associated Milk Producers, Incorporated, or AMPI, and it is
a 5,000-member dairy cooperative based in New Ulm, Minnesota.
Now, AMPI annually markets 5-billion pounds of milk for
dairy producers from Minnesota, Wisconsin, Iowa, Nebraska,
Missouri, South Dakota, and North Dakota, and it operates 13-
manufacturing plants.
Now, Mark has been with AMPI for 30-years, beginning as an
accountant, and he became general manager in 1990. Mark has
also previously served on the Board of Directors for the
National Milk Producers Federation and also for the Minnesota
Dairy Leaders Roundtable.
I appreciate his willingness to come to Washington today to
highlight what we view as the fundamental unfairness of our
Nation's dairy pricing system and to propose alternatives to
the existing structure.
Now, Mark has endured the same frustrations that I have in
Minnesota, with family farmers being forced out of business due
to a system that helps producers in other regions of the
country gain a competitive advantage over them.
Again, I want to thank you for the opportunity to be here
this morning to introduce Mr. Furth and know that his
suggestions will be useful for the work of this committee and
for the Senate.
Thank you very much, Mr. Chairman.
The Chairman. Thank you for coming, Senator Grams.
Senator Grams. You are quite welcome.
The Chairman. Mr. Furth, you are recognized.
STATEMENT OF MARK FURTH, GENERAL MANAGER AND CHIEF EXECUTIVE
OFFICER, ASSOCIATED MILK PRODUCERS, INCORPORATED, NEW ULM,
Mr. Furth. Thank you, Mr. Chairman. Thank you, Senator
Grams.
These 30-years that I have spent working for dairy farmers
as part of this cooperative called Associated Milk Producers,
most of that time has been spent in one way or another with
milk marketing and milk pricing. And whatever little bit of
expertise that I have gained in those 30-years, that is what I
hope to be able to share with you this morning.
In those 30-years, I have seen a lot of changes in milk
marketing and milk pricing. Three changes that I think have
been significant and that should bear on policy into the next
decades:
One is that cooperatives have become the major marketing
vehicle for most United States dairy farmers. Almost all United
States milk today is marketed by dairy cooperatives. That is a
significant change from 30-years ago. It has increased
dramatically, continues to increase.
Second, 30-years ago, bottled milk, fluid milk, which you
are hearing so much about this last couple days, was the major
usage of milk by far and away. Today it is not. Cheese has
become the major usage of milk in this United States, a
significant change.
Lastly, marketing has become very national. When I joined
this business some years ago, markets were very local. They are
no longer. Almost all dairy products are marketed on a very
national basis today.
In that same period of time, something that hasn't changed
is that the two significant Federal dairy programs continue to
exist almost exactly like they did 50-years ago: price supports
and the dairy price support program. Now, to have that kind of
longevity, they must either be very, very good programs or
very, very outdated. Hopefully that is something that this
committee will look at in the coming sessions.
Although these 2 programs are both over 50-years old, they
have in the last 15- or 20-years taken a very different
direction. Starting in the early 1980s, the national safety net
for dairy farmers through the price support program has been
significantly lowered. At the very same time, the support level
offered to dairy farmers through things like Federal milk
marketing orders has actually increased. While we have lowered
the safety net for most of the Nation, we have raised it for
isolated areas. Fluid Class I prices have actually increased,
giving price relief to farmers with higher Class I utilization
and the benefit of Federal price control.
To make this discrimination worse, reliable economic
studies by the likes of USDA and Food and Agricultural Policy
Research Institute [FAPRI] show that the relatively higher
supports for some actually lower the price for the other dairy
producers not so affected. Dairy is a national market today,
with supply/demand setting the price and balancing the market
for almost all products. Class I fluid use is a rapidly
shrinking part of total U.S. milk production and an
increasingly ineffective and unfair vehicle for supporting
prices for U.S. dairy farmers.
Meanwhile, the United States is a very attractive market
for the rest of the world. Without the import tariff rate quota
system that we have, we would be a magnet for any surplus
production anyplace in the world. If U.S. trade policy lowers
import restrictions, as is contemplated by many, without first
leveling the playing field here in this United States, those
regions without the safety net of higher Class I prices and/or
compacts will be sacrificed. I trust you will not let that
We need a national dairy pricing system and a national
dairy policy without regional distortions. I believe recently
legislated Federal order changes and the Northeast Compact
extension have further distorted our U.S. pricing system. How
can Congress in good conscience consider international policy
until it first ensures a fair domestic pricing system for U.S.
dairy farmers?
As you consider another farm bill, I propose the
elimination of Federal orders and compacts as poor policy that
helps some farmers at the expense of others. I propose a
strengthened national price support program for all dairy
farmers in this Nation.
An effective national pricing system should include the
pooling of all benefits and costs across the entire Nation and
a two-tier pricing mechanism that provides disincentive for
farmers to increase production into the face of a price-
depressing surplus, similar to that existing today.
I hope this committee can reclaim jurisdiction over these
issues. Your decisions will have a huge influence on the health
of our industry for decades to come. Please ensure that dairy
is a strong, healthy, and prosperous part of American
agriculture. Give us a national policy, not a patchwork of
regional manipulations.
When the ever famous Titanic set to sea, there was great
confidence that new technology and new markets were unbeatable.
The Titanic was so unsinkable that it provided life boats for
less than half the passengers. You know the rest of the story.
As dairy sets to sea in a world market, it would be
overconfident of us to eliminate price supports ad import
quotas. The remaining safety net of Federal orders and compacts
would save far too few dairy farmers.
Not only would we be short of life boats, but have
preassigned seating besides.
Regional dairy policies must go. Our great industry and our
great Nation deserve better.
Chairman Lugar and committee members, I thank you very much
for the opportunity to testify this morning. The dairy farmers
of AMPI have great confidence in this committee's ability to
help craft dairy policy into the next century.
[The prepared statement of Mr. Furth can be found in the
The Chairman. Thank you. I appreciate your testimony.
I have a note. Do you want to make a short comment?
Senator Conrad. Could I just make a quick comment? The
Budget Committee is convening at 10:30.
The Chairman. Very well.
Senator Grassley. Is it 10:00 or 10:30?
Senator Conrad. They moved it to 10:30.
Senator Grassley. OK.
The Chairman. That would affect you also.
Senator Grassley. Yes.
Senator Conrad. And I appreciate very much this
accommodation. I appreciate my colleagues. I agree with
everything Mr. Furth just said. As I examine what we have been
talking about this morning, Option 1A, Option 1B, the final
order, it strikes me that all of those are basically
rearranging the deck chairs on the Titanic. We have got a
policy that is a failed and flawed policy, and we have got to
go back to first principles and rewrite the dairy policy for
this country. If we do not, we are going to see a massive
elimination of dairy producers in this country, and we will
regret very much sometime in the future looking back on a
failure to act.
I just hope that people were listening as Mr. Furth
testified because I think he hit on precisely what needs to be
Mr. Chairman, thank you very much.
The Chairman. Thank you, Senator Conrad.
Senator Grassley, and then Senator Fitzgerald. I know each
one of you needs to make comments at this point, and--------
Senator Grassley. I am going to wait until my constituent
is done testifying.
The Chairman. Very well. Senator Fitzgerald?
Senator Fitzgerald, if I may, I just wanted to make a
comment before Mr. Clayton left the room. Is Mr. Clayton here?
Thank you. I am sorry I wasn't here earlier.
I just wanted to mention the milk forward pricing pilot
program that we established last year prior to our adjournment,
and I was just hoping that we would be able to follow the
congressional mandate and make the program effective by March
1st and publish broad guidelines as soon as possible in order
to give dairy producers and processors the necessary details of
the program. And, hopefully it would have a regulatory
structure that makes it workable and not inoperable, and I
would just appreciate it if you could let the Secretary and
others know at USDA the importance of the milk forward pricing
pilot program. I think it is very important to our dairy
industry in this country. I think it would be a good step that
would help a lot of people. And so I hope we can move forward
with that. And I appreciate your taking that concern back to
the Secretary.
The Chairman. Thank you, Senator Fitzgerald, and I would
just second the Senator's comment. This is a very important
program for our committee. You understand that. And we are
really eager to know how the details are being formulated and
what progress you are making. It is not a solution to the
problem, but it is another tool that is important for the
marketing for dairymen.
All right. Now, pardon me, Mr. Vanblarcom, for interrupting
your train of thought, but we are back to the panel again, and
we are pleased to have your testimony. Would you please
proceed?
STATEMENT OF JAMES VANBLARCOM, COLUMBIA CROSS ROADS,
Mr. Vanblarcom. Thank you very much. Good morning. My name
is Jim Vanblarcom. I am a dairy producer from northeast
Pennsylvania, Bradford County. My family and I manage a 100-cow
dairy that we have owned and operated since 1974. I am also
very actively involved in off-farm agricultural activities. I
am the president of the Bradford/Sullivan County Farm Bureau,
also serve on the Pennsylvania Farm Bureau's Dairy Policy
Committee. I want to thank the Committee for providing the
opportunity for me to give a brief perspective on how national
dairy policy affects myself and other Pennsylvania dairy
The economic impact of the Pennsylvania dairy industry is
huge. Total milk produced in the State amounted to $1.73
billion. We are the fourth leading producing State in the
Nation. While Pennsylvania's dairy industry continues to
maintain a slow rate of growth in total milk production through
greater producer efficiencies, our dairy farm numbers, cow
numbers, and total market share of the Nation's production
continues to shrink. In fact, about 30-percent of the State's
dairy farmers have gone out of business in the last 10-years.
At the same time, Pennsylvania dairymen have increased milk
production by about 20-percent.
Milk price volatility has made maintaining an economically
viable operation a real challenge. Price swings of 30- to 40-
percent in 1-month has not become uncommon. I challenge anyone
to run a business with this level of volatility that dairy
producers have experienced in the past.
My brother farms next door with 120-cow dairy. We share
equipment and labor during planting and harvesting seasons. In
this cooperative effort, we both save money. We are both hard-
working, experienced, knowledgeable dairy producers. My brother
and I ranked third and fourth in milk production in Bradford
County, which is the third largest milk producing county in the
State. Even with our best management practices, if we had
stakeholders, they would look at our present dairy operations
as a poor investment due to the lack of financial performance.
I have three children, all of which have varying degrees of
interest in agriculture. Under present conditions, I would
understand them not choosing a career in agriculture because
they have seen the ups and downs and experienced it personally.
Dairymen in the upper Midwest and the Northeast are slowly
losing their ability to compete. Milk production is shifting to
the West. Chart 1 shows that the percentage of milk produced in
the Southwest, West, and California has more than doubled since
1970 to 1997.
The trends of westward and larger dairies would be all well
and good if our only need is cheap milk. However, numerous
consumer concerns come to mind. There are environmental issues
created by very large dairies and future competition for water
in the Western areas; also, most important, the lack of
producers in proximity to the high population centers of the
North and the Northeast. Over 25-percent of the United States
population lives within a three-or four-truck-hour drive of
Pennsylvania and New York dairy farmers. Just imagine how
today's diesel fuel prices would affect a cost of California
and Western milk in the city of New York.
What dairy policy changes can be made to address the
current challenges I as well as other producers face? First let
me say thank you as a producer for your action that was taken
by Congress last year to address producer concerns on Federal
milk marketing order reforms. With positive action on Option 1A
Class I pricing differentials and the extension of milk price
supports for another year at the current level, combined with
component pricing that allows the higher of Class III or IV to
be used as a Class I mover, we have avoided an even more
disastrous scenario on producer prices than we are already
experiencing.
I believe a regional approach to pricing milk is the best
method to help stabilize producer prices and address producer
price needs affected by local marketing conditions. If properly
administered, we now know dairy compact pricing can bring
benefits to producers, at little, if any, cost to consumers,
with no impact on national marketing conditions. I believe the
future national dairy policy should allow for expansion of
dairy compacts.
I would like to finish up quickly with--there are two other
tools that we would really like to have. The Dairy Export
Incentive Program should be fully funded to help maintain our
presence in an international marketplace, a revenue insurance
program for dairy producers similar to that as provided for
other crops. And my most important message: I love dairy
farming, the way of life it creates, and with your help, I
would like to someday retire and help my children take over the
farm.
[The prepared statement of Mr. Vanblarcom can be found in
the appendix on page. 298.]
The Chairman. Thank you very much, Mr. Vanblarcom, for your
We are honored that Congressman Sherwood is with us, and he
has a word for the previous witness.
Mr. Sherwood. Well, thank you, Chairman Lugar. I would have
liked to have been here a little earlier and said this before
Mr. Vanblarcom testified, but he is one of the most respected
dairy farmers, he and his brother, in Bradford County, and they
run a very heads-up, modern, efficient operation, and they are
well regarded in the community.
And I wanted to say that so that everyone would understand
it is easy to come and complain about market forces, but what
you have heard from Jim Vanblarcom is from a forward thinking,
modern agriculturalist. And I think what he mentioned to you is
that if we don't pay attention, we will soon have all the milk
for the whole country produced on factory farms, and it will
lead to the type of scenarios like we saw in North Carolina
where we all saw all the hogs floating in the river. Well, when
you get these huge amounts of animals in confined spaces, it is
a different landscape than we have been used to. And I would
like to urge you to think about if that is what we really want
in the future.
Thank you very much, Chairman.
The Chairman. Thank you very much for coming to our
hearing. We are honored to have you. We appreciate your
comments about your constituent, and we appreciate that, too,
having heard the testimony.
Mr. Tillison.
STATEMENT OF JAMES TILLISON, ALLIANCE OF WESTERN MILK
PRODUCERS, SACRAMENTO, CALIFORNIA
Mr. Tillison. Chairman Lugar, members of the Committee, I
am Jim Tillison, executive vice president and CEO of the
Alliance of Western Milk Producers, an association that
represents the interests of dairy cooperatives in California
and the milk producers who own them. We appreciate being given
this opportunity to talk with you about the dairy price support
program, international trade, and to provide a brief
description of the California pricing system.
Few Government programs have been as effective as the dairy
price support program. It removes excess milk from the
marketplace in the form of butter, nonfat powder, and cheddar
cheese. When demand is up, these products are released back
into the marketplace. In this way, the program assures
consumers that milk and dairy products will be available by
assuring dairy farmers of a market of last resort.
In 1996, milk producers reluctantly agreed to phasing out
the dairy price support program. At that time it was believed
that the General Agreement on Trade and Tariffs would present
additional opportunities for dairy exports. Unfortunately, that
has just not been the case.
It has been estimated by cooperative dairy economists that
the average producer milk price would drop from $1.50 to $1.75
per 100-pounds of milk should the support program end. The
total cost to dairy farmers nationwide would be approximately
$2.7 billion. We were successful in gaining an extension
through this year and are hopeful that Congress will keep the
program in place through the full term of the 1996 farm bill,
at least at the current level of $9.90.
The alliance believes that the dairy price support program
is far superior to producer income supplemental payments. The
support program is market-oriented and much less costly than
the supplemental income program. In the past 2-years, Congress
has approved $325 million in emergency income relief to milk
producers, with a maximum payment to a producer of $5,000. USDA
estimates the cost of extending the support program at $300
million in total for 2001 and 2002. The net effect on producer
income would be over $2 billion.
The alliance member cooperatives believe that the U.S.
dairy industry came out on the very short end of the stick in
the GATT negotiations. The United States' ability to subsidize
exports has been dramatically reduced while the European Union
is able to continue to subsidize hundreds, even thousands of
times the quantity of dairy products that the U.S. is allowed
to subsidize. An excellent example is the ``Other'' dairy
product category--products like ice cream--where the European
Union will be able to subsidize a billion pounds of product
while the U.S. is limited to just 70,000-pounds.
Free trade appears to be a one-way street running toward
I have the privilege of serving on USDA's Animal
Agriculture Trade Advisory Committee. Most of what we hear at
the meetings is how our various trading partners are not living
up to their trade agreements with us. That is why the alliance
will work for a continuation of the support program and the
Dairy Export Incentive Program until world markets are truly
free but, more importantly, truly fair. That means the complete
elimination of Government-sanctioned activities like the EU's
export subsidies and New Zealand's state trading enterprise
monopoly. Until that time, significant limitations should be
put on all dairy product imports from countries that employ
these and other trade-distorting activities.
The implementation of Federal order reform brings milk
pricing in California and in the Federal order system much
closer together. While differences still exist, the basic
concept is now the same.
Like California, Federal orders now use product-based
pricing. As a result, prices will track much more closely than
they previously did between the two systems. For the past 17-
months, the average difference in the cheese milk price between
California and the Federal order reform system would have been
just 3-cents per hundredweight of milk. The so-called
California advantage is no more.
If USDA is going to continue to use the National
Agricultural Statistics Service [NASS] price series, it should
have the authority to audit all plants reporting product
prices, and reporting by all plants should be mandatory. It
should also have the authority to require the reporting of
manufacturing costs and to audit plants to verify that these
costs are accurate. This is what is done in the California
In summary, the alliance urges the extension of the support
program and the extension and perhaps expansion of the Dairy
Export Incentive Program [DEIP] program. In addition, this
committee should take an active role in the upcoming round of
trade negotiations. Your involvement will ensure that
agriculture's interests are not subjugated to the trade
interests of other industries or other purposes. The ability to
produce food is a form of security that no country should risk.
That is why this committee, as well as the House Committee on
Agriculture, must assure their constituents they represent that
trade will be fair, not just free.
Thank you for this opportunity, and I will be happy to
answer any questions you will have.
[The prepared statement of Mr. Tillison can be found in the
The Chairman. Well, thank you very much, Mr. Tillison. Let
me just assure you on the last point, the Committee is
extremely vigorous pushing our trade negotiators to the
ultimate. We are disappointed in their results thus far, but,
nevertheless, we will continue to visit with them right in this
room because it is of the essence, and I think we all
understand that.
Mr. Jensen, would you give your testimony?
STATEMENT OF LARRY J. JENSEN, SENIOR VICE PRESIDENT OF SUPPLY,
DISTRIBUTION AND BUSINESS DEVELOPMENT, LEPRINO FOODS, DENVER,
Mr. Jensen. Mr. Chairman and members of the Committee,
thank you for the opportunity to appear before you today. I am
Larry Jensen, senior vice president of Leprino Foods. I also
serve as secretary and treasurer of the International Dairy
Foods Association [IDFA] and chairman of the National Cheese
Institute, one of the constituent organizations of IDFA.
Leprino Foods is a family-owned company that has grown from
making small batches of ricotta and mozzarella cheese for local
delivery to the world's largest producer of mozzarella cheese
today. We operate eight manufacturing facilities that receive
milk regulated by the Federal Milk Marketing Order system and
two manufacturing facilities that are regulated under the
California State order.
Federal dairy policy is complex and has far-reaching
impacts on the structure and competitiveness of the U.S. dairy
industry. While we do not advocate total deregulation, we
believe it is critical that Federal dairy policy evolve to be
less intrusive on dairy markets and the industry. Federal dairy
policy should allow natural regional and scale efficiencies to
develop and manifest themselves in the marketplace. This means
allowing milk production to flourish in highly efficient
regions and facilitating a conversion to more efficient methods
in traditional production regions. It is critical that greater
efficiencies develop throughout the industry in the years to
come so that trade barriers are not needed to protect our
domestic markets.
One of the most complex aspects of Federal dairy policy is
the Federal Milk Market Order system. The Federal order system
is a potent tool in that by setting minimum milk prices to be
paid by proprietary processors, it can greatly influence
industry structure. As a result of the FAIR Act of 1996, USDA
attempted to make several significant strides forward in their
first effort to reform Federal milk pricing policy in the
context of the new global market realities brought on by the
WTO.
These advances included replacing the antiquated Class III
milk pricing system, so-called Basic formula price [BFP], with
a broader price measure tied directly to the national finished
product value of cheese. Additionally, for the first time, all
milk in major manufacturing markets will be priced on the
components upon which cheese-making value is derived: protein,
fat, and other solids.
Unfortunately, the Federal Milk Marketing Order reforms
became highly controversial last year and led to several
provisions in the omnibus budget bill that overturned
significant portions of the reforms. While the final provisions
did not directly overturn USDA's Class III price formula, there
was much discussion regarding one aspect of the formula used to
calculate the Class III milk price, the so-called make
allowance.
The make allowance is one of many factors used in the Class
III price formula, all of which combine to establish a minimum
price level for milk based on the raw milk value of both cheese
and whey. It is important to understand that the make allowance
is not a payment to cheese makers, and its use in the Class III
formulate in no way guarantees cheese maker profitability. The
only function in the make allowance is to translate a finished
product value of milk into the raw milk equivalent value for
use in setting a minimum price that proprietary processors must
pay under Federal orders.
We believe that the debate in Congress last year over the
make allowance in the Class III price formula was largely based
on erroneous preliminary estimates of the price impact of the
new formula. Current USDA data shows that for the most recent
16-months ended in December of 1999, the only period during
which actual data was collected to calculate both the old BFP
and the new Class III price, the new minimum prices actually
would have resulted in a slightly higher milk price.
While we are appreciative that Congress did not legislate
over USDA's Class III decision, we are concerned with what we
perceive to have been strong sympathy for increasing the market
intrusiveness of the milk pricing system.
Today we have in place a Federal Milk Marketing Order
system that is complex, still intrusive on the market, and
highly subject to the tugs and pulls of the legislative
process. The dairy price support program was extended for this
year, and USDA just last week announced their support for
extending it through 2002. One of the last decisions of
Congress last year was to extend the Northeast Interstate Dairy
Compact that provides a protected market for a small group of
farmers to the detriment of other farmers and consumers. All of
these changes combine to put the dairy industry further behind
our global competition.
Mr. Chairman and members of the Committee, the U.S. cheese
industry is now the largest user of farm milk and is
experiencing strong growth in market demand year after year. We
have a great opportunity to grow markets domestically and earn
a great share of international markets if we keep our focus on
the market and make sure that our policies pave the way rather
than impede our progress. As you debate Federal dairy policy,
we urge you to continue to adopt those policies that will allow
the industry to flourish in the long term.
Thank you for the opportunity to appear here today.
[The prepared statement of Mr. Jensen can be found in the
The Chairman. Well, thank you very much for that testimony,
Mr. Jensen.
Mr. Meyer, before I call upon you, let me say that you are
doubly blessed to have both of your Senators on hand, and I
want to recognize the distinguished ranking member, first of
all, because I think he wants to make a comment. And maybe he
will also make a comment about you in the process.
Senator Harkin. Thank you very much, Mr. Chairman. I am
pleased, along with my colleague Senator Grassley, to introduce
Dennis Meyer who is with Family Dairies USA. He is--a good,
capable Iowa dairy farmer, with a good family from near
Dubuque. They have a great family, three sons. He owns 144-
acres. He rents an additional 240-acres. He has a herd of 92-
Holstein cows, is active in his church, active in his
Again, when I think of Dennis Meyer and his family and the
kind of dairy farmers that we have in that area of Iowa, it
just seems to me that is what we are talking about. How are we
going to preserve opportunities and enable these family farmers
and family dairy farmers to remain in business, not only in
Iowa but in Wisconsin and other parts of the country? I don't
mean to be parochial about the Midwest.
That is one of the reasons why I hope we are here and
having these hearings: how we are going to keep Dennis and his
family and thousands of them in Illinois and Wisconsin and
other places in business. So I am delighted he is here.
The Chairman. Senator Grassley?
Senator Grassley. Well, you know, a person only has one
biography, so there is not much I--------
Senator Grassley. At least that is true of Iowans.
Senator Grassley. So I won't add anything, but obviously I
am glad you are here. When you are done testifying, I am going
to go to the Budget Committee meeting.
The Chairman. At least, Mr. Meyer, you have not been
accused of reinventing yourself. You have just one life, and it
has been a good one, and we are grateful to have you here
today. Please proceed.
STATEMENT OF DENNIS MEYER, MEMBER, BOARD OF DIRECTORS, FAMILY
DAIRIES, USA, BERNARD, IOWA
Mr. Meyer. Thank you, Chairman Lugar. Thank you, Senator
Harkin, for your kind comments.
Good day and thank you, Chairman Lugar and members of the
Committee, for this opportunity to share our members' concerns
on dairy policy. As Senator Harkin said, I am Dennis Meyer. I
am a dairy producer from Dubuque County, Iowa, in America's
traditional ``Dairy Heartland.'' My wife Darlene and I and 3-
sons far 384-acres and milk 92-Holsteins.
Family Dairies USA is a grassroots organization
representing over 6,000 small- and medium-size dairy farm
families in nine Midwestern States.
The ultimate goal of this cooperative has been a single,
national milk marketing order that treats all producers
equitably. During the recent Federal order reform process, we
sought basic reforms that bring needed equity and simplicity
and move us toward our ultimate goal. These reforms included
much flatter Class I differentials, broad order consolidation
that raises Midwest Class I utilization much closer to the
national average, a competitive Grade A-B pricing system
recognizing the full competitive value of farm milk, and the
inclusion of California in the Federal order system.
Though Secretary Glickman's reform package made only a
modest step toward our overall reform goals, we nevertheless
believed it was an important step toward a better system.
Therefore, we are deeply disappointed that Congress interfered
in the reform process by blocking the modest reforms in
Secretary Glickman's final rule. Now that Congress has derailed
those modest reforms, we urge Senate and House leaders to work
with us to bring needed equity and simplicity through other
We are strongly opposed to regional dairy compacts.
Compacts are contrary to our goal of a uniform national dairy
policy that treats all dairy producers equitably regardless of
where they live or where their milk is marketed. These unfair
milk pricing cartels erect new trade barriers to the movement
of raw milk among regions of the country. Like the Eau Claire-
based Class I differentials, compacts legalize the principle
that it is okay to maintain pricing rules that discriminate
against many producers in some regions.
Since July of 1997, the Northeast Compact has fixed the
regional price of fluid milk in the New England States. Since
the compact was to be a transitional step between the outdated
Federal milk regulation and Federal milk order reform mandated
by the 1996 farm bill, Congress scheduled it to sunset in April
of 1999.
Unfortunately, the opponents of dairy reform inserted
provisions in the fiscal year 1999 appropriations bill that
delayed the sunset of the Northeast Compact until October 1st
of 1999, as part of a broader effort to delay and obstruct the
reform process. And again at the end of last year, through the
fiscal year 2000 appropriations bill, we saw the Northeast
Compact renewed for 2 more years, through yet another backroom
political deal.
The extension of the Northeast Compact has emboldened other
States to pursue these regional dairy compacts in search of a
quick, easy answer to the complicated problems of dairy policy.
Many States have enacted or are considering legislation
allowing them to join the Northeast Compact or form a Southern
Dairy Compact. If Congress were to authorize the expansion of
the Northeast Compact or a Southern Company, what was to be a
temporary crutch in the New England States will engulf over
half of the States and seriously endanger for the Federal order
A 1999 University of Missouri study shows that a majority
of producers in the Nation would be harmed by the combined
effects of regional compacts in the Northeast, Mid-Atlantic,
and Southeastern States. Producers in every region outside of
the Northeast, Mid-Atlantic, and Southeast stand to lose
between 17- and 21-cents per hundredweight of milk, according
to the study.
Congress should not approve agricultural policies that so
clearly provide benefits to the producers of one region at the
direct expense of the consumers of that region and producers
elsewhere. Instead, there should be an effort to create a more
rational and uniform national dairy policy. The Secretary of
Agriculture should have the flexibility and authority to
maintain a sound and cohesive national milk pricing policy,
without the regional fragmentation caused by compacts.
Congress would be making a big mistake to further expand or
extend the Northeast Compact or authority any new dairy
compacts. Compacts are inconsistent with the broader Federal
milk marketing order reform process laid out in the 1996 farm
bill.
If we allow regionally biased policies such as compacts and
high Class I differentials to control dairy policy, we will
never move beyond the divisions that have plagued this
industry. Let's work together to find a national solution to
our national concerns.
Thank you very much for letting me air my opinion.
[The prepared statement of Mr. Meyer can be found in the
The Chairman. Thank you very much, Mr. Meyer.
We will ask Senators now to observe a 5-minute limit on the
first round of questions to these witnesses.
Let me ask, first of all, we have had some statistics
furnished to the Committee in response to my request and others
as to how profitable the dairy business is. And these are
fragmentary statistics, but Texas dairy farms, at least in the
material presented by Texas A&M, representative farms--and they
differentiate this by large and mid-size and small, with small
farms being 80-cows--were showing a rate of return of roughly
20-percent on invested capital, which appears to me to be a
pretty high figure.
We had yesterday a dairy farmer from South Dakota, as I
recall, who said over the years he had gotten about 5-percent
on invested capital. We had an Indiana farmer who had a good
year and got 19-percent, but admitted that was an abnormal
Some statistics from Cornell University, presumably of New
York dairy farmers, indicate a 7-percent return on assets. That
is a different situation depending upon the debt and the
leveraging, at least, of the capital that is involved there.
But the comment was made earlier, I think by Mr. Jaeger,
that, by and large, these dairy farm results of return on
invested capital appear to be substantially higher than what
the Committee has seen in terms of return on, say, corn farms
or soybean farms or cotton or rice farms. Admittedly, it is
very hard in these discussions to pin this down. When I asked
yesterday to the dairy farmers who wanted to modernize what
return you expect on your capital, the most common answer was,
well, we really haven't got into that. The question is we
either modernize or we leave. But the comparison of how you
might invest the money somewhere else was not a large
consideration in this, although ultimately it may need to
become.
I just want some feel from any of you, Mr. Meyer, for
instance, and Mr. Vanblarcom, you are dairy farmers out there
now attempting to make a living on this sort of thing. Does
return on capital ever enter into your picture? Or is this such
a traditional thing your family does that you just continue on
doing it sort of hoping that the income will be sufficient?
Would you make a comment, Mr. Meyer?
Mr. Meyer. Yes, return on investment does enter a lot. I am
a highly leveraged dairy producer. I am, I guess, relatively
started in the business. I have been doing it for all my life,
but actually buying my farm and doing some building and so
forth has been relatively in the last several years. So I am
highly leveraged dairy farmer, and, yes, it does enter into it.
When I go to my banker and do my projection for the upcoming
year, it definitely enters into it.
It is also a tradition to me--I am a farmer. I have been a
farmer. My father farms. I have got a brother that is a dairy
producer. But it most definitely does, and I guess one
statement I like to make is I am certain that none of you
people would like to have half of your income taken away, you
know, from you, and that is exactly what has happened to us in
the last several months. And we don't know when that is going
to change. And yet my input costs continue to rise. Right now,
yes, feed costs are low, and I am in a situation where I
produce a lot of my own feed. But my other--all my other
expenses continue to, at best, stay at level or increase. And
how do you--I know one person made the comment before that you
must become more efficient. There is only a certain degree of
efficiency that you can, you know, maintain.
We have an outstanding market in our country to sell fluid
milk, to sell processed cheese, and so forth, and we need to
work on that to try to better that market so that we as
producers can stay in the business.
The Chairman. Mr. Vanblarcom, do you have a comment on this
Mr. Vanblarcom. Yes. My return on the dollar, I couldn't
give you that exact figure right today for this previous year,
but I can give you some figures that I looked up recently
concerning the return and the net growth or net gain in value
for a farm across Pennsylvania. The Pennsylvania Farm Bureau
has a farm management service that keeps accurate records on a
large number of dairy farms, and over the last 3-years, their
net worth went up by 9-percent, but their net--or their total
debt load went up by 10-percent.
The Chairman. Senator Harkin, do you have questions of the
witness?
Senator Harkin. Thank you, Mr. Chairman. I am sorry I
wasn't here for all the testimony. I had read it, though, so I
am familiar with what you had testified to and had in your
written testimony.
I just wanted to ask Mr. Furth with AMPI, in your written
testimony you basically advocate doing away with the compacts
and the marketing orders and provide a stronger income support
for all farmers. That is your basic position. And you also in
your written testimony mentioned a 2-tier pricing program.
Now, some of us had advocated that 15-years ago, and I am
just wondering: Is that still valid today or not? How would
that work?
Mr. Furth. Well, my vision of how two-tier pricing would
work for dairy is an extension of the price support program and
one that would set a better level of support for an adequate
supply of milk, a lower level of support for milk that is
potentially surplus.
Senator Harkin. And that would be a relatively good level
of support at the first level. Is that what you are saying?
Mr. Furth. A lower level of support for that marginal
amount of milk that is potentially surplus.
What dairy farmers, as most of agriculture, I suppose, is
prone to do is that when prices get lousy, they are lousy
because there is too much production. What does the average
farmer do to react to that? Produce more. It is the only thing
they can do to control the problem.
And so when less production is needed, they actually
produce more, and that is what I meant in my testimony by------
Senator Harkin. Because of all the fixed costs and
everything like that.
Mr. Furth. Sure.
Senator Harkin. Farmers understand.
Mr. Furth. Precisely. So I think that we need a price
support program long term that provides some disincentive for
that. When somebody like USDA is projecting a surplus in the
coming year and we are already at a surplus, why provide any
incentive--why not provide a disincentive to further expansion?
I am not talking about quotas. I am not talking about telling
each farmer what they can produce. I am talking about providing
some financial disincentive to expanding into the face of a
surplus. This could operate only at times when we were
expecting a surplus. It could be phased back in and out based
on those kind of projections. It is only on the margin. We are
only dealing with a couple percent of milk production.
I am just saying that when a dairy farmer is getting ready
to double his herd next spring, he ought to pencil into those
considerations the fact that maybe that milk is going to be
produced for a world market price of 8-bucks. And maybe he
would hold off on his expansion for 6-months or a year.
Nothing to do with size. I am not talking about big
farmers, small farmers. I am talking all farmers.
Senator Harkin. I want to come back again to Dennis from
Iowa. Now, you know as well as I do up in your area we have
half as many dairy farmers as we did 20-years ago.
Mr. Meyer. That is right.
Senator Harkin. A lot of them have gone out of business,
and some of the smaller ones that were maybe milking a dozen or
so cows, they are gone. You have got 92. That is a pretty good
A lot of people say to me, well, Senator Harkin, you are
just old-fashioned, you are living in the past. These dairy
farmers are going to go out of business. We are going to have
these big dairy operations and milk a lot of cows, like we do
with pork and poultry now.
I guess I don't have a real pointed question for you,
Dennis, on that. But, you know, when you think about Dubuque
County and your area there where you are from, and Jackson
County and those nearby areas, I mean, you have good feed
supplies, you have reasonable input costs, the same way in
Illinois across the river from you, in Senator Fitzgerald's
What I am probing here is just to see how you feel about
the future and whether you think there is a place for the size
of operation that you have and to be able to continue that
family farm size of dairy operation.
Mr. Meyer. Well, one comment that I would like to share
with you is my veterinarian in my small community of Cascade--
there are four veterinarians in that veterinary clinic. He made
the comment to me, he said, If it wasn't for you dairy
producers, we could shut the doors. I mean, Cascade was a very,
very large hog-producing area with a lot of very efficient,
very good hog producers. They are no longer in business.
I like to do my business locally at my Cascade--my little
town of Cascade. I can go to Wal-Mart in Dubuque--nothing
against Wal-Mart. But I can go to Wal-Mart in Dubuque or some
place like that and maybe buy things cheaper. But I like to
service the people that I go to church with, that my kids are
in basketball with, or whatever. I enjoy doing my business
locally. As these small and medium producers exit the business,
those businesses begin to also exit the business.
We had 4-feed stores, four feed businesses in Cascade. We
now have 1. We had two veterinary clinics. We now have 1. We
had 3 implement dealers. We now have one.
Consequently, from a producer's standpoint or from the
other side of the situation, a consumer of machinery, feed, and
so forth, that eliminates my ability for shopping around. You
have one price. You have one implement dealer to go to, and
that is it. They quote you a price and that is what you have to
live with.
So, yes, I certainly think that not only is there a place
for them, but I think it not only is important for the small-
and medium-size dairy producer, hog producer, or whatever, but
it is also very important for urban America. These small towns
will dry up and go away if we don't help with the proper
marketing programs that we are talking about to keep us in
business so that we can, you know, in turn keep the small
communities in business.
Senator Harkin. I share that. Thank you.
Mr. Meyer. Thank you.
Senator Harkin. Thank you, Mr. Chairman.
The Chairman. Senator Santorum?
Senator Santorum. I would yield to Senator Fitzgerald.
Senator Fitzgerald. Thank you, Mr. Chairman. And I would
like to thank all the panelists for making their presentations
today, and I want to compliment our two dairy farmers here from
the different parts of the country, Mr. Meyer from Iowa and Mr.
Vanblarcom from Pennsylvania. And I guess I have a question for
you, Mr. Vanblarcom.
I have no doubt that what you testified to is correct, that
you would probably be a little bit better off if you were in,
if Pennsylvania were in that Northeast Dairy Compact. I think
you are generally correct on that. But at the same time, I have
no doubt in my mind that Mr. Meyer would be a little bit worse
off if that Dairy Compact were expanded. And, in fact, you
would probably be better off at the expense of folks like Mr.
Meyer in Iowa and in my State of Illinois and Wisconsin and the
And I guess my question would be: Why should Congress come
in and prefer you to Mr. Meyer? You are both good people. You
are both hard-working farmers. You are the backbone of our
country. But why should we pick you as a winner and him as a
loser?
Mr. Vanblarcom. That is tough.
Senator Harkin. That is a tough one.
Mr. Vanblarcom. Land O'Lakes has saw fit to support the
compact situation, and also, when you asked should the
Government pick one person over another, at present, under the
present situation, the Far West is being picked over the Middle
West, Northwest--or North and Northeast. So it is taking place
right now. And it is not going to be easy to find an equitable
program, but as Mr. Meyer says, he is watching out for his
interest, I am watching out for my interest.
We all care about the dairy industry as a whole. My concern
is the Northeast consumer. If we lose our Northeast dairymen--
and a lot of my area, the only thing we can grow profitably is
forage. We harvest the win and the rain and the sun and put it
through a cow, and we produce a product that the consumer can
use readily. And it needs to be local.
My concern is not just myself, but it is the consumer also.
Senator Fitzgerald. Well, let me just say that I think that
on other farm programs where we have one commodity that
Congress wants to help, say, all soybean farmers or corn
growers, there is a lot of support in Congress to do that, and
we normally step up to the plate.
I think the reason these compacts are so divisive around
Congress is because really we are being asked to prefer farmers
in a certain region of the country, dairy farmers in a certain
region of the country, over the others. And I guess I am real
uncomfortable doing that, and obviously, my farmers are being
hurt in Illinois, and so I am going to fight that.
But on a broader policy issue, we are one country, and
balkanizing farmers by regions and breaking up their interests
over these compacts is just not a good idea. If we started
these compacts in corn farming or soybean growing or any other
area, I think it would just be a horrible precedent. And I hate
to see this kind of balkanization of the country and Congress
being asked to pick out some winners by region. I think that is
why compacts between States were looked with skepticism upon by
our Founding Fathers, and they required congressional approval.
They didn't allow States to enter compacts unless Congress
approved it. And this is really the only one that I am aware of
that allows trade barriers between States.
So I would hope that you and other dairy farmers would
think about what the effect of these compacts is on farmers in
other parts of the country that are not in the compact. If we
put everybody in the compact, then the compact wouldn't be any
good. The reason it is good for the Northeast is because they
are benefiting at the expense of the ones who are left out of
the compact.
But, with that, thank you all very much for appearing
before us today.
The Chairman. Thank you, Senator.
Senator Santorum.
Senator Santorum. Well, I guess to comment on Senator
Fitzgerald's comments about the Northeast Dairy Compact, there
are many of us in the northeastern part of the country who
believe that we have had balkanization of agriculture for a
long time. In fact, we just saw it during this drought
assistance--I mean, excuse me, this emergency assistance for
America's farmers. We went through the worst drought in 100
years in my State and in the Northeast and the Mid-Atlantic
States. We passed an emergency supplemental for--something akin
to an emergency supplemental for agriculture for $7.4 billion,
of which $7 billion basically went to people who had produced
too much and were having bumper crops. So we gave them $7
billion, and we gave $400 million to folks who didn't produce
anything because of the drought.
Now, to me, I don't know about, you know, the average
American out there, but, you know, those of us who have been
sitting up in the Northeast doing our agriculture, not asking
the Government for a handout, also sort of look at the
balkanization saying, you know, we have been dumping a lot of
our money into the Midwest and Southeast and all these program
crops for decades, and we haven't asked for much of anything.
We are now at a point where agriculture in the Northeast is
being threatened by a variety of factors, and we are coming
forward and saying, hey, you know, it is our turn, we would
like a little bit of help up our way.
Again, $7 billion goes to basically farmers in the
Southeast and Midwest, upper Midwest, double AMTA payments.
Less than 20-percent of my farmers get AMTA payments, and that
is not true in Iowa. It is not true in many other areas across
the country.
Again, the reason we rushed out there is because we had low
prices. My folks would love to have just had a problem with low
prices. They had low prices and nothing to sell. And we got
nothing. My folks are showing up at the Farm Service Agency
[FSA] office and getting 30-cents on the dollar for their
drought relief. And we have folks up in other areas of the
country getting double AMTA payments plus bumper crops.
Then you wonder why my folks come here and wonder, hey, how
about us this time? We have been doing this for decades.
Decades we have been dumping money. And farm programs have been
written on this committee and other committees to benefit those
who come to this committee and, arguably, fight for their
people. God bless you. You went out here and did a good job,
and folks in that area of the country did well.
But, you know, northeastern agriculture is important, too,
and I think we have every right to come forward and say, you
know, well, we are hurting. When you were hurting, we came and
supported you, and now we are going through a very difficult
time in our area of the country. And we want some support too.
And whether it is with dairy--and I understand the problems
with dairy. Mr. Vanblarcom and I have--I have been up to
northeastern Pennsylvania and Bradford County and other areas
to talk to farmers up there, and it is very difficult up there
in the northeastern part of my State. And there are a lot of
dairy farmers hurting bad, even worse than in other areas of my
State.
As many of you know, I have had some concerns about the
Northeast Dairy Compact because I find myself out here, as you
just heard, not favoring the kind of agriculture policy that we
have dictated about preferring one region over the other. And I
think we have done that, and we may be in the process of doing
that again when it comes to crop insurance. But we are going to
work against that, too.
I hesitate to sort of say, well, since you guys have done
it, we need to do some of it, too. I would rather have it to
where we support folks who are out there doing a good job and
not prefer one region over the other. So far we have not done
that in this Congress. We have not done that in previous
Congresses. And so I object a little bit to my friend from
Illinois saying, well, it is--picking out one program and
saying we are balkanizing and ignoring 99-other programs when
we have done the very same thing to benefit his farmers.
And so I would just--Mr. Vanblarcom, you didn't say that,
but I thought I would answer the question for you. And if you
would like to expound on that at all, feel free to do so.
The Chairman. Well, thank you very much to Senator
Santorum.
We have been joined by Senator Leahy. Do you have questions
for the witnesses?
Senator Leahy. Like he said.
Senator Leahy. I would just reiterate what I said
yesterday. In the areas where we have used the compact,
consumers are paying less for their milk. It was interesting to
note that in a couple of the States that are speaking so much
against the compact, saying, of course, that they are only
interested in the consumer, in their States consumers pay more
for milk.
I was impressed with lobbyists who get paid hundreds upon
hundreds upon hundreds of thousands of dollars who come up here
in their very nice automobiles to say that they only influence
for fellow dairy farmers. Well, dairy farmers in Vermont or
Pennsylvania don't make this kind of money. They work very,
very hard--harder than most people do. All they want is a fair
return. The compact does it. And it doesn't cost the taxpayers
anything. This is the most important thing. We are always asked
in this committee to give huge amounts of money for corn
farmers, for soybean farmers, for wheat farmers, for this type
of producer or that type of producer. We are asking the
Northeast, let's just run a program ourselves that won't cost
the taxpayers anything.
By God, you would think that we had suggested the ending of
all farming in America. Every one of these interests that rely
on huge Government subsidies come in to attack the program, it
gets nulled. No taxpayers' money.
I think it is a bad mistake. I am not suggesting it is the
testimony of anybody here, but I am just saying it as a general
statement. Group after group, region after region that rely
upon billions of dollars of Government subsidies are opposed to
a program that farmers have set up that has no Government
subsidy. For the life of me, I think that it expands
parochialism and hypocrisy beyond any level I have seen in 25-
years here, and I have seen some levels.
So, anyway, that is just my thought, and I would suggest it
is not balkanization. If some of these areas are so concerned
about the Dairy Compact would show the same kind of initiative
and the same kind of intelligence and the same kind of effort
that the Northeast did, then do their own. And tell the
taxpayers we will get out of their pocket and just do it
ourselves.
Thank you. Thank you, Mr. Chairman.
The Chairman. Well, thank you very much, Senator Leahy.
I just would comment, I am sure the witnesses can observe
as Senators to testify that we have some disagreements of our
own. And some of the echoes from your advocacy are heard here
and even repeated in your presence. But we appreciate the rich
variety of thoughts which you have brought in your oral
testimony today and in your prepared papers. And we will take
these seriously. They have been made part of the record, and we
thank you very much for coming.
The Chairman. I would like to now call an additional panel
to be composed of: Clark Hinsdale, president of the Vermont
Farm Bureau, on behalf of the American Farm Bureau Federation;
John Neal Scarlett, South East Dairy Farmers Association of
Tennessee; John Frydenlund, director of the Center for
International Food and Agriculture Policy of the Council for
Citizens Against Government Waste; Will Hughes, Wisconsin
Federation of Cooperatives; Gene Paul, past president of the
National Farmers Organization of Minnesota, and Bill Brey,
president of the Wisconsin Farmers Union on behalf of the
National Farmers Union.
[Pause.]
The Chairman. May we have order again in the hearing room
so that we can all hear the witnesses clearly?
Before Mr. Hinsdale is recognized, I want to recognize
Senator Leahy.
Senator Leahy. Thank you, Mr. Chairman. I came down and, as
you know, I am in another hearing, but I wanted to introduce
Clark Hinsdale. He is a friend of mine and my family, has been
for years. He is also president of the Vermont Farm Bureau. In
fact, he is testifying before this committee on behalf of the
American Farm Bureau Federation, a very significant testimony.
And he hails from a multi-generation Vermont farm family. He
runs a diversified dairy farm, and he has done a lot in
Vermont. He has been president of the Vermont Farm Bureau for 7
years, and, in fact, after he became president, you saw a great
revitalization in the Vermont Farm Bureau, a great expansion,
and one that became very involved in a bipartisan fashion in
our State. So he is chairman of that. He is chairman of the
board of the Farm Family Insurance, a member of the board at
Yankee Farm Credit, as well as what he does on his farm.
I will put my whole statement in the record, but I would
suggest that if we listen to people like Clark Hinsdale, I
think we can find a solution out of here. He has had to bring a
lot of differing people, differing parties together to make it
work, and he has done that, and thank you for having him here.
The Chairman. Thank you very much, Senator Leahy.
Let me just comment personally, in recognition of what you
have said, that 4-years ago when I was running for a different
office than the one I am now involved in, I visited with
Senator Leahy and the Vermont Legislature and, likewise, the
Farm Bureau leaders and dairymen in Vermont, and Mr. Hinsdale
was a leader then. He has become an even more prominent leader
on behalf of the Farm Bureau of his State subsequently. It is
good to have you again in the Committee room, and please
proceed with your testimony.
STATEMENT OF CLARK W. HINSDALE, III, PRESIDENT, VERMONT FARM
BUREAU, INC., ON BEHALF OF THE AMERICAN FARM BUREAU FEDERATION,
Mr. Hinsdale. Thank you, Mr. Chairman. My name is Clark
Hinsdale, as has been already said, and I am fortunate here to
be presenting testimony on behalf of the American Farm Bureau
Federation concerning national dairy policy. Our membership
does include the majority of our Nation's farmers, and we seek
to promote their interests in all regions of this country.
My message to you is, first and foremost, one of profound
gratitude for what you have already done for us in the
extension of the price support program, Option 1A, and many
other things that have been mentioned here today, not the least
of which is the extension of the Northeast Compact. These
efforts have provided some measure of income stability and a
greater measure of hope to our Nation's dairy farmers.
I want to personally thank you, Mr. Chairman, for visiting
dairy farms in Vermont. You have not only entered our barns and
our kitchens, but our hearts as well. Together with your
predecessor, who has dairy literacy in his job description, we
believe you can tackle some of the great issues of the day,
from opening up world markets to ending our use of food,
medicine, and land mines as weapons against innocent people who
find themselves citizens of hostile regimes.
I might come back to our Northeast Dairy Compact. At a time
when so much attention is focused on the need to improve
agricultural risk management tools and to create an effective
counter-cyclical safety net for farmers to facilitate our
transition to a more market-oriented agriculture, the genius
and efficiency of the compact should be apparent. Simply put,
the compact extracts revenue from the marketplace, not the
Government, operates only when prices are low, and doubly
depends on the good will of consumers, both through their
economic and political decisions.
In January, the voting delegates of the American Farm
Bureau Federation reaffirmed their support for compacts by
saying, ``We support State and regional initiatives, or
compacts, which are consistent with our overall goals of
Federal market order reform and a market-oriented dairy
program.''
New language was also added to our dairy policy, stating,
``We support modifications in the Federal marketing order that
will enhance the price of milk received by producers,
including, but not limited to, Option 1A price differentials
for Class I milk, adjusting USDA formula for make-allowances on
Class III milk, and regional dairy compacts.''
With a track record of returning an estimated $40 million
to dairy farmers both within and outside the compact region,
the bushel is off the light. Twenty-five States have passed
legislation authorizing regional compacts. We support
legislation that would extend the current Northeast Dairy
Compact to include Maryland, New York, New Jersey, Delaware,
and Pennsylvania. The Farm Bureau supports the authorization of
a Southeast Dairy Compact, extending westward to include
Missouri, Oklahoma, Kansas, and the rising star of the Lone
Star State of Texas. We encourage you to continue to allow
producers and the industry to work together through such
efforts as the Northeast and Southeast Dairy Compacts to
stabilize producer income.
We appreciate the opportunity to visit with you on American
Farm Bureau's perspective on dairy policy. We truly appreciate
the progress that has been achieved and look forward to
continuing to work with you toward agricultural policies that
provide nourishment for the world, opportunity for our farmers,
and security for our country.
I might also add that it is--in our problem-solving role in
the Farm Bureau, it is of great value and benefit for me to be
able to join you in hearing the very diverse testimony as we
seek to find opportunities to guarantee in this country that
our farmers have an opportunity to succeed.
[The prepared statement of Mr. Hinsdale can be found in the
The Chairman. Thank you very much, Mr. Hinsdale.
Mr. Scarlett?
STATEMENT OF JOHN NEAL SCARLETT, ON BEHALF OF THE SOUTH EAST
DAIRY FARMERS ASSOCIATION NEW MARKET, TENNESSEE
Mr. Scarlett. Thank you, Mr. Chairman.
First, let me say I am glad to see that you all are going
to enter the testimony into the record because, as slow as I
talk, I might not get all mine in.
I would also like to thank the other members of the
Agriculture Committee for holding these hearings and giving a
dairy farmer from east Tennessee the chance to come up here and
be heard.
My family and I run a 200-plus-cow dairy which was started
by my grandfather in 1930. We market our milk as independent
producers through an organization called Piedmont Milk Sales, a
marketing organization which has about 260-producers in 5
Southern States.
I would like to begin my testimony by thanking the Members
of the Senate who made sure that the flawed attempt to redo the
Federal order regulatory system last year was corrected. I am
all for making the system work better, and I think that is what
Congress did. There are a couple more changes to make, but
those will work their way through the regulatory process at
USDA this year.
My purpose this morning is to let you know how important
the Federal Milk Marketing Program is to the dairy industry in
my part of the country. The main purpose of the Federal Order
Program is to provide an orderly flow of fresh milk for the
consumer. And in the Southeast, that is a real challenge in
some months.
As most of you are aware, the Southeastern United States is
a rapidly growing population center. That rapid growth makes it
more difficult to have adequate supplies. But the added
transportation cost of moving milk from areas of the country
where there is more than enough to drink makes it more cost-
efficient to maintain a healthy local supply of milk.
For instance, hauling milk from northeastern Wisconsin to
east Tennessee adds $3.39 a hundredweight, which means that
adds 29-cents a gallon, much more than the 4-cents a gallon
they were talking about a while ago being added. And hauling
from upstate New York adds 27-cents a gallon. Now, those are
not figures that we just pulled out of the air. I called
Piedmont before I left, and that is what they gave me when they
had to have extra milk besides our local supply. The two charts
attached to my testimony bear those out to other destinations
in the South.
I want you all to know right up front I have no malice
whatsoever in my heart for any of the folks that are dairy
farmers in Wisconsin or New York or Iowa or anywhere else. But
I have got many friends up there, and I want to stay friends
with him. But you just simply cannot pay those farmers a fair
return, pay the plant a give-up charge, load that on a truck
and haul it to east Tennessee and put it on the shelf cheaper
than what the consumers can buy my milk, irregardless of the
program. Federal order minimum pricing, in the interest of
farmers and consumers, provides a great financial incentive for
keeping milk production low.
On that note, the local impact, which has been stated
earlier by the dairymen from Iowa about what it does to the
areas out there, is an extremely important point. There is
about $6 million in milk checks that come back to our county
where I live. Now, if you believe what the economist says, the
multiplier effect, multiply that by six, that is $36 million
that is spent there in our local economy. In Tennessee, we are
a sales-tax-based State. That is how we build our schools, pave
our roads, educate our children. And if you take that away, the
only sales tax we get is off the milk that is hauled in, would
be what comes out of the store. It doesn't provide any
infrastructure money as the money that comes back in the milk
checks does to be spent locally.
A local supply of milk is much more also than just cheaper.
It is almost more dependable. Those of you here in the DC. area
remember just a few days ago--it was on the news--of how bad it
was to get to the office in the snowstorm. If it was hard for
you to get to work, imagine if you were driving a milk truck or
trying to pick up milk and get it to the plant and the stores
within the Southeast.
The bottling plants in our area were begging for milk 2-
weeks ago, and milk was readily available. Now, imagine what it
would be like if all the milk supply you had, had to be trucked
The Federal Order Program also provides financial functions
that are important in the entire marketing chain. It ensures
Class I producers are paid the prices if milk is sold as
beverage, Class II is used in cheese and yogurt, Class III for
manufacturing, Class IV for milk for butter. Producers also
assure that they are paid for the components.
An entirely understandable question by this committee then
is: Does the market still work? I can tell you from recent
experience it certainly does. The parts of 1998 and 1999
weather-related difficulties in areas of the country kept milk
supplies tight, and we had record-high prices. Now the
situation is reversed, and they are at low prices as we have
seen in the last 20-years.
To put that in context for all the non-farmers in the room,
imagine trying to feed your family, pay your mortgage, educate
your children by having your paycheck cut 40-percent.
The position I am, a dairy farmer every day, if the milk
produced on my farm doesn't move that day, I do not have a
product to sell by the next day. That is one of the most
critical features of the Federal Dairy Program. It keeps dairy
farmers on an equal basis from being pitted against each other.
We have heard a lot of talk about deregulation. First, let
me say the current farm bill does not authorize deregulation,
it does not require changing Class I differentials, and it
certainly did not want to lower the income of the average dairy
farmer. That is why it is so important for Congress to
intervene to repair the flaws in the marketing order. Without
those changes last year, entire investments in facilities would
have been very dramatically affected.
Another aspect of the price regulation I would like to
finish up with is on compacts. I would like to say the Southern
Dairy Compact would be a great help to the industry in our area
to keep the fast-growing market in the Southeast adequately
supplied with reasonably priced fresh milk. Compacts also allow
everyone in the milk marketing chain to have a say in how milk
is priced.
On the subject of compacts, I would like to call for a
higher level of honesty in the debate of this issue. For
instance, calling compacts undemocratic simply isn't true. Over
5,000 legislators in 25-States have voted in favor, and an
amendment last year with dairy compact language in it in the
Senate here received 53-votes. Still, we do not have a compact
in the South, therefore denying the people and their
legislators that spoke of having the benefit of local dairy
farmers retain them in their communities.
Another reason I wanted to be here today is to have the
opportunity to remind this body and the American people that
there is one group that is clearly not sharing in the economic
boom of the country right now. As I said before, milk prices
are the lowest level in 20-years, and the Federal Milk
Marketing Order provides at least a small degree of stability,
although more is needed.
I urge the U.S. Senate to continue looking for ways to keep
farming economically vibrant and American farmers and rural
communities having that opportunity for economic gain.
Again, I thank you for the opportunity.
[The prepared statement of Mr. Scarlett can be found in the
The Chairman. Thank you, Mr. Scarlett, for your testimony.
Mr. Frydenlund.
STATEMENT OF JOHN E. FRYDENLUND, DIRECTOR, CENTER FOR
INTERNATIONAL FOOD AND AGRICULTURE POLICY, CITIZENS AGAINST
GOVERNMENT WASTE, WASHINGTON, DC.
Mr. Frydenlund. Mr. Chairman and members of the Committee,
on behalf of Citizens Against Government Waste, I want to thank
you for this opportunity to testify on the subject of whether
there is a need for a Federal dairy policy.
CAGW is a 600,000-member, nonprofit, nonpartisan
organization, which grew out of President Reagan's Private
Sector Survey on Cost Control, better known as the Grace
Commission. The organization's mission is to work for the
elimination of waste, mismanagement, and inefficiency in the
Federal Government, with the goal of creating a Government that
manages its programs with the same eye to innovation,
productivity, and economy that is dictated by the private
sector.
The Center for International Food and Agriculture Policy
institutionalized CAGW's long-standing goal of dismantling
Depression-era agricultural price supports and regulations. In
addition to a belief that Congress should build on the
accomplishments of the 1996 freedom to farm bill and achieve a
truly free market for agriculture, the center advances the
philosophy that the best way to wean America's farmers off the
Federal dole and assure them a prosperous and secure future is
to promote a more open global food economy by dismantling
barriers to free trade.
CAGW applauds you, Mr. Chairman, for holding this hearing,
particularly for asking the right question: Is there a need for
a Federal dairy policy? It is appropriate to begin a discussion
of dairy policy with such an examination, rather than the
traditional assumption that there should be a dairy program,
which then simply moves into a debate of what that program
should be and how much money should be allocated on its behalf.
It is now well past 60-years since the Federal Government
first determined that it needed to be involved in milk pricing.
The result was the creation of a dairy price support program
and the Federal Milk Market Order system. There may arguably
have been some justification for Federal subsidies and
management of dairy production way back then before vast
technological progress, modern production techniques to
maximize output, efficiency, and quality, and advancements in
the Nation's infrastructure made these policies obsolete.
During seven decades of modernization and change outside of
Washington, the Federal Government's stranglehold on milk-
pricing structure has remained constant.
Just as is the case in every other industry, technological
innovations have allowed some dairy farmers to become more
cost-efficient. It should come as no surprise, then, that this
country has experienced significant reductions in both the
number of dairy farms and milk cows. The time has come for
leaders to acknowledge that these trends represent progress
rather than a cause for hand-wringing.
Until relatively recently, the cost of Federal meddling has
been most blatantly demonstrated by the excesses of the dairy
price support program, which laid out huge sums of Federal
taxpayer money to dairy farmers. Now, however, the Federal
dairy program is a tangled web of mind-numbing pricing schemes
that have metastasized into a more layered, incomprehensible,
intrusive labyrinth increasingly divorced from economic
realities. Rather than allowing the marketplace to determine
the price of milk, dairy prices are controlled by behind-the-
scenes maneuvering in Washington, bureaucratic log-rolling, and
regional political favoritism that we have heard so much about
already today.
I have brought along a chart that truly illustrates how
mind-boggling the system is that has been built over the last
60-years.
As with many other Government programs gone haywire,
intervention in the dairy industry was designed to be
temporary. And as I said, until recently, the dairy price
support program had been the cornerstone of the Federal
Government's involvement in the dairy industry. In the late
1970s and early 1980s, price supports were driven to
unprecedented heights as a result of regional politics and
election-year payoffs which ultimately ended up costing the
taxpayers $17 billion during that decade and led to the
voluntary diversion program and whole-herd buyouts.
These experiences have led to less congressional enthusiasm
for raising dairy price supports, but as this developed, the
milk marketing orders have become the most important bulwark of
Federal involvement in milk pricing.
Within the milk marketing orders' logic-free zone, the most
illogical of all provisions is the differential pricing. These
additional premiums are charged to the manufacturers of fluid
milk based in part on how far the manufacturing plants are from
Perversely, the differential system penalizes dairy farmers
in the regions best suited to dairy farming and rewards dairy
farmers operating in high-cost, inefficient areas far from Eau
Claire. This makes about as much sense as the Federal
Government requiring computers manufactured in Maine to be sold
at higher prices than those manufactured in the Silicon Valley.
It is equally ludicrous that the Federal Government
established minimum prices for milk or sets different prices
for milk based upon what it is used for. I would also like to
point out that the extensive and time-consuming effort
initiated in the 1996 farm bill to provide modest reforms of
the system, which was scuttled by Congress last year in the
extension of the Northeast Dairy Compact, was a serious setback
for reform of the entire industry.
Interstate dairy compacts represent a threat to the long-
term viability of the dairy industry, and without going too
much into detail about all of our objections to this sort of
milk cartel system and providing what really is a milk tax on
consumers, I would like to point out that what we need to do is
really look at dairy policy, get outside of the box of just
debating between the different regions and deciding who are
winners and losers. This unbelievable system that has been
developed over the years is only getting more complicated every
time Congress decides that they are going to try to equalize
things or intervene to try and make the system more fair.
It has been demonstrated by the producers that have
testified here today that there is no system that this Federal
Government can put together that is ever going to be fair for
every dairy farmer in the country. If we are going to try to
have a social engineering policy that must determine that we
never lose another farmer from the land, then this is not the
way to do it because you cannot even do this fairly. The only
way, then, if that is going to be the goal that the Congress
decides on, a social engineering policy to make sure that every
farmer has a fair income, then Congress needs to get rid of the
milk marketing order system, get rid of the dairy price support
program, and come up with a farm income assistance program,
some sort of supplemental assistance that is directed to the
farmers in need. And it is really the only logical scheme left.
[The prepared statement of Mr. Frydenlund can be found in
The Chairman. Thank you very much for your testimony.
Mr. Hughes?
STATEMENT OF WILL HUGHES, UNIVERSITY OF WISCONSIN, CENTER FOR
COOPERATIVES, MADISON, WISCONSIN
Mr. Hughes. Thank you, Chairman Lugar and Senator Harkin,
for having me to testify today. I don't know if it is an
advantage or a disadvantage, but I am only representing myself
today, and I am speaking as a staff economist for the
University of Wisconsin Center for Cooperatives.
I have also had the honor to grow up on a dairy farm in the
Northeast and now reside in the Midwest. And I haven't tried
the West out yet, but if looks like if you want to do dairy,
you should be looking at that area as well.
I think my first point today is that there is a tendency to
exaggerate how important Federal orders are in the marketplace
today. There is also a tendency perhaps to over exaggerate how
bad they are. But what I want to address is the question of
whether the playing field is level, this equitability question,
after all these reforms have taken place and we spent a lot of
dollars and time in the last 10 years working on it, and that
is, I think, why I was invited here today.
The answer to the question ``Is there a level playing
field?'' is a resounding no. You, Mr. Chairman, used the word
``de minimis,'' and I like that word and will now put that into
my portfolio.
In my written testimony, there is an Appendix a. It is near
the last part of the testimony, and it is a chart, a bar chart
that shows the distribution of Federal order benefits in the
new system versus the old system distributed across regions.
And these benefits range from a low of 37 cents a hundredweight
to a high of $3.63 a hundredweight. It is a crude measurement.
I can give you sophisticated analysis that I have reference in
my written testimony that would show you about the same thing
on a slightly different scale.
With respect to Class I milk, Federal orders have not been
reformed, and I am showing that in my Appendix b's that are
attached in the testimony.
If you look at Appendix b1, that chart shows a plot of
Class I differentials in Federal orders east of the Rocky
Mountains by distance from Eau Claire, and the large black dot
represents USDA's final rule. And as you can see, it moved the
system slightly to the more equitable plane.
FAPRI, which is a group that does forecasting and analysis
on policy, worked with USDA and came up with a consensus
forecast, and I would hope that this committee would look at
that forecast. It was really underutilized in the debates in
Congress this last session and other information was abused to
show worse results. But that shows that 60 percent of the dairy
farmers in the States were benefited under the final rule
proposal, and I would like you to look at that.
Appendix b on the opposite page shows what we have with the
new 1A differentials, and it hardly looks like reform at all.
There are some other technical details that suggest that we
could have even raised the Class I price surface more than we
thought, and it relates to the Class I mover and changing the
Basic formula price [BFP].
Ask yourself the question: Do Federal orders increase milk
production? Our analysis at the University of Wisconsin
suggests they do so by about a billion pounds. A billion pounds
in the pipeline has quite a price effect. They also decrease
cheese prices by about 4-cents per pound, according to our
analysis. And they also, therefore, affect the cheese milk, or
the milk used in cheese, by about 40-cents.
Compacts do the same thing as Federal orders, only in a
more dramatic way. Our studies at the University of Wisconsin
suggest that compacts create many more losing farmers than they
do benefiting farmers. For example, in my testimony, I refer to
analysis that the Northeast Compact, if you included New York
and Pennsylvania, would add $237 million on about 12 percent of
the farms in the country versus taking away $146 million spread
off a larger number of farmers and, therefore, per
hundredweight a lesser amount of a loss.
So I am here to tell you that the world without regulation
would be pretty flat. I know there was a little discussion
yesterday, but Cornell did some analysis for USDA as to what
would the price surface look like, relative prices amongst
areas, and they found it to be--and they were looking at this
in the aspect of without regulation. And they would say that
there would be quite a narrowing in the range from how we are
regulating prices. And that work was used to formulate Option
1B, the final rule, and so on.
Our history of trying good intentions has caused vicious
cycles of surpluses and low milk prices, the high supports in
the 1980s, the 1985 increase in the differentials, we had to
come up with buyouts and diversion programs and so on. This is
the law of unintended consequences.
Building a national dairy program that treats farmers
equitably is essential, and that is what should preoccupy this
committee until the job is adequately done, and I am confident
and hopeful, knowing the interests that sat at the table these
2-days, that can be done. I think it is going to take a little
trick, which I will get to in a minute.
This is going to be complex because, as you have heard,
there are low-cost areas, high-cost areas, high-cost producers,
low-cost producers. There are manufacturing areas, then there
are fluid areas. And the bottom line is, in trying to come up
with balancing a system that works for all those players in
equitable ways, I think we are going to have to back off, as
Mr. Jaeger said here, and be more simple and basic in our
approach. That ought to run on the principle that less
regulation is superior to more regulation, and we ought to
focus on helping the industry manage this downside price-risk
problem that we see repeatedly in recent years.
So what should we do? Short term, 1- to 2-years until we
get to the farm bill, say no to more or extensions to compacts.
I have a chart in my testimony that speaks to that. You have
heard about the price support program and the DEIP program. I
do think that is an important part of the safety net. At
current levels, they do not distort markets and work as a
reasonable safety net.
I think Congress should consider additional direct
payments, assuming prices will remain low for the next year or
so. Direct payments at the levels and distributions that are
possible will not distort markets, and they are the most
effective means of supporting.
Farmers don't like them that I have talked to because they
are perceived as a handout, but if they are tied to price
levels and they are truly needed and targeted, I think they can
be effective.
The farm bill, congressional leadership. Steve Gunderson
tried this several years ago and it didn't work. But if there
was more broad-based congressional leadership that laid down
the hammer that you will deregulate all regional programs
unless the dairy industry and USDA develop a new national
program, I think it can be done, and it will require that
hammer be put in place.
I believe if we don't move to replacing Federal orders in
the future through these other kinds of programs or,
alternatively, adopting a California-style system, we can see
the system self-destruct over time. And I see time and time
again that farmers value these programs.
The problem is they become an entitlement, and lawyers
would say a property right, as you see this inequitable
distribution of benefits, and that has to change.
Finally, keep developing tools that help dairy farmers
manage price risks and revenues by encouraging forward
contracting options, maybe some support on premiums for that,
and I agree with an earlier gentleman, look at that revenue
assurance as another vehicle.
Is there a need for a Federal dairy policy? Yes. Will
consumers go without milk without one? No. Would the size and
structure of dairy farming be different without dairy policy?
Yes, it would be. Do we need to ensure a local supply of milk
via Federal policy? No, we should not do that. There will
always be local milk production. Promote fair competition, and
farmers and the industry will find ways to produce milk where
it is needed. Be careful of protecting the past without
hindering the future.
[The prepared statement of Mr. Hughes can be found in the
The Chairman. Thank you very much, Mr. Hughes.
Mr. Paul.
STATEMENT OF EUGENE PAUL, LEGISLATIVE COORDINATOR, NATIONAL
FARMERS ORGANIZATION, AMES, IOWA
Mr. Paul. Mr. Chairman, on behalf of the National Farmers
Organization, we want to express our appreciation to you and
Senator Harkin for holding these hearings today.
Our organization represents independent producers
nationwide in negotiating contracts and other terms of trade
for grain, livestock, and dairy. And our purpose is to help
independent farmers extract the dollars they need to cash flow
their operations.
Dairy farmers today are facing some devastating situations.
The current dairy policies have brought extreme price
volatility to the dairy industry. Since September, the basic
formula price has decreased by about 40-percent.
The milk price today is far below the milk production costs
experienced by dairy producers in this country.
We can see the turmoil this has caused by looking at the
exodus of dairy operations over the past years. Since 1992,
approximately 30-percent of our dairy farmers have gone out of
business. With that, it has had a negative impact on the rural
businesses and infrastructure as well.
USDA's dairy pricing reform leveled the field of milk
pricing to the lowest level found for milk in the country. The
dairy pricing reform was designed to function like California's
State order pricing system. The gains from being competitive
with California's milk pricing system cannot be worth the
further demise of this Nation's dairy industry.
The majority of America's milk production is being utilized
for the production of dairy products. A great deal of focus has
been placed on Class I milk. However, Class I differentials are
important, but most of the milk is used for the manufacturing
of cheese priced in Class III.
USDA's new dairy pricing system and the California State
order milk prices are set using end product pricing formulas to
establish the value of milk to be used for the manufacturing of
cheese, butter, and powdered milk. End product pricing formulas
alone do not find the true value of raw milk. Raw milk has a
value before it is processed into a dairy product. Raw milk's
value is the cost to produce the milk, such as the hay, grain,
equipment, utilities, and labor.
Another major issue with end product pricing is the setting
of a make allowance level. Make allowances assist the milk
processors in covering the production costs of the plants;
whereas, the milk-producing segment of the industry receives no
production cost consideration at all.
It has been said that the dairy industry can export or
trade its way to a healthier condition. This idea has been the
fix-all, save-all remedy for what ails the dairy industry.
However, a recent economic report on this issue from the
University of Wisconsin shows the fallacy in export salvation
for America's dairy industry. The report predicts the direction
and amount of milk price change for America's dairy producers
as a result of free trade to be a negative 0.4-percent.
Basically, chasing freer trade for the dairy industry will
result in lower milk prices for America's dairy producers.
Some have looked at the Canadian market as a market to be
opened and conquered by this country's dairy industry. All this
would do would be to lower the Canadian dairy producers' milk
price to an inequitable level. The gain to America's dairy
producers by ruining Canada's current dairy system would be
minimal, if any gain at all.
The situation we are facing today is the issue of price,
and I fail to see how lowering price in one area will benefit
another. Why not raise the price in the lower-priced areas to
those areas which are receiving a higher price? To this end, to
provide some stability in milk prices, the National Farmers
Organization supports the Northeast Dairy Compact Commission
and the expansion of the compact and the creation of similar
entities to help producers extract more dollars from the
In addition, a dairy industry milk management program has
some benefits and should be given an opportunity in the United
States. We encourage a mandatory system; however, a voluntary
system could be established with the cooperation of dairy
producers and dairy cooperatives using a coordinated and
systematic culling of producing cows.
To deal with the situation facing us today, the National
Farmers Organization is requesting emergency action to be taken
by USDA to establish a floor price for the price of milk in all
Federal Milk Marketing Orders. We are calling on USDA to
initiate emergency rulemaking proceedings to institute a milk
floor price of $13.50 per hundredweight for Class III milk.
The economic situation facing America's dairy producers
today must be addressed. Without quick action in the form of
price relief, which National Farmers Organization has
requested, financial disaster will plague America's dairy
producers causing many more to exit the industry.
Thank you for the opportunity to speak to you today?
[The prepared statement of Mr. Paul can be found in the
The Chairman. Thank you very much, Mr. Paul, for your
Mr. Brey.
STATEMENT OF BILL BREY, PRESIDENT, WISCONSIN FARMERS UNION,
STURGEON BAY, WISCONSIN, ON BEHALF OF THE NATIONAL FARMERS
Mr. Brey. Thank you, Mr. Chairman, Senator Harkin.
On behalf of 300,00 farm and ranch families of the National
Farmers Union, I would like to thank you for the opportunity to
testify. I am Bill Brey, the president of the Wisconsin Farmers
Union. I have been a full-time dairy farmer from Sturgeon Bay,
Wisconsin, in northeast Wisconsin, and I farm there with my
wife and family. We milk 95-cows and run 600-acres of alfalfa,
corn, barley, canning peas, and soybeans.
Many people would say that Wisconsin is ideally suited to
produce milk. Yet, nowhere is the economic devastation brought
on by low prices more evident. My State has dropped from over
40,000-dairy farmers in the 1980s to 21,000 as of January 1st.
With prices hovering around $9, farmers will continue to be put
out of business.
National Dairy policy has become very contentious with one
region pitted against another. However, it is the strong belief
of the members of National Farmers Union that only by working
together can we move forward to a national solution.
I have worked to implement this strategy in my home State.
When we made plans for our 69th annual Wisconsin Farmers Union
convention held in Eau Claire, Wisconsin, on February 4th and
5th, I invited producers from all regions of the country to
participate on a national dairy producer panel. Our panel
included dairy farmers from Vermont, Alabama, Texas, Minnesota,
California, and Wisconsin.
My testimony today will include two sections: National
Farmers Union support for continuation of dairy policy at the
Federal level, and the principles of agreement reached by panel
participants.
National Farmers Union [NFU] believes there is a strong
need for Federal dairy policy. NFU supports continuation of the
Federal Milk Marketing Order system, the dairy price support
system, dairy nutritional programs, and dairy export programs.
Federal Milk Marketing Order system. While the Federal Milk
Marketing Order system is not perfect, it provides important
protection for both producers and consumers. The system
provides testing and standards and helps ensure the orderly
marketing of dairy products throughout the United States. It
ensures producers are paid for the products they deliver and
provides consumers with a safe and healthful supply of dairy
products wherever they live.
We believe that some changes are needed. The National
Farmers Union supports reform of the Federal Milk Marketing
Order system on Class III and IV, as directed by Congress. In
particular, we are concerned that the new, higher processor
manufacturing allowances set by USDA will result in less
producer income. Farmers are questioning why processors should
receive a guaranteed cost of production for manufacturing, even
while farmers are left at the mercy of the market. We are
considering the benefits of a variable manufacturing allowance
that would adjust in the relationship to the producers' milk
price.
Dairy price support program. The dairy support price sets a
floor on the price received by all producers, regardless of
region and regardless of how each producer's milk is used.
National Farmers Union favors a dairy price support program
that is set at a level sufficient to curve market volatility.
The current level of $9.90 per hundredweight is too low to act
as a stabilizer. And I would like you to make reference to page
5, a chart which shows the support price was an effective price
stabilizer until the late 1980s, when it was reduced too far
below the average market level.
The 5-year average base price for milk, the basic formulate
price, is $12.78. Therefore, our members believe a support
price of $12.50 would protect against the huge drops producers
have experienced in the past few years. Commodity Credit
Corporation purchases may need to be capped to limit Government
costs and avoid surplus product.
A stable supply benefits processors by keeping plants
operating at capacity. Decreased volatility would also benefit
consumers who pay more when farm prices increase, but seldom
see a corresponding decrease when farm prices go back down.
Immediate relief. In the short term, we believe that the
Commodity Credit Corporation should continue to provide
emergency assistance to farmers, for example, the $125 million
appropriated by Congress in last fall's emergency funding.
However, assuming that funding is distributed in the same
manner as 1999, these payments are likely to be in range of 14
cents per hundredweight, with a maximum of $3,600 for any
producer. This would be a payment of approximately $1,400 for
the average Wisconsin producer. The feed alone for that same
size producer would be about $7,000 for just 1 month. Since
USDA is projecting significant drops to dairy producers' income
for 2000, emergency assistance will be more important than
Dairy compacts. Our members have called for a nationwide
solution that will ensure opportunities for all dairy farmers,
regardless of region. National Farmers Union will support dairy
compacts to the extent they are coupled with a support price
that is high enough to stabilize price and enable producers to
earn a fair return from the market.
National dairy trade policies. There is often discussion
about whether various U.S. dairy programs are allowable under
the World Trade Organization and how our programs will affect
the United States' ability to negotiate further agreements. We
would point out that U.S. farmers produce 160-billion pounds of
milk per year and export only 3-billion. Since the lion's share
of our milk, 98.2-percent, is sold in the United States, it is
imperative that the United States maintain an ability to
operate domestic programs for food security. There is no
financial advantage in supporting policies that lower the
market price to producers on 98.2-percent of the milk just to
increase exports.
In addition, since the world market is heavily subsidized,
we support maintaining the DEIP.
Food and Drug Administration standards. We believe that the
standards for a hearing by FDA to change the definition of
natural cheese that thereby allows the use of imported milk
protein concentrate would displace domestic milk used for
manufacturing, resulting in great program costs and lower
prices to dairy farmers.
Regional disagreements have caused some people to ask
whether total deregulation would be preferable to maintaining
national policy. However, we believe the benefits provided by a
Federal dairy program far outweigh the items of contention.
In conclusion, I would urge Congress to try the same
strategy. Thank you, Mr. Chairman.
[The prepared statement of Mr. Brey can be found in the
The Chairman. Well, thank you very much, Mr. Brey.
Let me just begin the questioning by commenting that in the
panel today and, likewise, yesterday, the trade policy question
arose in testimony of many witnesses. Essentially, yesterday
the testimony was that American dairy producers, by and large,
are not competitive with imports from New Zealand and Australia
that are not subsidized, not very competitive against the
European situation, which is heavily subsidized and almost
overwhelming. And, therefore, the solution was essentially
barriers to imports, both to protect against those who were
more efficient as well as to level the playing field against
the preponderance of the subsidy of Europeans that might come
in. This is with regard simply to the producer side.
Now, on the consumer side, consumers would argue that
imports might lower the price of milk, however it came,
subsidized by the Europeans or free market by the Australians
or New Zealanders, and, therefore, the quality of life for most
Americans, but not for dairy producers, would increase.
I don't know whether a fortress-America situation is
tenable indefinitely. It probably is temporarily because
agriculture negotiations have broken down very badly. There is
a glimmer of hope that something might start at the WTO. It
happened in Geneva this week. But that has prospects for months
and years of talking about anything. And so as a result, this
is probably not going to change.
What I ask all of you, however, is during the course of
this interim period, is it likely that American dairy producers
will become more efficient, costs will come down, so that if we
ever do get into a situation of world trade--which I suspect we
will at some point; I don't know how you maintain immunity to
all of this indefinitely--that we will be competitive?
If not, I suspect that we are in for some difficulty, but
do any of you have any feeling about this? Most of you have
said--in fact, all of us are calling for efficiency and lower
cost, but we don't understand the dairy business. You can't
lower cost at some point. You just simply are there, and it is
a tough business. Therefore, if you can't produce efficiently,
you protect what you have got, in essence, in a fairly mature
market where the amount of demand does not increase much year
by year, maybe a 1 percent increase per year, very modest over
the last decade.
Does anybody have any comment about do we become more
efficient? Does it make any difference? Or is the trade policy
you are advocating--namely, keep the imports out and don't get
really mixed up in this WTO business--is that the best we can
do? Yes, Sir?
Mr. Hinsdale. Well, of course, we focused here, since this
is a dairy hearing, on trying to balance the equities within
dairy, and then, of course, we can slide into the larger, more
challenging question of balancing equities across commodity
lines. And it is, of course, interesting and unique that over
98 percent of dairy production is for use here in the country
as opposed to the picture in other commodities where it is
upwards in the 50-percent range or something, like wheat.
You know, as we have seen the consolidation in U.S.
agriculture, essentially you get the consumer consolidation in
supermarkets, you know, driving everything all the way back to
the chain, and we have seen the consolidation in poultry and
consolidation in hogs. And dairy is the other bookend because
it is so capital-intensive and so strongly geographically
rooted that it is probably one of the most difficult forms of
agriculture to achieve the concentration and efficiencies that
have taken place elsewhere.
Certainly from the American Farm Bureau's point of view, we
need to continue to move in the direction of freer and fairer
trade and simply recognize that a bulky, capita-intensive
product like milk is kind of the bookend over here.
But certainly in the American Farm Bureau, we recognize
that the collective interest of agriculture is served by
continuing to try to move ahead with world trade.
The Chairman. Well, certainly that appears to be the
testimony of the American Farm Bureau here in the Committee. In
other words, essentially the testimony, as I understand it, is
that the dynamics of American agriculture, the expansion of our
income, the potential for American farm families to do a whole
lot better comes from, as you suggest, exporting half of our
soybeans, a third of our corn, maybe a quarter of our wheat
every year. The failure to do that almost is bound to depress
prices, depress income, make things miserable for most of the
farmers that the American Farm Bureau represents.
So the dairy thing comes as a very distinct difference from
this situation. In other words, is the American Farm Bureau
position with regard to dairy that, despite the open business,
all the delegations, the Farm Bureau, going to Geneva all the
time and so forth, that here we sort of draw a line around
America for this situation--which is not a very dynamically
growing situation. You know, in essence, you gentlemen are
talking about something that is very, very stable.
Now, if we were to talk about increasing demand for dairy,
it is going to have to be with some other customers somewhere
else in the world. But what I am suggesting is, if our costs
are much higher than some other people who are also competing
in the rest of the world, our chances of making those sales are
not very good without DEIP, which means we then subsidize
exports to try to improve our position.
You know, now, maybe this is just the way that it is, that
we have a cost structure here that is not very competitive, a
very mature market, and, therefore, we are constantly dividing
up the pie, either by region or by classes of milk or however
many tiers you want to look into the pricing. If so, that is a
serious problem all by itself, plus the fact that, as we heard
yesterday, there appear to be large differentials of return
from large cow operations as opposed to medium as oppose to
And I would just say anecdotally from my own experience in
Indiana, each time that I visit with dairy people, typically
confidential meetings we want to have, and inevitably it is the
30-cow operation, a 65-year-old man and a 40-year-old son, and
the 65-year-old man would like to figure out how to retire, how
to get some equity from this situation and how to entice the
40-year-old son to keep going. And the 40-year-old is not sure
he wants to do this for 25 more years.
They come to me and they want a magic solution: What can
the Federal Government do to help our situation? Well, lots of
things, but typically these people the next time around in that
county are not in business. They are among those that are being
described today as the casualties of the process.
Now, I think, Mr. Frydenlund, you mentioned--or maybe Mr.
Hughes, if our policy is the retention of every one of these
farmers, then we really will have to have a very different
policy altogether, very targeted at the 30-cow people, or the
40 or 50 or so forth, because these are really hurting. They
are on the margin, and when the price goes down, it really
becomes tough. Or the reinvestment question, how do you get
more competitive, or how do you refurbish the infrastructure of
what you got?
Do any of you have any broad thoughts? Some of you have
expressed those, and I don't mean to diminish that, but sort of
help us in this situation because we are discussing now why in
this panel we have a policy, why we have programs, why we are
doing any of this, as opposed to something, a distributional
chart of how we divvy it up regionally.
Mr. Brey. Mr. Chairman, I would like to get back and kind
of couple the whole--there were many questions you asked, and I
would like to lay it a little bit from some experiences that I
One is that us as dairymen in the United States, when we
look at the dynamics of what world trade is and we see that the
Chairman is from New Zealand and we see also--I have been on
some dairy panels around the world, and the Chairman is also
representing dairy, the vice chairman on the dairy committee
side of it. That lets--and when we look at production costs and
efficiencies, I think we have to look at--in our United States,
if I have a 26,000-pound herd average, which I have achieved, I
am probably most efficient as far as pounds per cow. If I
change that--if I look at that, and my cost of that has been
hovering around the $14, $15 hundredweight like everyone else.
If I lay that over and I say to the New Zealander, who has
grass-fed cattle and no concentrates, no dry matter intake, no
machinery, no grains, especially none imported from Indiana,
from that standpoint, I am using up the efficiency that I am
comparing it as.
So when you look at New Zealand that exports 95 percent of
their product and has to put it on the world market, that is
their agriculture, they have to force it someplace. And from
our standpoint, why should the United States be importing and
force our domestic price to compete with the unrealistic
benchmark of inefficiencies or efficiencies of that $7 versus
what it costs me to produce my milk?
The Chairman. It is a very important piece of testimony.
You know, correspondingly, when I talk to friends from New
Zealand, they would say you folks in Indiana have ideal
conditions for production of corn. God has given you 39 inches
of rainfall fairly steadily almost every year, and without
irrigation, without other cost factors that enter into other
situations, you have got a very low-cost product which you send
everywhere. And we certainly try to do that. Delegations go
from Indiana all over the world trying to sell corn on the
basis that we are low-cost and do have enormous geographical
weather advantages. Some would say the same thing for wheat in
wheat country and what have you.
This is the problem. Now, it may be that we decide that
dairy is distinctly different, and that really, I suspect, has
been the decision of the Congress without distilling it quite
this way, that we have something here that is very different
from corn or beans or even pork, which now you have a surplus
production and we export and do so competitively where once we
didn't maybe 3 or 4 years ago.
Do you have a thought, Mr. Hughes?
Mr. Hughes. Yes. I am not a trade expert, so with that as a
caveat, you can find data around the country that can show you
different results, but I believe--like looking at Cornell
summarizes financial information on New York dairy farms, and
we have some in Wisconsin that show that productivity is
increasing on a 1-to 2-percent-a-year basis.
The Chairman. In dairy?
Mr. Hughes. In dairy. Costs are going down. But USDA
statistics are not showing that.
The Chairman. Well, why are they different? Why are your
figures different?
Mr. Hughes. That is a good question. Can't answer that for
you. It is a methodological issue.
Mr. Hughes. But the incentives in Europe, where they have
production controls, they manage very intensively to lower
costs. And so particularly in the UK, Denmark, and the
Netherlands, they can compete with the U.S. pretty well. Some
of the other countries are not competitive with the U.S.
New Zealand and Australia, you know the story there. They
can run forage very efficiently through cattle.
The analysis that I have seen that I respect somewhat is
that if you could get to free trade, fair, free trade--that
means eliminating European subsidies and opening up access to
markets--you could see the gains to New Zealand and the losses
to the European, with about a wash for the U.S. So the problem
is how to get there. And you have heard Mr. Tillison testify
about people cheating and there are all kinds of institutional
arrangements, and it is that how do you get there. And I am
quite skeptical that you can leap to that situation without
considerable shock to dairy producers in the country.
The Chairman. Well, I would be skeptical, too, you know,
for the reasons that all of you have given, namely, we have an
impossible predicament with the Europeans.
I am just trying to think down the trail. There may come a
day when we have a different group of Senators sitting around
here, a different feeling in the country, and people will say,
well, this dairy business has gone on long enough. There will
be a reforming spirit coming through here, and people will say
consumers ought to benefit, all the rest of us. And, by golly,
if we want milk for 20-percent less, the dairy farmers will
say, well, that is totally unfair. It is a cheap food policy,
and these people are unreasonable, and we are all going out of
business and so forth. But consumers may say, well, that is one
of those problems. We all have problems. And looking out after
number one, namely, my family, as a consumer I would like to
have cheaper milk.
At that point we better have a cost structure, and I am
heartened by what you are saying, Mr. Hughes, that while all
this argument is going on somewhere else, somehow productivity
is going up, the cost structure is improving, and, you know,
that is the most heartening evidence because, you are right,
USDA doesn't show that. Now, they may not be polling the same
farmers or looking at the same data, but we are trying to look
for some good news here, even while the fortress is holding and
the political support for it.
For the moment, there is political support in the Congress
for roughly the programs that we have; otherwise, they would
have been dispensed with a while back. But they have not been.
But I think in part it is because the public doesn't understand
how milk is priced. Most Congressmen don't understand how milk
is priced. This is such a byzantine argument that, by and
large, there is sympathy for dairy farmers and for other
farmers. So, by and large, money is voted to help them out.
Now, what some of you are saying is, even as we are voting
it, have we thought through who it is we want to help. Now, I
think, Mr. Paul, you have suggested that essentially--or maybe
Mr. Brey, that small farmers, when we had these general
distributions, don't do particularly well because it is on a
per-pound basis or whatever. The big get more money. That is
true of all Government programs unless we have a very targeted
cap sort of thing.
One of you suggested, well, do a $12.50 general support,
but cap it off. Now, you could work that one to a point, I
suppose, where you has a pretty heavy cap. I mean, it came way
down so that only very small dairy herds were benefited. That
would be a more direct way of keeping all those folks in
business so long as they could make it on other grounds. And
people think about those things from time to time. Then other
people come in and say, well, after all, we have got a herd
that is 80 cows, sort of a good, average herd, or a couple of
hundred, why are we being discriminated against?
Now, you can go around and around, but to the extent that
anyone wants to address this, what about a policy in which we
have no compacts, we have no marketing orders, but we do have a
support price and it is higher, with the thought that some of
you are suggesting that it needs to be, because our costs are
way up, well above $12.50, you are saying, I think, in most
farms. So this is well below cost. It is sort of a safety net,
and we have a national policy. What would be wrong, just
hypothetically say $12.50, and eliminate compacts and eliminate
marketing orders and just say $12.50? Then, if so, what kind of
a cap? Is this for everybody? Does it offer incentives for
overproduction? Some of you were suggesting we want
disincentives for overproduction.
Does anybody have a thought about this? Yes, Mr.
Frydenlund?
Mr. Frydenlund. Mr. Chairman, I would just caution that any
sort of artificial increase in the support price gets us down
the same road that we went in the 1970s and 1980s where the
artificially high support prices led to increased production
and--------
The Chairman. To another whole-herd buyout or something of
that sort.
Mr. Frydenlund. Yes, it is a dangerous way to go. Now, I
don't--if the assistance is somehow managed with some sort of
targeting, that might have less of an impact. But I am not
really sure how that would work.
I do want to just say that I think that the efforts of
members like yourself in Congress that have been pushing for a
global marketplace, or at least pushing for the World Trade
Organization to level that playing field, in the long run I
think that is going to be of more potential benefit for the
entire dairy industry than probably anything else. In fact, I
would argue, without sounding too critical of the entire dairy
industry, that the time and effort that the dairy industry has
spent debating over which way to go on marketing orders and
which way to go on support prices has all been focused upon a
very small--just the domestic market. And I think that the
dairy industry itself has failed to look at opportunities out
in the rest of the world, and that is a much bigger market than
our very limited static number of people here; whereas--and I
know that there are difficulties. For instance, bulk milk is
not probably something that is going to be easily exported, but
even in other commodities, you know, wheat, feed grains, etc.,
the growth opportunities there are more and more becoming in
value-added products, in processed products, than just in the
bulk commodities.
So the same dynamic could exist for dairy, and I think if
we didn't have these programs that basically just keep us
looking inward, there would be a greater incentive to produce
for the world market.
The Chairman. Mr. Brey?
Mr. Brey. Mr. Chairman, what I tried to illustrate in the
example is that the 5-year average per hundredweight is $12.50.
As of this time, we have very little surplus, certainly not in
cheese. And if we would raise that price and keep the $12.50
rather than the $10.10 that we are--why we are here today
talking about the big picture of it, the Northeast Compact in a
sense would not call for itself because it would be coming
from--it would be non-regionalism because we would all be
receiving that $12.50.
We said that wouldn't be on all--I think it should be
capped for the like the family or farm unit--------
The Chairman. Well, how many cows?
Mr. Brey. Probably 2-million pounds, 2- to 5-million pounds
per farm. I take that out of the Minnesota publication, the
university, average--the profit per cow ranges anywhere in
between 50- and 100-cows. Those are the top graphs as far as
income return per cow.
Well, if that is the case, then at a 20,000-pound herd
average, you are at 2- to 3-million pounds per cow. So that is
kind of what that economic unit would be. Then the rest could
be left to--if there is--an export market or something of that
nature. But in order to keep this exodus from losing in our
State alone 20,000 families--and the projection is it will cut
another 10,000 out probably in the next 5-years, just not only
because of age but because of this downward pressure.
The other question that--------
The Chairman. Just let me stop you for a second. Without
putting too fine a point on it, you would say give the $12.50
to farmers that have 100-cows or less, in essence, using the
20,000 times 100-cows or so.
Mr. Brey. Or up to 100-cows.
The Chairman. Up to 100-cows.
Mr. Brey. For everyone.
The Chairman. Now, then everybody else gets whatever the
market price is. In other words, there is no support there. So
at that point, you are on your own. Is that essentially right?
Mr. Brey. Pretty much so.
The Chairman. OK. Please continue.
Mr. Brey. You know, we talk about supply and demand. USDA
projects the projection in 1999 and 2000 will reach 164-billion
pounds. Meanwhile, the commercial use forecast has also been
increased. Commercial use on milk equivalent, milk-fat basis,
including commercial exports, is forecast at 167-billion
pounds, up from last month's forecast.
Well, why are we in such a downward pressure if we are
asked--if the projection is 165-billion and the need is called
for 167-billion? This signal from USDA should say that there is
a demand for milk, bringing this price up, not to where it is
being depressed.
The Chairman. Well, the USDA I think testified yesterday
that the price will go up. It always is lower in January. And
by June or July, if we had the hearing, it would be a more
cheerful group.
But, nevertheless, you know, you have to average these
things over a year. You have these cycles, but maybe not that
much. Likewise, we heard yesterday there is quite a new demand
for cheese. Now, the cheese price, as opposed to the whole-milk
price, is pretty favorable. So, in essence, consumer demand
seems to be increasing for cheese, whereas it is very stable
for whole milk at these prices.
I don't know how that factors into the 164/167, but it is
an important figure. As you say, there may be a little more
demand there.
Yes, Sir?
Mr. Scarlett. Mr. Chairman, I would like to go back to the
purpose of the orders when you are talking about doing away
with orders and only having the price support. The purpose of
the orders there, be ever how many they are, the 31 or now the
11, the purpose of those orders is to provide--make sure there
is a supply for the consumers of milk or dairy products in
those areas and to make sure that is a stable thing.
So I would question highly about going only to a support
price and doing away with the orders because you have different
needs in different parts of the country as far as the consumer
needs. And also, as far as--------
The Chairman. Well, Mr. Scarlett, on that point, some have
testified that even though--you make a good point, and that is
one reason we have had these marketing orders--that milk can be
supplied from other regions fairly rapidly, in other words,
that consumers in Tennessee will not be without milk if
marketing orders don't exist that are that narrow. The 31,
maybe the 11 still gets you there, maybe zero.
I think Mr. Hughes is testifying--and I think you answered
your own question. Would consumers get milk? You said yes. But,
in essence, you are saying not necessarily, as I understand it.
Mr. Scarlett. Well, Mr. Chairman, not necessarily, because
we have talked about the policy of keeping the farms and--of
course, I guess being my size of dairy, I would tend to
disagree with Mr. Brey over there.
The Chairman. His cap is too low?
Mr. Scarlett. The cap. A nice fellow down home, they milk
about 400-head, and he said he never had a cold cookie until he
got married. He didn't know what it was. He didn't get a cookie
when it is hot. He has got give other brothers, and they are
all there. Do you penalize them for all staying on the farm and
saying because they milk more, do you divide it out per person?
I mean, I guess it would raise in my mind some serious
questions about that.
But we have also talked about market policy and what the
consumer wants and what we--you said yourself the consumer
wanted maybe the dairy at X-number of price or 20-percent less
or whatever it happened to be. But as in my testimony, we have
got--another issue to consider is the effect on the rural
communities and the effect on the economies within each State,
and there are many variables to that, that if you eliminate
those, we would have to bring into consideration of does the
consumer--would they rather pay--would they rather have that
milk check coming back to the community and being spent in
there, or would they rather have to pay more for their schools
and pave their roads and direct taxes, or how do we handle some
problems like that?
The Chairman. That is a very important set of questions.
This committee wrestles, if we are on a different subject, on
community development, with just that idea. How do we get more
vitality back in hometown America and get more banks and more
jobs and everything else? A lot of farm families need those
jobs in order to supplement income they have on the farm.
Yes, Mr. Hughes?
Mr. Hughes. Well, I can't answer all of your questions.
They are too heavy . But the idea of having a policy that is
going to keep X-number or all farmers in business is probably
unrealistic, in my opinion. Farmers enter and exit farming for
lots of different reasons. Part of it is the price horizon.
What do they expect their price and income capabilities?
But the experiment in Vermont and in the New England States
with, you know, who has been exiting and what size farms they
are, where they have stabilized and increases prices, looks to
me, based on at least anecdotal evidence, that the smaller-herd
size exit faster in Vermont relative to the U.S. and their
larger herds grow more. So there you are providing that
umbrella for the expansion. Well, why do farmers expand? Well,
they want to have more income units to cover more families, and
you are not going to be able to stand in the way of that
process. And you shouldn't, in my opinion.
The Chairman. Well, it is an interesting question.
Mr. Hughes. On capping, unless, you know, we are going to
get this country to full supply control, which--------
The Chairman. It sort of oversimplifies the question, but
Mr. Scarlett's point on this, if we cap this off at 100-cows at
$12.50 and you have a market price, conceivably consumers would
be happy. The price of milk generally in the country would be
much lower. All the Government money would be going essentially
to one group of people, but not to 300 more cows Mr. Scarlett
has, and so he would be selling a lot of milk very
competitively. That might or might not fit the community
development idea of the checks coming back to Tennessee or
other situations, but it does rationalize the question.
Now, this is one of these things in which there is no
theological answer. Pragmatically, these decisions happen
because Members of Congress push and poll and broker the
situation on behalf of their constituents, as has happened
before. But, nevertheless, as a preface why we are having these
hearings, we came to an impasse last November in which some
people won and other people lost.
Now, people who lost said in order to stop the train of our
filibuster, you are going to have to re-examine this. And many
people are very skeptical about these hearings. I heard some
comment yesterday that we were going through the motions and
that, in essence, nothing is going to happen. Well, maybe so,
maybe not.
As I said at the beginning of the hearing, we will sort of
poll our members, having heard all this testimony and as they
read it and so forth, and see which way they want to move. But
I appreciate very much your candor, a variety of points of
view, the honesty from your own experience that you have
expressed, because, without that, why, we are simply flying
blind. This is a group around this table who want to do good,
but they really need information, and they need facts from
people who are on the firing line.
Does anyone else have a comment? Yes, Sir?
Mr. Paul. I just wanted to make one other comment, Senator.
When we talk about this free trade idea, I don't believe we can
ever expect that the European Union is going to absolutely give
up their subsidies.
The Chairman. Maybe not.
Mr. Paul. They are going to protect their farmers. And I
think the point that was raised by the witness from Tennessee,
this local supply has a great deal of truth to it because you
are not only looking at a local supply of milk, you are dealing
with the people that are involved in those areas and the impact
those people have on that rural economy. As you said yourself,
we are dealing with this rural development. What are we trying
to do? We are trying to put dollars and people back in rural
areas. There are people out there right now, and if we need to
do something with the price of milk so that they can stay there
and keep those local businesses, schools, and so on going, I
think that is--we have got to look at a broader picture than
just simply the price of milk.
The Chairman. Yes, Mr. Hinsdale?
Mr. Hinsdale. Just two brief things. One is I do believe
that many of the services and functions that have been provided
by milk marketing orders in that system will be taken over as
the continued growth and development and consolidation and
expansion of farmer-owned cooperatives. I think farmer-owned
cooperatives are a very important mechanism in the dairy
industry that will continue to become more important and make a
lot of the Government program stuff less relevant.
The second observation in terms of the question of
measuring equality or fairness and what that means, recognizing
the geographical, environmental, and cultural diversities of
our regions, I happen to come from the State that has the most
dairy-dependent economy in the United States of America.
Vermont is more dependent on the milk check than Kansas on
wheat, Florida on citrus, or Indiana on corn. And all the
value-added, whether it is your Ben and Jerry's or your Cabot
cheese and the culture that works in companionship with that,
our average community is less than 3,000 people and our average
community has seven dairy farms. That is how intimate the
relationship is.
So as we move forward with agricultural policy, there will
be regional forms of agriculture, whether it is ethanol
production or dairy production in the Northeast, where there
are certain forms of agriculture that make a disproportionate
contribution to the economy and the culture of the area, which
is why people fight so hard for it. And what we need to find is
to be able to allow in this United States of America different
regions that have different industries that are key to their
regions, to have the opportunity to have initiatives to develop
those resources.
And I think that we need to do that, and I appreciate the
opportunity to be here today.
The Chairman. Thank you.
You had your hand up, Mr. Brey.
Mr. Brey. Just as I don't come to Washington, DC., very
often, and you ask a question and in my quick response
sometimes I do have a slip of the tongue, and I did mean that
the price support should be on all milk and should be capped.
Whenever we go over 3-percent of domestic use, well, then it
should be into the free market sense. And I base that on the
fact that I did mention that milk in the previous 5-years was
at $12.78, and we have cleared the market basically except for
some small powder purchases. So why should we, when we are
projected to be 3.5-billion pounds below domestic production
because of need, why should we be sacrificing a $10 price for
our milk?
The Chairman. Well, I appreciate that point. Obviously, we
were in a hypothetical discussion of targeting. Now, you can't
have it both ways. Either you target or you say all milk. And
so you take Mr. Scarlett into your tent. Whereas, you had it a
little bit excluded earlier on.
Well, I appreciate very much each of you for coming, some
from very long distance and great inconvenience, but you have
added immeasurably to our understanding and I think to our
other colleagues.
So saying, the hearing is adjourned.