**Dairy: Making More Out of Milk**

*Remarks for Bruce I. Knight, Under Secretary for*

*Marketing and Regulatory Programs*

*2007 Dairy Forum*

*International Dairy Foods Association*

*Orlando, FL*

*January 14, 2007*

Thank you, Jim (Green). I appreciate the warm welcome and Connie's
(Tipton) invitation to speak with you this evening as you begin IDFA's
2007 Dairy Forum.

I've been in my new position in Marketing and Regulatory Programs at
USDA for just over five months now. At this point, I'm completing that
"walking the fields" phase of getting to know the lay of the land, when
you've bought or rented a new quarter section---or bought a new plant.

I still have a lot to learn, of course, but this is an exciting time to
be serving American agriculture. And I appreciate the opportunity to
work with AMS Administrator Lloyd Day and Dana Coale who administers the
dairy programs in AMS.

As some of you know, I grew up on a farm near Gann Valley in South
Dakota. I still own farm and ranchland in my home state and have a
cow/calf operation.

But when I was very young, my father owned a small herd, about 20 cows,
I think. I can't remember too clearly.

One of my earliest memories, from when I was maybe four years old, is
going with my older sister to walk the dairy cows in. I can still hear
Dad calling, "Soo, Bossy."

Of course, if my father had maintained that dairy herd, I probably never
would have slid down the slippery slope of politics and wound up in
Washington, D.C.

More recently, I visited Kemps in Minnesota, and Jim showed me around. I
really appreciated his taking the time to educate me. It was quite a
change from what I remember of my dad's operation. As you can imagine, I
was really impressed with the progress in the dairy industry.

It's a healthy industry that provides high quality products to customers
here and abroad. There's been a lot of streamlining and process
improvement. You've increased efficiency and boosted productivity.

**[Changes in the Dairy Industry]{.underline}**

We need to consider these changes as we look at farm policy and
programs. Our agricultural programs actually pre-date my father's little
herd. In fact, most farm programs were begun in the 1930s, which
pre-dates most of us here tonight.

Yet farming has moved far beyond those horse-drawn plow days to GPS and
precision agriculture. And dairying has moved beyond the days when 60
percent of milk marketed went for fluid consumption by customers near
the farms where it was produced.

In the past 25 years, milk output per cow has risen 50 percent, and milk
production has increased by nearly one-third while the number of cows
has declined. Herds are 300 percent larger, but the number of dairy
farms has dropped by 70 percent.

In addition, the product mix has changed. Fluid milk consumption in the
U.S. has declined to 36 percent of output. But per capita cheese
consumption in the U.S. is up 75 percent in the past 25 years.
Production probably topped 182 billion pounds last year and is forecast
to be just slightly higher this year at about 183 billion pounds.

**[Streamlining]{.underline}**

As we all know, the dairy industry has changed, but dairy programs are
still based on the original approaches created 70 years ago. When I was
asked to take on the responsibilities at Marketing and Regulatory
Programs, it didn't have anything to do with my expertise in milk
marketing orders and promotion, beef exports, Johne's disease or animal
ID. Rather, I was asked to bring my experience in improving
organizational structure, strengthening management and streamlining work
processes to a new area.

When I began working on my first farm bill in 1985, I was told that
dairy policy was sacrosanct. Change was not only unlikely; it was
impossible.

Over the past two decades as I've worked on farm policy with Congress,
as a lobbyist and with USDA, I've found that no farm policy is more
constrained or tightly reined in by Congress than dairy policy.

As a federal manager, I have much less flexibility on dairy programs
than with anything else in my portfolio. It's cumbersome and difficult
to make any changes to increase efficiency. That's a challenge. But
we're trying.

For example, I know you want us to reduce the time involved in the
formal rulemaking process for the Federal Milk Marketing Order Program.
The Agricultural Marketing Service has been working on that.

We are committed to shortening the amount of time involved in the
decision-making process and to examining ways we can improve our
responsiveness. (Actually, that's a challenge I will be presenting to
Administrator Day and others.) At the same time, we want to retain the
integrity and the transparency of the process so that all
parties---producers, handlers and the public---can fully participate.

**[Federal Milk Marketing Program]{.underline}**

I want to touch briefly on a few issues related to the Federal Milk
Marketing Order Program. We're still analyzing the proposal submitted by
National Milk Producers Federation and all of the evidence included on
the record of the hearing held last month regarding Class I and Class II
price levels.

Industry comments are due the end of January. So we will be sure to
include these in our analysis.

Of course, we are still involved in the make allowance issue. We issued
an interim final decision late last year. The new make allowances were
scheduled to be used for February prices. But last Thursday, a request
to enjoin the Department from implementing these new make allowances was
filed in District Court. At this time, what I know is that the hearing
will be held in Ohio later this week, and we will await a court
decision. Meanwhile, comments on this proceeding are due this month, and
we will consider them before we issue a final decision on make
allowances.

There are several other hearing proceedings underway as well---fluid
milk product definition and some regional issues that we are continuing
to work on....all on an emergency basis, of course!

As part of our efforts to enhance the transparency of the rulemaking
process, we held a pre-hearing informational session in December to
begin the dialog on all the Class III and Class IV proposals we recently
received. We do understand the need for speed on these proposals, and
this is part of our effort to move more quickly.

**[NAIS]{.underline}**

Another issue that dairy farmers need to be involved in is animal
identification. One of Secretary Johann's top priorities for 2007 is
getting the National Animal Identification System operational. The first
step is premises registration.

Our goal is to get 25 percent of premises registered by the end of this
month.

We're almost there. We have more than 343,000 premises signed up, out of
1.4 million.

I'm sure all of you understand full well just how important it is to
have a modern animal identification system that will enable us to
respond timely to animal disease events---and the critical importance of
being able to trace out and trace back if a problem should arise. We
know that the threat of a foreign animal disease outbreak in the United
States is real, and we need to be prepared since we can't predict when
an outbreak might occur, where it will hit or how severe it will be.

We've been working to make NAIS a system that works for farmers and
ranchers, and we've made some changes in the system in response to
feedback we've received from producers. That includes making clear that
at the federal level, NAIS is a voluntary system. I can't emphasize that
too much.

It's designed, pure and simple, to protect animal health, to protect
consumer confidence, to protect domestic and world markets, and most of
all---to protect producer economic investment and income.

Another point is that producers can choose the extent of their
participation. They can choose to simply register their premises and
stop there. Registering your premises today does not commit you to
participating in the tagging or tracing phases of NAIS down the road.

We've also modified NAIS to increase confidentiality, to ensure that
private business information is safeguarded. In addition, we're doing
all we can to minimize costs, supporting states in making premises
registration free and encouraging multiple options to keep tagging and
tracking costs low.

Ultimately, we need to have a critical mass of producers on board by the
end of January 2009. That will be much more challenging.

I want to encourage you. If you're a dairy farmer, please register your
premises. If you're a processor or handler, encourage the farmers you
work with to register.

I want to hear from you on how this voluntary system needs to meet your
needs---both today and in the future. I want to know about the practical
synergies with NAIS and the technologies you are already using today.

**[2007 Farm Bill]{.underline}**

I want to turn now specifically to the next farm bill. With the
expiration of the 2002 farm bill this year, we have an opportunity to
develop a farm policy that supports today's agriculture.

As I mentioned earlier, we need to focus on agriculture in the 21^st^
Century, not the farms we grew up on or that our parents were raised on,
but the farms and ranches that constitute American agriculture today. We
need to consider carefully what American agriculture needs in the years
ahead.

Seven decades ago when our farm programs were created, we had 6 million
farms.

Today we have 2 million. Further, in 2007, most of our food and fiber
will actually come from about 150,000 farms and ranches.

One in three acres is planted for export. And half the nation's milk
comes from the 4 percent of dairies with 500 cows or more.

In the summer and fall of 2005, the Secretary and other top staff at
USDA met with farmers and ranchers in a series of listening forums to
hear their ideas on future farm policy. We learned that some producers
are very happy with the 2002 farm bill, but others pointed out that
current farm programs produced a very uneven distribution of support,
with regionalized winners and losers. The reality is that sixty percent
of farmers today receive little support under the current farm bill.

As Secretary Johanns has said, we need a farm policy that is equitable,
predictable, and beyond challenge by our trading partners. We're still
in the process of developing recommendations for farm policy, based on
producer recommendations, issue papers and economic analyses of a
variety of options.

I can't say whether there will be a plank on dairy or not, and I can't
predict what Congress will do. Without unity of vision within the
industry, it's difficult to guess what will happen.

Nevertheless, I encourage you to think creatively about where you in the
dairy industry want to go. Given the lack of clear consensus, you could
easily end up with the status quo.

Is this the best choice? If you're a dairy farmer, processor or handler
nearing retirement, maybe so. But if you're looking ahead to 20 or 30
more years in the dairy sector, then what's the optimum policy for you?

**[Globalization]{.underline}**

And as you ponder what dairy policy should be, remember to consider it
in context of the ever-shrinking planet on which we now live. The world
is growing smaller, but international marketing opportunities are
growing larger.

The market for milk products has moved beyond Kalamazoo and Kansas City
to include Kazakhstan, Kuwait and Korea. In fact, South Korea has been
an expanding market for cheese---partly due to the popularity of pizza
there!

Globalization has changed the landscape of our world significantly---and
forever.

Our planet and our lives are more interconnected and interdependent than
ever before.

Instead of local, regional or national markets, we're facing a global
market. American economic writer Thomas L. Friedman describes this
collapse of national barriers to commerce by saying simply that "The
world is flat."

Whatever language you use, we have a new vista before us, and it
stretches not from sea to shining sea but from continent to continent
all around the globe. Greater transparency and the speed and increase in
the flow of information are spearheading greater openness in markets
worldwide. These are global trends we ignore at our own peril.

**[Exports]{.underline}**

Dairy products are a vital part of our export picture. Since the U.S. is
the strongest dairy-producing country in the world, the potential for
export of milk products is tremendous.

With the phase-out of subsidies in the EU, drought in Australia and poor
weather and other difficulties in New Zealand, the U.S. has surged
ahead. We surpassed New Zealand in 2005 as the leading exporter of
nonfat dry milk with exports valued at more than \$557 million---and
exports will be even higher in 2007.

The U.S. is also a top exporter of whey products with estimated exports
valued at nearly \$31 million in 2006. And increased exports are driving
prices up---above \$1.00 per pound for nonfat dry milk and record levels
of more than 40 cents per pound for dry whey.

**[Innovations]{.underline}**

One of the keys to increased exports as well as domestic sales is
innovation. And the dairy industry has been wonderfully innovative.

USDA has helped with dairy promotion and research programs. These
programs are working to stimulate sales and to increase awareness for
future sales.

There are some exciting programs and possibilities---marketing single
serving milk products in vending machines in schools as sugary drinks
are removed and in restaurants. (As a parent I love this one!)

Another promising possibility is increasing sales of yogurt in fast food
offerings.

For cheese producers, the international appetite for pizza seems to be
unlimited.

As we all know, the key to survival in any business, and increasingly in
farming, is innovation. If you don't invest, adapt and grow, you will
die. Those who innovate and find ways to use every last drop of their
product to add value to other foods will have a chance to thrive.

**[Conclusion]{.underline}**

I think 2007 will be a pivotal year for American agriculture and for the
dairy industry. Milk production will remain steady, but exports should
continue strong as global demand continues and the value of the dollar
favors exports. Opportunities for innovative products and marketing
ideas will continue for the domestic market as well.

Discussions on future farm policy will intensify. Will there be changes
in dairy programs? Can the industry come together and recommend a
strategy that moves us forward with programs that will support producers
and processors in today's dairy industry?

I hope so. I'd welcome the opportunity to work with you on a unified
approach.