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S. HRG. 107–216

CONSIDERATION OF THE COMPLEXITIES INVOLVED IN MILD DISTRIBUTION AND PRICING

FROM THE FARM TO THE CONSUMER

HEARING

BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON APPROPRIATIONS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

SPECIAL HEARING

MAY 14, 2001—PHILADELPHIA, PA

Printed for the use of the Committee on Appropriations

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate
(II)

COMMITTEE ON APPROPRIATIONS

TED STEVENS, Alaska, Chairman

THAD COCHRAN, Mississippi

ARLEN SPECTER, Pennsylvania

PETE V. DOMENICI, New Mexico

CHRISTOPHER S. BOND, Missouri

MITCH MCCONNELL, Kentucky

CONRAD BURNS, Montana

RICHARD C. SHELBY, Alabama

JUDD GREGG, New Hampshire

ROBERT F. BENNETT, Utah

BEN NIGHTHORSE CAMPBELL, Colorado

LARRY CRAIG, Idaho

KAY BAILEY HUTCHISON, Texas

MIKE DEWINE, Ohio

ROBERT C. BYRD, West Virginia

DANIEL K. INOUYE, Hawaii

ERNEST F. HOLLINGS, South Carolina

PATRICK J. LEAHY, Vermont

TOM HARKIN, Iowa

BARBARA A. MIKULSKI, Maryland

HARRY REID, Nevada

HERB KOHL, Wisconsin

PATTY MURRAY, Washington

BYRON L. DORGAN, North Dakota

DIANNE FEINSTEIN, California

RICHARD J. DURBIN, Illinois

TIM JOHNSON, South Dakota

MARY L. LANDRIEU, Louisiana

STEVEN J. CORTESE, Staff Director

LISA SUTHERLAND, Deputy Staff Director

TERRY SAUVAIN, Minority Staff Director

SUBCOMMITTEE ON AGRICULTURE, RURAL DEVELOPMENT, AND RELATED AGENCIES

THAD COCHRAN, Mississippi, Chairman

ARLEN SPECTER, Pennsylvania

CHRISTOPHER S. BOND, Missouri

MITCH MCCONNELL, Kentucky

CONRAD BURNS, Montana

LARRY CRAIG, Idaho

HERB KOHL, Wisconsin

TOM HARKIN, Iowa

BYRON L. DORGAN, North Dakota

DIANNE FEINSTEIN, California

RICHARD J. DURBIN, Illinois

TIM JOHNSON, South Dakota

Professional Staff

REBECCA DAVIES

MARTHA POINDEXTER

LES SPIVEY

RACHELLE SCHROEDER

GALEN FOUNTAIN (Minority)

JESSICA ARDEN (Minority)

Administrative Support

ANGELA LEE (Minority)
(III)

CONTENTS

Page

Statement of Dr. Neilson Conklin, Director of Market and Trade Economics,

Economic Research Service, U.S. Department of Agriculture .......................... 1

Opening statement of Senator Arlen Specter ........................................................ 1

Statement of Dr. Conklin ........................................................................................ 2

Prepared statement .......................................................................................... 4

Conditions and prospects for the U.S. dairy industry .......................................... 4

Price support program ............................................................................................. 6

Dairy export incentive program .............................................................................. 7

Imported milk proteins ............................................................................................ 7

Dairy compacts ......................................................................................................... 7

Retail prices ............................................................................................................. 8

Statement of Robert Robinson, Managing Director, Natural Resources and

Environment, General Accounting Office ........................................................... 8

Prepared statement .......................................................................................... 10

Analysis of farm-to-retail prices ............................................................................. 11

Relationship between farm and retail milk prices ................................................ 11

Contacts and acknowledgement ............................................................................. 13

Statement of Arden Tewksbury, Northeastern Pennsylvania farmer ................. 13

Statement of Luke Brubaker, Lancaster County farmer, member, Pennsylvania Marketing Board ........................................................................................ 15

Prepared statement .......................................................................................... 17

Agricultural activities .............................................................................................. 17

Local government activities .................................................................................... 17

Community activities .............................................................................................. 18

State government activities .................................................................................... 18

Position of Brubaker farms ..................................................................................... 18

Statement of David McCorkle, President, Pennsylvania Food Merchants Association .................................................................................................................... 21

Prepared statement .......................................................................................... 22

General comments & introduction ......................................................................... 22

The supermarket business model ........................................................................... 22

The Pennsylvania Milk Marketing Board ............................................................. 22

How the supermarket dollar is spent .................................................................... 32

Statement of Earl Fink, Executive Vice President, Pennsylvania Association

of Milk Dealers ..................................................................................................... 32

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CONSIDERATION OF THE COMPLEXITIES INVOLVED IN MILD DISTRIBUTION AND PRICING FROM THE FARM TO THE CONSUMER

MONDAY, MAY 14, 2001

U.S. SENATE, SUBCOMMITTEE ON AGRICULTURE, RURAL

DEVELOPMENT, AND RELATED AGENCIES, COMMITTEE ON APPROPRIATIONS, Philadelphia, PA.

The subcommittee met at 8:50 a.m., in the James Byrne Federal

Building, Ceremonial Courtroom, 6th and Market Streets, Philadelphia, Pennsylvania, Hon. Arlen Specter presiding.

Present: Senator Specter.

STATEMENT OF DR. NEILSON CONKLIN, DIRECTOR OF MARKET AND

TRADE ECONOMICS, ECONOMIC RESEARCH SERVICE, U.S. DEPARTMENT OF AGRICULTURE

OPENING STATEMENT OF SENATOR ARLEN SPECTER

Senator SPECTER. Good morning, ladies and gentlemen. The

hearing of the Agriculture Subcommittee of the Senate Appropriations Committee will now proceed.

Today we are going to examine the issue of pricing of milk. There

have been wide fluctuations in the price paid to farmers, with the

hundredweight price dropping from more than $16 a hundred

weight to less than $10 a hundredweight. At the same time, the

price of milk to the consumers has gone up, something that I can

attest to personally. At a time when the farmers were getting much

less, I was paying $2.29 for a half gallon, instead of $1.95. These

questions have led the subcommittee to seek this hearing. And

we’re going to be focusing on these pricing arrangements. Senator

Thad Cochran, chairman, has requested that the hearing record

will remain open to timely manner—in a timely manner so that additional statements or questions can be submitted by other subcommittee members.

The issue at hand came into sharp focus in January of 1999 when the price per hundredweight was $16.27, and a month later

it was slightly above $10. At the approximate same time, from

March 1999 to April 1999, the farm price fell 48 cents a gallon, and

the retail price fell only 29 cents a gallon. We will have experts

here from the United States Department of Agriculture, which has

noted that the transmission studies show that farm prices—when

farm prices go up, the transmission factor is much more rapid, reflecting those changes in the retail price than when the price goes
2

down. In the studies of the General Accounting Office have shown

that the change at the farm levels is not necessarily change at the

retail level. The price spread has been increasing, because when

farm prices are trending down, the retail prices are constant or actually increase.

This is obviously a major problem for the Commonwealth of

Pennsylvania where agriculture is the largest industry and dairy

is the single largest component of agriculture. Pennsylvania is the

fourth-largest dairy producer in the nation. There are approximately 9,900 dairy farms which produce $1.73 billion worth of milk

a year. Over the past decade, Pennsylvania’s lost an average of

three to five hundred farms per year. And this is a national problem as well, which warrants concern by the United States Senate,

by the Congress, and especially concern by a senator representing

the Commonwealth of Pennsylvania.

As I think most of you know at this point, President Bush is

going to be visiting in Philadelphia today, which has required us

to advance the hearing and also to condense the hearing. I must

leave here shortly after 10:00 to be with the president, so we’re

going to call all the witnesses in a single panel. If you’d all come

forward—Dr. Neil Conklin, Mr. Robert Robinson, Mr. Arden

Tewksbury, Mr. Luke Brubaker, Mr. David McCorkle, and Mr. Earl

Fink—and our time alloted for each witness is going to be at five

minutes, which is in accordance with the committee practice. The

green light will go at the beginning, and the red light will go on

at the end.

Our first witness is Dr. Neil Conklin, who serves as director of

the market and trade economics division of the Department of Agriculture, Economic Research Service. Dr. Conklin holds a Masters

Degree in agricultural economics from the University of Wyoming

and a Bachelor of Arts in history from Castleton State College in

Vermont. Dr. Conklin, thank you for joining us. Thank you for the

information you have given us in advance of this hearing. The floor

is yours.

STATEMENT OF DR. CONKLIN

Dr. CONKLIN. Good morning, Senator Specter. Thank you. The

Department of Agriculture appreciates your invitation to discuss

retail dairy prices. I will make a brief statement focusing specifically on the issue of retail prices, but I have provided a more complete picture of the current dairy situation for the record.

Farm-level milk prices declined through 1999 and much of 2000,

as you noted. The blend price, on average for the United States, fell

from almost $17 a hundredweight in January of 1999 to a low of

$11.48 in February 2000. Thanks to strong butter and cheese demand, farm milk prices are now rising. The average blend price in

March was $13.64 per hundredweight compared to a price of

$11.63 at the same time last year. Blend prices for Pennsylvania

have shown a similar trend.

Retail dairy prices do not follow farm-level prices on a one-forone basis. This is a point on which even economists agree. There

is no reason to expect retail prices to follow farm prices exactly

since marketing costs, including energy, packaging, and labor, also

affect retail prices and margins. Retail prices for fluid milk as
3

measured by the Bureau of Labor Statistics, were at the same level

this March, as they were in January of 1999. Over the last 2 years,

retail prices have fluctuated upward and downward, but they have

not declined or risen in step with farm prices. As a result, the

farm-to-retail spread has widened.

The Economic Research Service measures the farm-to-retail

spread nationally using a market basket of dairy products. Between January 1999 and March 2001, this spread rose by almost

nine percent, a bit faster than the overall rate of inflation over this

period. Research conducted at USDA and elsewhere has examined,

in some detail, the behavior of farm-to-retail price spreads.

Let me briefly summarize the findings of studies—these studies

at USDA and elsewhere. First, retail price changes for fluid milk

lag behind farm price changes. Second, retail price changes are

asymmetric. That is, retail prices respond more rapidly to an increase in farm prices than they do to a decline in farm prices. For

example, a 1994 USDA study indicated that a $1 per hundredweight increase in farm prices would lead to a $1.04 increase in retail prices within two quarters. A comparable decline in farm prices

would lead to a retail price adjustment of only 59 cents during the

same two quarter period.

Senator SPECTER. The first thing here was what again——

Dr. CONKLIN. A dollar and four cents, Senator. Why this asymmetry in retail price behavior? Economists have cited several factors: one, operation of the Federal price support system. Retailers

might expect that price declines would be temporary if prices fell

to a point where the Federal support system kicked in. This was

hypothesized as an important factor several years ago when Federal support prices were higher than they are today—other factors

include: consumer insensitivity to changes in the milk price at retail, retailer resistance to price changes, changes in marketing

costs, and finally market power.

These factors are undoubtedly all important, but their importance varies over time and across markets. While price spreads do

rise and fall as farm and retail prices change, their long-term trend

has been upward. This is consistent with the observation that price

adjustments between farm and retail level are asymmetrical. Over

the two decades from 1980 to 1999, the spread for fluid milk in the

United States has doubled, rising from about 49 cents per half gallon to $1.03 per half gallon.

Senator SPECTER. Dr. Conklin, your time has expired. I’m sorry.

Dr. CONKLIN. That concludes my remarks.

PREPARED STATEMENT

Senator SPECTER. Your full statement will be made a part of the

record. If you care to summarize the balance, you’re welcome to

take another minute.

Dr. CONKLIN. That did conclude my remarks, Senator. I was

right at the end.

Senator SPECTER. Okay, thank you very much, Dr. Conklin.

[The statement follows:]
4

PREPARED STATEMENT OF DR. NEILSON CONKLIN

Mr. Chairman and Members of the Committee, the Department of Agriculture appreciates your invitation to discuss the impact of dairy policy and programs on producers, processors, and consumers. I will start with a brief overview of the economic

situation in dairy markets. This description provides the context in which dairy policy will operate in the future. I will then review the performance of the major Federal programs operating today: the milk price support program, emergency market

loss assistance programs, and the Dairy Export Incentive Program (DEIP). Three

issues of current interest: dairy compacts, concentrated milk proteins, and retail

prices are then discussed.

CONDITIONS AND PROSPECTS FOR THE U.S. DAIRY INDUSTRY

The Federal Agriculture Improvement and Reform Act of 1996 was passed during

a year when farm milk prices were much higher than in the early 1990’s. Since

then, milk prices have been quite volatile but also rather strong most of the time.

Demand, fueled by strong economic expansion, has grown rapidly, particularly during 1998–2000. When milk production grew particularly fast (like 1997 or 2000),

prices fell to levels similar to the early 1990’s, as production growth out-stripped

demand increases. However, when milk output slowed or slipped, prices quickly shot

to very high levels (like 1998,1999, and probably 2001).

In 1996 and 1997, milk-feed price ratios did not favor normal increases in concentrate feeding and milk per cow. However, the incentive to boost milk per cow

since then has been strong, sometimes very strong, and milk per cow has generally

grown rapidly. When milk per cow has faltered (like recently), weakness was generally caused by forage or weather problems. Modern dairy feeding has become increasingly dependent on top quality forage, and such supplies were very tight in

1997, 1998, and recently.

Changes in milk cow numbers represent a tug-of-war between the dairy farmers

who are expanding their farms or building new ones (mostly large farms with highly

specialized division of responsibilities) and dairy farmers who are quitting dairying

because they cannot generate an acceptable family income. Once either group builds

up momentum, swings in milk cow numbers may persist long after prices have reversed their original course. For example, the sizable decreases in cow numbers in

the mid-1990’s were caused by the relatively low returns of the early 1990’s. These

declines did not slow much until 1999, despite the strong returns of 1996 and 1998.

Similarly, the strong returns of 1996, 1998, and most of 1999 unleashed such a

surge of herd expansions that the low prices of 2000 did not even result in typical

decreases in cow numbers until early this year.

In 2001, milk cow numbers are expected to decline about 1 percent. Dairy farm

exits in late 2000 and early 2001 increased as a result of the low returns of 2000.

Meanwhile, expansion by stronger farms has slowed, partially because of lower returns and partially as an inevitable pause after the rapid growth of 1999–2000. Milk

per cow in early 2001 fell well below a year earlier, the result of forage quality problems, stressful winter weather, and less use of bovine somatotropin. Milk per cow

is expected to recover in coming months but may increase only fractionally for the

year. Milk production is projected to slip slightly for the year, with increases from

a year earlier not coming until late 2001. A large increase is expected in 2002, as

brisk recovery in milk per cow easily outweighs a decline in cow numbers.

Demand growth during the 1998–2000 period was extraordinary. The booming

economy resulted in consumers boosting their spending in restaurants and treating

themselves at home. Commercial use of cheese, butter, and fluid cream grew rapidly

in the face of relatively high consumer prices during most of the period. Overall

sales of milkfat rose at an annual rate of almost 3 percent. Not all dairy products

had as strong demand, however. Use of fluid milk and most perishable manufactured products were stagnant, while use of skim solids in processed foods fell. Sales

of many nonfat or lowfat foods, that had used larger amounts of skim solids in the

mid-1990’s, fell sharply, and imported concentrated milk proteins may have been

substituted in some uses. Even so, commercial use of skim solids rose faster than

did population during this period.

Demand for dairy products continues to increase in 2001, although growth may

not be as strong as it was. The economy has developed a number of weaknesses,

and consumer confidence has slipped. But, economic growth is expected to continue,

and consumers are likely to want more dairy products. Demand in 2002 is a bit

more uncertain but a sharp slowdown is not expected.

With 1998 production increasing only slightly, strong demand shot average 1998

farm milk prices up about $2 per cwt to a record $15.50. Although production grew

sharply in 1999, milk prices did not really catch up with demand and decreased only
5

about $1 per cwt. Milk prices ultimately collapsed in late 1999 and 2000—but only

after increases in milk output over a 2-year span reached 6–7 percent. Because of

the large increases in wholesale butter and cheese prices since the start of the year,

milk prices in 2001 are now projected to rise almost $3 per cwt, back above the 1999

level. If milk production grows as expected in 2002, milk prices probably will decline, maybe $1 or a bit more.

Prices of nonfat dry milk have been the glaring exception to the general pattern

of volatile but mostly strong prices. Powder prices have stayed close to the support

purchase price since late 1998. While government removals of butter and cheese

have been minimal, the surplus of nonfat dry milk was large. Removals of nonfat

dry milk during the current marketing year are projected at about 500 million

pounds, down from the almost 700 million a year earlier but still quite large. The

surplus of skim solids this year will be 3–4 percent of production, compared with

almost no removals of milkfat. Commodity Credit Corporation’s (CCC) uncommitted

inventories of nonfat dry milk in early May had reached 552 million pounds and

were still growing.

Retail dairy prices rose relatively rapidly during 1998–99, reflecting soaring

wholesale and farm prices during 1998 and only slight moderation in 1999. Retail

prices increased almost 4 percent in 1998, followed by a boost of almost 6 percent

in 1999. The farm-to-retail spread fell about 2 percent in 1998, as retail price increases lagged farm prices. However, the spread then jumped about 12 percent with

the softer farm prices of 1999. The spread rose about 5 percent in 2000, as retail

prices were about steady in the strong economy, while farm prices were low. In

early 2001, retail dairy prices were about 2 percent higher than a year earlier even

though the farm-to-retail spread was lower. Further price rises during the rest of

the year. For the year, retail prices are projected lift average 2001 dairy prices 3–

4 percent, even though the farm-to-retail spread is expected to continue somewhat

below a year earlier.

Although concentrate feed prices and forage costs have varied significantly and

many other costs have risen steadily, milk prices have been responsible for most of

the swings in net returns to dairy farming in recent years. Returns in 1996 were

well above those of the early 1990’s. Lower 1997 milk prices reduced returns considerably, but they stayed above the early 1990’s. The higher milk prices and lower

feed costs in 1998 and 1999 boosted dairy returns sharply. However, the low milk

prices of 2000 reversed the pattern sharply, probably dropping returns to levels

below those of the early 1990’s. In 2001, concentrate feed prices are projected to be

about the same as 2000’s modest levels. Although forage costs will be higher, stronger expected milk prices will increase net returns considerably, probably back to near

those of 1999. Net returns in 2002 probably will not match those of this year but

are expected to be moderately favorable.

Dairy farmers have been cautious about debt since the 1980’s. Debt loads have

remained fairly low relative to debt capacity, possibly a response to the volatility

of prices and returns in recent years. The 1999–2000 expansions by stronger producers were funded to a significant degree by the 1998–99 returns. These moneys

probably were also used to reduce earlier debt. Dairy farm debt may have risen

some in 2000 because of all the new or expanded operations, but the increase probably was not large.

Since 1996, both the number of operations with milk cows as estimated by the

National Agricultural Statistics Service, USDA and the number of farms selling

dairy products as estimated by the American Farm Bureau Federation have fallen

about 6 percent per year, similar to or slightly slower than the declines of the early

1990’s. This continuing long-term decline represents a mix of individual farms combining into multi-operator farms, purchase of dairy farms by neighbors, and the exit

of facilities from dairying.

During the next 10 years, milk production is expected to grow slowly, about 1 percent or a little more per year. Although it is no longer as easy to boost milk per

cow by simply feeding more grain, advances in management, nutrition knowledge,

and genetic potential of the cows imply that strong increases in milk per cow are

likely to continue, probably at trend rates similar to the past. Growth in milk per

cow may not be as steady as the past, however. Milk cows are more geographically

concentrated than in the past. Although these concentrations are widely scattered,

local weather conditions may have more effect on the national average than in the

past. In addition, modern feeding may have made milk per cow more sensitive to

variations in forage quality than it was during most of the post-World War II period.

Milk cow numbers are expected to decline slowly, representing the net effects of

diverging patterns by different groups of dairy farmers. The split between the large,

industrially organized farms and the generally smaller traditional farms probably

is the widest seen in the dairy industry since larger, more heavily capitalized and
6

specialized dairy farms replaced small dairy enterprises on general farms in the

1950’s and early 1960’s. Most traditional operations will stay viable for the foreseeable future, but they will be challenged to reduce costs enough to generate an adequate family income.

Growth in the western dairy industry probably will be more constrained than in

the past by urban pressures, environmental restrictions, fewer places to develop totally new dairy industries, and (most importantly) availability of top-quality alfalfa

hay. These factors will not keep the West from producing more milk, but expansion

may be somewhat slower. However, development of ‘‘new style’’ dairy farms east of

the Rockies may accelerate. Dairying is moving back to parts of the Great Plains,

and new large farms have proven quite competitive in northern dairy areas.

Demand for dairy products is expected to continue to increase slowly. A growing

population will demand more dairy products, particularly with Hispanics contributing a significant share of the population growth. Cheese demand shows no sign

of slowing and will continue to be the main source of strength in total dairy product

demand. Demand for butter and other milkfat products undoubtedly will not maintain its extraordinary strength of recent years, but is expected to stay fairly good.

Milkfat and skim solids can provide significantly improved quality to a wide variety

of processed foods with only a very modest impact on ingredient costs. On the other

hand, demand for fluid milk seems likely to stay stagnant unless its slipping status

in the beverage market can somehow be reversed.

Growth in commercial use of dairy products is projected to keep pace with the increases in milk production only if farm milk prices rise somewhat more slowly than

the general inflation rate. However, this price erosion is not expected to be large,

nothing like the decreases that occurred in the 1980’s and early 1990’s. It seems

likely that prices probably will continue to be more variable than in the past, in

part because growth in output is unlikely to be synchronized with growth in demand

and in part because a much larger and a growing share of dairy products is traded

under contract or some other standing arrangement. Spot markets are not likely to

regain the liquidity that they enjoyed as recently as the 1970’s.

PRICE SUPPORT PROGRAM

The price support purchase program has been largely unchanged since 1949, offering to buy as much butter, cheese, and nonfat dry milk as anyone wishes to sell

to CCC at announced prices. These prices are set so as to allow plants of average

efficiency to pay at least the support price for manufacturing grade milk during the

year. Since butter and nonfat dry milk are joint products of milk, any pair of support purchase prices for the two products that will return the combined value needed to support milk prices. In the past, relative prices of butter and nonfat dry milk

prices generally were adjusted in an attempt to equalize the relative size of the

milkfat and skim solids surpluses.

The 1996 Act specified that the support price for milk would remain at $9.90 per

cwt, but only through 1999. At the end of 1999, the purchase program would be

eliminated, and a recourse loan program would begin at prices equivalent to the

former support price. At that time, it was projected that market prices would only

occasionally be close to the support price and that purchases would not be large.

In general, those projections have proven accurate.

Since enactment of the 1996 Act, subsequent legislation modified it significantly.

The support purchase program was extended and the loan program delayed, first

until the end of 2000 and then until the end of 2001. In addition, there have been

three Market Loss Assistance Programs. These programs differed slightly, but basically made cash payments to producers based on their historic milk production. Payments totaled $200 million in 1998, $125 million in 1999, and an estimated $675

million in 2001. In 1998 and 1999, payment was limited to the first 2.6 million

pounds of milk produced on a farm, while the latest program limit was set at 3.9

million pounds.

The very large surplus of nonfat dry milk in recent years, while butter markets

have been very tight with market prices reaching as much as four times the support

purchase price, would seem to argue for a decrease in the support purchase price

for nonfat dry milk and a corresponding increase in the support purchase price for

butter. Relative support prices remain little changed since the early 1990’s, when

a series of shifts were implemented to correct what had been a large butter surplus.

A lower price of nonfat dry milk would stimulate use of skim solids in all products,

reduce the incentive to import such products as concentrated milk proteins, and possibly stimulate commercial exports of nonfat dry milk. It would also help address

the continuing imbalance between the price of milk for cheese (Class III) and the

price of milk for butter-nonfat dry milk (Class IV) in Federal order markets. Class
7

III and Class IV pricing remains under review within the Department, looking at

such matters as make allowances, determining product prices, and pricing of components among other questions.

The National Milk Producers Federation, among other organizations representing

dairy farmers, has proposed extending the support purchase program, at least

through the remainder of the 1996 Act. The impacts of such an extension would

vary considerably, depending on market conditions, adjustments to relative purchase prices of nonfat dry milk and butter, and the level of support price specified.

DAIRY EXPORT INCENTIVE PROGRAM

Since July 1, 2000, we have had to comply with the full World Trade Organization

(WTO) commitments to limit subsidized exports. This holds our exports under the

Dairy Export Incentive Program (DEIP), plus any Government export sales, to

68,201 metric tons of nonfat dry milk, 3,030 metric tons of cheese, 21,097 metric

tons of butter or its equivalent in milkfat, and no dry whole milk. During the negotiations, we told other WTO members that we intended to apply these limits to the

quantities covered by contracts accepted during the year. By not being very rigid

about the timing of actual shipments, we increased the flexibility of exporters in

meeting the needs of importing countries as well as simplifying enforcement. In recent years, we have almost fully contracted for the allowed exports of all products

except butter, where very tight domestic markets have made domestic manufacturers uninterested in committing to DEIP sales.

Before July 2000, we allowed certain amounts of unused commitments from earlier years to be ‘‘rolled over’’ into new allocations, similar to actions taken by the

European Union. However, we did not roll over quantities of products that were contracted but not actually shipped for whatever reason. This would have been a

change in the understood commitment to other WTO members, and it was not clear

that these quantities would have been shipped if additional allocations had been

available.

With the continuing large surplus of domestic skim solids, part of the dairy industry have asked if new allocations representing these unfilled contracts could be

made. In addition to the earlier objections, we interpret the agreement to say that

roll-over was allowed only during the completed transition period.

IMPORTED MILK PROTEINS

A wide variety of concentrated milk products are imported into the United States,

ranging from casein and caseinates to total milk protein to milk protein concentrate

(MPC). Casein and total milk protein are precipitated from skim milk, while MPC’s

are produced, in a variety of protein contents, by membrane filtration of skim milk.

In recent years, total imports of these products have grown somewhat as declines

in casein imports have been outweighed by rapid increases in MPC imports. MPC’s

evidently have substituted for casein in some uses, as well as benefited from a growing market for sport and nutritional drinks. However, they probably have also substituted for domestic skim milk solids in some uses. In addition, there is concern

that they are being used to produce standard varieties of cheese, a technical violation of Food and Drug Administration standards of identity.

Concentrated milk proteins have never been covered by import restrictions. In

part, this was because casein and caseinates, unlike milk powders, were declared

not to be primary agricultural products under the General Agreement on Tariffs and

Trade and were therefore subject to more stringent restrictions on limiting import

access and a ban on export subsidies. The status of milk protein concentrates is unclear since they share some of the characteristics of both casein and milk powders.

The tariff-rate quotas (TRQ’s) that resulted from the Uruguay Round Agreements

were clear WTO market access commitments of the kind we expect other countries

to adhere to closely. Any change in the application of those TRQ’s might involve intricate negotiations with other countries. Together with the U.S. dairy industry, we

are considering remedies, consistent with our international trading obligations, to

see what can be done about increased MPC imports.

DAIRY COMPACTS

The Northeast Interstate Dairy Compact (the Compact) was authorized by the

1996 Act to include the six New England states: Connecticut, Maine, Massachusetts,

New Hampshire, Rhode Island, and Vermont. Under certain conditions, up to 6 additional States could be added with Congressional approval. Authority for the Compact was to terminate with the implementation of Federal Milk Marketing Order

reform. Legislation passed by Congress in 1999 extended the duration of the Compact to September 30, 2001, but did not add states to the existing Compact. Also
8

introduced in 1999 was legislation to allow establishment of a southern compact but

no action was taken. May 2001 sees legislation to extend and expand the Compact

and also to establish a compact of 14 States in the South. The States to be included

in the southern compact area are Alabama, Arkansas, Georgia, Kansas, Kentucky,

Louisiana, Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, Tennessee, Virginia, and West Virginia.

Economic effects of the existing Compact and other possible compact areas have

been estimated and reported in several studies. The Office of Management and

Budget (OMB), the University of Missouri, the University of Vermont, the University of Massachusetts, the Pennsylvania State University, and most recently, the

University of Connecticut have conducted studies since 1998. The general conclusions of these studies are similar:

—Milk producers in the compact areas, and those outside that supply milk into

the areas, receive a higher farm milk price and respond by increasing production.

—Higher retail prices in the compact areas reduce consumption of fluid milk so

that more milk is available for manufacture into products such as butter and

cheese.

—Farm milk prices outside compact areas are reduced.

RETAIL PRICES

Since 1996, retail prices for all dairy products (as measured by the Bureau of

Labor Statistics) increased an average of 3.1 percent, with fluid milk prices rising

2.8 percent and other dairy product prices rising 5.3 percent. In comparison, the annual average increase for all food at retail was 2.5 percent. General inflation, measured by the Consumer Price Index, has increased 2.4 percent per year over the period.

Year-to-year increases in retail prices varied considerably, from a high of 6.0 percent in 1999 to a low of 0.6 percent in 2000. Similarly, rises in fluid milk prices

ranged from 6.2 percent to 0.2 percent. Prices of other dairy products rose at a faster pace, ranging from 9.2 percent in 1998 to 2.1 percent in 2000. In contrast, retail

price increases for all foods have been relatively steady at 2.1–2.6 percent.

Retailers, and processors to a lesser extent, tend to resist price changes, partly

because of the direct costs and partly from fear of adverse consumer reaction. Retail

prices lag farm prices, whether prices are rising or falling. These lags help to explain the erratic changes in farm-to-retail spreads in recent years. Over the long

run, the spread has risen just slightly less than the general inflation rate.

Mr. Chairman, that completes my review of the current market situation for milk

and the immediate issues facing the principal Federal dairy programs. I note that

the programs reviewed here are supplemented by many other Federal programs

that affect milk producers and the dairy market, including risk management programs, food assistance programs, trade programs other than DEIP, promotion programs and research and extension programs. I would be pleased to respond to questions.

Senator SPECTER. We turn now to Mr. Robert Robinson, managing director of the National Resources for the Environment at

the U.S. General Accounting Office, graduated Phi Beta Kappa

from the University of Maryland in 1973. Thank you for joining us,

Mr. Robinson. The floor is yours.

STATEMENT OF ROBERT ROBINSON, MANAGING DIRECTOR, NATURAL

RESOURCES AND ENVIRONMENT, GENERAL ACCOUNTING OFFICE

Mr. ROBINSON. Thank you, Mr. Chairman. In my remarks today,

I’d just like to make just a few key points. At the outset, it is important to understand the price consumers and the price farmers

receive for milk in this country is the result of an extraordinarily

complex interaction of government program rules, price classes, a

multitude of private-sector entities, and variations in milk markets;

and hard data to discern exactly what is happening in this complex

mix, including what costs are being incurred and what profits are

being made, is very limited. In this context, during the course of

our work, we cobbled together the best information available from
9

many different sources to lay out as clear a picture as we could on

milk prices across the country, including Philadelphia.

Although our report was nearly 200 pages long and contains a

vast amount of detail, a few basic observations jumped out. First,

nationwide and in the Philadelphia market, farmers receive about

42 percent of the price consumers pay for milk at the store. At the

time of our analysis—again, two-percent milk cost about $2.50 at

the store, and, therefore, the farmer’s share of that was about a

dollar. Second, we found, in most of the milk markets we examined, the difference or spread between what the farmer received for

milk and the retail increased over the 26-month period governed by

our analysis. In some markets, such as New Orleans and Denver,

the price spread increased dramatically, by about 47 cents. In other

markets, such as Philadelphia, the increase in the price spread was

less pronounced, but still increased by about 13 cents. The increase

in the price spread resulted largely from farm prices trending down

over the period while retail prices either stayed constant or trended

higher. Third, at any given point in time——

Senator SPECTER. Would you repeat that last statement, Mr.

Robinson?

Mr. ROBINSON. The increase in the price spread resulted largely

from farm prices trending down over the period while retail prices

either stayed constant or trended higher.

Third, at any given point in time, we found that changes in farm

prices were not always mirrored by similar price changes at the retail level. By that, I mean reductions in prices received by farmers,

for example, generally did not translate into lower prices paid by

consumers. As milk moved farther from the farm, the relationship

between changes in what the farmer received and changes at other

levels in the marketing chain weakened. Other factors began to

more prominently influence the price.

This marketing chain for milk is composed of four basic parts:

the farmer, the dairy cooperative, the wholesaler, and the retailer.

As the milk leaves the farm, each entity performs certain functions

for which they, of course, receive a payment. Collectively, these

links in the chain beyond the farmer received about one and a half

times what the farmer received for a typical gallon of milk.

In our study period, again, while the farmer received about a dol- lar of the $2.50 final price, the other entities collectively received

about a dollar and a half. The breakdown of this dollar-fifty was

as follows: cooperatives such as Land O’ Lakes, on average received

about 25 cents; wholesalers such as Suiza Foods received about 75

cents; and finally, retailers such as Acme and Pathmark on average

added about 50 cents to the price, bringing the price of that original dollar gallon of raw milk provided by the farmer to $2.50.

PREPARED STATEMENT

To recap, Mr. Chairman, our work showed two basic things: the

price spread between farm and retail prices increased during our

2 year study period, and reductions in prices received by farmers

did not always translate into lower prices to consumers. While

changes in the farm price have some influence on the retail price

of milk, in comparison to other factors this influence has proved to

be limited. Thank you.
10

1We are currently updating the information included in the October 1998 report, at the request of Senators Feingold and Leahy, and expect to issue our updated report in June 2001.

[The statement follows:]

PREPARED STATEMENT OF ROBERT A. ROBINSON

Mr. Chairman and Members of the Subcommittee: Thank you for the opportunity

to discuss our work on fluid milk prices. Our statement today is based primarily

on our October 8, 1998, report entitled Dairy Industry: Information on Prices for

Fluid Milk and the Factors That Influence Them (GAO/RCED–99–4).1 As you know,

the process by which milk prices are set is a very complex one. This is because milk

prices are influenced by a variety of Federal and State programs that regulate the

production and sale of milk and because several entities are involved in the process

of moving milk from the farm to the consumer. Each of these entities—dairy farmers, cooperatives, wholesale milk processors, and retailers—perform distinct functions relating to the processing and marketing of milk, and each receives a portion

of the price of milk. At your request, our comments today will focus on the relationship between farm-level and retail-level milk prices and the factors that influence

the price of milk as it moves from the farm to the consumer.

In summary, for the period January 1996 through February 1998, we found the

following:

—On average, farmers received about 42 percent of the retail price of a gallon of

2-percent milk (the most frequently purchased milk), and retailers received

about 17 percent; the spread between farm and retail prices increased in most

of the markets we reviewed.

—Changes in fluid milk prices at the farm level generally did not mirror similar

price changes at the retail level in most markets. This is because as milk passes

through various processing, packaging, and distribution stages after it leaves

the farm, a variety of other factors begin to influence its price. For example,

at the wholesale level, the costs of pasteurization, packaging, and transportation, have a major influence on milk prices, and at the retail level the pricing

strategies used by other retailers may have a significant influence on the prices

that consumers pay for milk at the grocery store. Consequently, as milk moves

farther from the farm, farm prices may have less of an impact on prices than

these other factors.

BACKGROUND

U.S. dairy farmers produce about 20 billion gallons of raw milk every year. The

top four milk-producing States in the United States are California, Wisconsin, New

York, and Pennsylvania. About 7 billion gallons of the nation’s milk is used to

produce fluid milk products such as the four kinds of milk—whole, 2-percent, 1-percent, and skim milk—as well as buttermilk and flavored milk, yielding about $22

billion in retail sales annually. Sales of 2-percent milk sold in gallon containers account for the largest volume of retail fluid milk sales in the United States.

Fluid milk reaches the consumer by a variety of pathways. Dairy farmers who

produce the raw milk used in fluid products can (1) market it through dairy cooperatives, (2) sell it directly to wholesale milk processors, or (3) process it into fluid

milk for direct sale to consumers. Most milk produced by dairy farmers in the

United States is marketed through dairy cooperatives. Dairy cooperatives, in turn,

can either sell, or arrange the sale of, raw milk purchased from farmers to wholesale milk processors, or they can process it into fluid milk and distribute the fluid

milk to retail outlets themselves. Wholesale milk processors process and package

the raw milk into fluid milk, which they then distribute to retail outlets. Wholesale

milk processors include independent bottling plants or retail food chains that own

bottling plants. Retail outlets purchase fluid milk from processor for direct sale to

consumers.

Most milk produced in the United States is regulated under either Federal or

State programs. These programs ensure that farm prices do not fall below a minimum level and provide a safety net for individual farmers who lack market power

compared with other entities, such as wholesale milk processors and retailers. The

primary Federal programs include the milk marketing order and dairy price support

programs. Currently, about 70 percent of the milk produced in the United States

is regulated under the Federal milk marketing order program. The Federal program

sets minimum prices that can be paid to farmers for unprocessed, fluid-grade milk

in specified marketing order areas.
11

2The four usage classes are Class I for fluid milk; Class II for soft manufactured dairy products such as yogurt and ice cream; Class III for hard cheese; and Class IV for butter and powdered milk. 3 In addition to Federal and State regulatory programs that set minimum milk prices, in 1996,

the Congress approved the creation of the Northeast Interstate Dairy Compact for six New England States. The Compact supplements Federal and State programs by setting the minimum

price to be paid to farmers for fluid milk marketed in the six-state area. The Compact is scheduled to terminate, unless reauthorized, by September 30, 2001. 4For the 1998 report, our detailed analysis focused on data for 2-percent milk; consequently

our results may not reflect pricing patterns and trends for whole, 1-percent, and skim milk. 5 Except for one market where retailers received a negative return because milk was being

used as a loss leader.

These prices vary by the class of product for which the milk is used, and, for some

classes, the minimum price also varies by location.2 Some areas, such as California,

which are not under the Federal milk marketing order program, are covered by

State programs. In these areas, dairy farmers are paid the minimum milk prices

that are established by the state government. These minimum prices may be higher

than Federal minimum prices.3

Dairy farmers selling milk within a Federal milk marketing order receive an average price, or blend price, that is based on the weighted average of the four usage

classes for all the raw milk sold in that marketing order. The average price of milk

they receive depends, in part, on the extent to which the total milk supply in a specific area is being used for fluid or manufacturing purposes. Buyers of milk regulated by Federal and State programs are permitted to pay farmers prices in excess

of the established minimums—known as over order premiums. Any such excess payments are determined by market forces.

ANALYSIS OF FARM-TO-RETAIL PRICES

In our 1998 report, we analyzed milk prices for the period January 1996 through

February 1998, for 31 selected markets across the country, including the Philadelphia, Pennsylvania, market. We found that on average, farmers received 42 percent

of the retail price for a gallon of 2-percent milk, cooperatives received 10 percent,

wholesale milk processors received 31 percent, and retailers received 17 percent.4

However, the portion received by those in various stages of the milk marketing

chain varied substantially among the markets. For example, the portion of the average retail price that farmers received ranged from about 31 to 54 percent, and the

portion that retailers received varied between about 4 and 31 percent.5 For the

Philadelphia market, we found that farmers, on average, received 42 percent of the

retail price of a gallon of 2-percent milk and retailers received 20 percent.

Furthermore, we found that retail prices for a gallon of 2-percent milk remained

constant or increased in 27 markets and decreased in 4 markets during the review

period. In contrast, farm prices decreased in 27 markets and remained constant in

4 markets. As a result of these price changes, the spread between farm and retail

prices had increased in 27 of the 31 markets over the 26-month period we reviewed.

In the Philadelphia market, we found that between January 1996 and February

1998 the farm-level price had decreased by about 13 cents while retail prices had

remained constant. As a result, the difference between farm and retail prices had

increased by about 13 cents per gallon.

In addition, retail prices for the four kinds of milk—whole, 2-percent, 1-percent,

and skim—varied significantly in the 31 markets we reviewed. For example, in some

markets, 1-percent milk was the lowest-priced milk sold at the retail level; in other

markets, skim milk was the lowest-priced milk; and in still other markets, the lowest-priced milk sold in retail stores shifted among 2-percent, 1-percent, and skim

milk. For the period we reviewed, in the Philadelphia market, skim milk was the

lowest-priced milk sold, averaging about $2.31 per gallon and whole milk was the

highest-priced, averaging about $2.58 per gallon.

RELATIONSHIP BETWEEN FARM AND RETAIL MILK PRICES

In 1998, we reported that for the period January 1996 through February 1998,

changes in prices at any given stage in the milk marketing chain were most often

reflected in changes in prices at the next stage. For example, in most of the markets

we analyzed, there was a strong correlation between changes in farm prices and

changes in cooperative prices—the next stage in the milk distribution process. Similarly, changes in wholesale prices generally correlated with changes in retail prices.

In contrast, changes in prices received by farmers less frequently correlated with

changes in retail prices. This is because as milk moves from the dairy farm to the

consumer it passes through various processing, packaging, and distribution stages,
12

and many factors other than the farm-level price begin to influence fluid milk prices

at each subsequent stage. In particular, we found that supply and demand forces

influence milk prices at all stages of the milk marketing process; however, the following factors influence milk prices at each particular stage:

—Federal and State dairy programs have a major influence on farm-level prices

for raw milk used in fluid products. These programs provide farmers with the

assurance that milk prices will not fall below the government-set minimums

and therefore may play a significant role in the production decisions of dairy

farmers.

—The price that cooperatives charge wholesale milk processors for fluid milk is

influenced not only by the minimum price established by Federal and State

milk marketing order programs but also by the services that the cooperatives

provide to the wholesale milk processors. Cooperatives generally sell raw milk

that will be used for fluid purposes to wholesale milk processors at prices above

the Federal or State minimums. This higher price, in part, compensates cooperatives for the services they provide to wholesalers. These services include

(1) transporting milk from different milk-producing areas, (2) scheduling milk

deliveries to coincide with demand, and (3) standardizing the component content of milk deliveries. In addition, cooperatives may be able to sell milk to

wholesale milk processors for a price higher than the government-set minimum

price because they have greater market power compared with the wholesalers.

One of the primary reasons dairy farmers become members of cooperatives is

to benefit from the cooperative’s greater bargaining power.

—Processing, packaging, and distributing costs have a significant influence on the

wholesale price of fluid milk, in addition to the wholesaler’s need to earn a normal return on investment. Processing services provided by wholesale milk processors include pasteurization, homogenization, and the standardization of butterfat and nonfat solids in flavored milks, buttermilk, whole, 2-percent, 1-percent, and skim milk. Wholesalers also incur costs for packaging these products

into a variety of types and sizes of containers and arranging for their distribution to retail outlets for sale to consumers. Costs of distribution may be significantly higher in rural markets compared with urban markets because smaller

quantities of milk have to be transported over longer distances. Some wholesalers also provide different levels of in-store service in addition to shipping the

products to retailers—such as unloading the milk at the store dock, restocking

the dairy case, and removing outdated and/or leaking containers. Differences in

any or all of these factors will be reflected in differences in wholesale-level

prices.

—Retail prices for fluid milk are influenced not only by certain factors that generally apply to all retailers but also by specific considerations at individual retail outlets. The retail-level factors that generally influence price include the

wholesale cost of the product; retailers’ operating costs, such as labor, rent, and

utilities; and their need to earn a normal return on investment. In addition, the

size, age, tastes, and income levels of the population in the marketing area and

the prices of substitutes will influence how retailers set prices for milk. For individual retail outlets, other considerations may influence the manner in which

retail prices for milk are set. To meet their stores’ goals, such as profit maximization and increased market share, individual retailers may use a number of

strategies for pricing fluid milk. In developing these pricing strategies, retailers

consider a variety of factors beyond their operating costs, such as the prices

charged by their competitors, the role that milk prices play in attracting customers to their stores, the convenience offered by their store compared with

other stores, and their desire to build an image of quality or low prices for their

stores. Those retail pricing strategies that are primarily based on a retailer’s

operating costs are generally referred to as vertical pricing strategies, whereas

those strategies that are based on responding to prices charged by competitors

are referred to as horizontal pricing strategies. Retailers generally use a combination of horizontal and vertical pricing strategies when setting prices for

fluid milk.

In conclusion, Mr. Chairman, our work shows that while the farm price of milk

has some influence on the retail price, other factors may ultimately have a greater

influence on the retail price. Given that farm prices account only for about 40 percent of the retail price, there is adequate opportunity for other factors, such as

wholesale processing costs and retail pricing strategies, to significantly influence the

other 60 percent of the retail price.

That concludes our prepared statement. If you or other Members of the Subcommittee have any questions we will be pleased to respond to them.
13

CONTACTS AND ACKNOWLEDGEMENT

For future contacts regarding this testimony, please contact Lawrence J. Dyckman

or Anu Mittal on (202) 512–5138. Individuals making key contributions to this testimony and/or the report on which it was based include Jay Cherlow, James Dishmon,

and Jay Scott.

Senator SPECTER. Would you repeat that last sentence again,

please?

Mr. ROBINSON. While changes in the farm price have some influence on the retail price of milk, in comparison to other factors, this

influence has proved to be limited.

Senator SPECTER. Limited?

Mr. ROBINSON. Yes, sir.

Senator SPECTER. Our next witness is Mr. Arden Tewksbury,

who serves as president of Progressive Agriculture and operates a

dairy farm in northeastern Pennsylvania. Mr. Tewksbury is an extraordinarily active advocate for farm interests. And it’s about time

he came to Philadelphia to see me, because I’ve been to his farm

on many, many occasions in my travels around Pennsylvania. And

I regret the early hour but, in self-defense, let me say that there

are many mornings when I leave my house at 6:00 or shortly before

to get to Northeastern Pennsylvania. We welcome you here, Arden,

and look forward to your testimony.

STATEMENT OF ARDEN TEWKSBURY, NORTHEASTERN PENNSYLVANIA

FARMER

Mr. TEWKSBURY. The only difference, Senator, is when you leave

Philadelphia to come to Northeastern Pennsylvania, you usually

know where you’re going to end up at when you get there. When

I came in to Philadelphia for the first time in 25 years, I ended up

in Camden, New Jersey.

Senator SPECTER. Then I compliment you doubly, because you’re

right here and on the spot and—you’re early, as a matter of fact.

Mr. TEWKSBURY. I left at 4 o’clock this morning to be here, but

that’s beside the point.

Senator SPECTER. However, 4 o’clock is late for you, Arden.

Mr. TEWKSBURY. We appreciate the opportunity to appear before

you, Senator, and we don’t have written testimony. We are going

to submit to you and your committee several suggestions that we

have on this overall problem. And I think the comments we’ve

heard so far from your two previous speakers certainly speaks very

clear as to a lot of the problems we have, but not all of the problems, and I’m going to relate to some of the other problems, if I

may be permitted to do so.

And as you said, we’ve been in advocacy. We have talked to

120,000 consumers in the last 26 months. And outside of six of

them, they all agreed they would pay a higher price for milk if they

knew it was going to go to the dairy farmers. They don’t say what

that price should be, except a higher price if it would go to the

dairy farmers. I think they have the feeling—and it’s not necessarily that true in Pennsylvania because of the marketing board

establishing prices here—but I think they have the feeling—and we

talked to a lot of consumers in Brooklyn and Staten Island and

New Jersey, and they have the feeling that the farmers are not

definitely getting their fair share of the price of milk that they buy

at the stores. And something has to be done.
14

And the fact that now, in the northeast corridor here, that production is down 5.2 percent, Senator, from a year ago, indicates

that there’s a real problem surfacing in their dairy industry. So we

think the time has come for senators, like Senator Specter and others, to reintroduce legislation, like you did a couple of years ago,

to bring in the dairy farmer’s cost of production into a new pricing

formula that would allow our dairy farmers to get a fair price, not

only for milk used as fluid, but also manufactured. And at the

same time, it could create a more level pricing to our consumers.

They are just torn apart as to why the price goes up and down and

up and down, and mainly down. And farmers, they say, are not getting their share, then why didn’t they leave the price up there so

we can get a fair share? Well, we don’t have the mechanism to do

it. The only way we can do it is by having a new and different type

of national pricing formula. So that certainly is our biggest concern.

As far as the retailing, you know, I have—I don’t have a problem

with retailers. We need them just as bad as they need us. But I

have a problem when I walked into some of—into a supermarket

in Berry, Pennsylvania two days ago and found Land O’ Lakes butter selling for $3.35 a pound and other butters selling for $2.45. I

don’t know which is right, but it really confuses consumers when

they see this.

In November of last year, the price that our cheese makers paid

the farmers for milk used for cheese all across the United States,

I think, was about $9.37 a hundredweight, the lowest price since

November 1977, 24 years ago. How in the devil do we expect our

dairy farmers to stay in business when they’re receiving prices like

this? Yeah, they are rebounding now. Are they going to stay there?

Are they going to collapse again? We think it is time, you know,

to have this pricing formula that would reflect a fair price on all

classes of milk and not allow, ever again, to have prices drop to

where they were 24 years ago to our dairy farmers.

And I have consumers tell me—again, we talked to 120,000, and,

as you know, we’ve handed in 25,000 names to your staff of consumers that support our position. And up in Meshauken where I

come from, I can go into Marty’s store and buy a five-pound block

of cheese for $8, $8.50—good American cheese. Consumers tell me

some of the markets, they have to pay $14, $15 for a five-pound

block. And sure, it’s their option whether they buy it or don’t buy

it, but these things all bother me, as a dairy farmer.

When I hear the gentleman tell me that the change in the prices

is very limited to what it costs at the dairy farmer level, that tells

us there is certainly a problem. I commend the Pennsylvania Milk

Marketing Board here in Pennsylvania for what they’ve done since

1987 on trying to give some better prices on fluid milk. But as everybody knows, that price only stays with the milk that is bottled

and stays here in Pennsylvania. They do not have the authority to

establish the pricing for milk that leaves the State. For instance,

my milk goes into New Jersey. We’ve appeared here several times

since 1987 in defense of higher premiums on milk, but it does not

directly affect my milk and many other thousands of dairy farmers

in Pennsylvania, and that’s where the Northeast Dairy Compact

would come into play. If we can’t do anything else, at least we
15

could give a better price to all of our dairy farmers for fluid milk.

That’s not the total answer, but it would help.

There are some things, Senator, that can be done, and there’s no

use of us pointing our fingers at our Pennsylvania Milk Marketing

Board or the Pennsylvania legislature. They’ve done all they can.

It’s up to the national people to step in and do something, as you

tried a couple of years ago when you and 16 other senators introduced legislation on pricing milk differently. That’s where we’ve got

to go.

We’re very concerned about milk protein concentrate coming into

the United States now that’s displacing domestic milk and our

cheese fats. Is it even legally coming into the United States? Has

FDA even said it’s legal to be in as cheese fats? There’s a lot of

questions out there. Are these milk protein concentrates coming in

from countries that have the foot-and-mouth disease? We think

there should be no dairy products coming into the United States

from any country that has the possibility of foot-and-mouth disease

or the mad-cow disease. Why do we want to take the possibility of

having these products blending into our problem in the United

States?

I think with the fact that production is down 5.2 percent, the fact

that most of Pennsylvania now appears to be heading for a possible

good drought if we don’t get some rain soon, we’re looking at some

real serious problems here in the United States and in Pennsylvania. And I think we have got to shore up the price to our dairy

farmers, not only to give them a fair price, but also to guarantee

a supply of milk for our consumers.

Senator SPECTER. Thank you very much. We will come back in

the question-and-answer session.

Our next witness is Mr. Luke Brubaker, a member of the Pennsylvania Milk Marketing Board and manages a 1,000 acre dairy agribusiness partnership in Lancaster County. Mr. Brubaker has

served as an ambassador for dairy management, nutrition, and

marketing, and overall expertise for the Citizens Network for Foreign Affairs. Thank you for joining us, Mr. Brubaker. The floor is

yours.

STATEMENT OF LUKE BRUBAKER, LANCASTER COUNTY FARMER,

MEMBER, PENNSYLVANIA MARKETING BOARD

Mr. BRUBAKER. Thank you, Senator. My speech here was about

10 minutes long. I’m going to have to do some real cutting here,

so—but could somebody pass these out here, maybe, while——

Senator SPECTER. Yes, John our staff will be glad to do that for

you.

Mr. BRUBAKER. Anybody that wants a copy—I would like the

Senator——

Senator SPECTER. Your full statement will made a part of the

record.

Mr. BRUBAKER (continuing). I would like the Senator to have

that. And anybody that wants a copy, well you can pass them out,

please.

Thank you, Senator for inviting me here this morning. I appreciate your holding this hearing on farm to retail and retail price—
16

milk prices. I’m going to go fast here, and I’m going to do some

skipping because I—that green light bothers me.

I’m Luke Brubaker from Mount Joy, Lancaster County, and a

member of the Pennsylvania Milk Marketing Board. I would like

to tell you a little bit about our operation, the dairy industry in

Pennsylvania, and how the milk marketing board benefits, not only

the producer, but the consumer, as well.

You can look down across my professional experience and qualifications there when you have time. I will page on here and get to

some of the meat of what we’re going to talk about and look at the

positions at Brubaker Farm. We think we have a positive attitude

toward the future of the dairy industry in Pennsylvania and America, and we have developed a progressive dairy enterprise that’s

centered on a family partnership and a business philosophy that

employs the latest technology to enhance the economic viability of

the dairy operation and the dairy for the future.

I’m going to skip on. I started out in 1950 with about 18 cows.

Today we’re up to about 600 cows—started out with about a 13,000

herd average and now about 24,000-plus. As a member of the

Pennsylvania Milk Marketing Board, I’m very sensitive to the challenges confronting today’s dairy producer without losing sight of

the need to be understanding of the consumer’s need for safe and

nutritious and affordable dairy products. Most recent indications of

the monthly production of Pennsylvania indicated that the Agriculture Statistics Service and Milk Production Report released

April 2000 shows that milk production and cow numbers are declining over a year ago. The primary report of the Pennsylvania

production in the first quarter of 2001 indicates milk production in

the State is down 4.3 percent over last year’s quarter, about 14,000

cows. The report would seem to reflect that lower milk prices received by Pennsylvania dairy producers over the past year, combined with reported feed-quality concerns, have taken their toll on

milk production in the State.

Recent and projected milk prices increases combined with the opportunity to harvest higher quality forages this spring may bring

back some production. However, with cow numbers in dramatic decline, it seems likely that milk supply will not be returning to last

year’s levels anytime soon.

Another factor is the health of the United States economy. If it

moderately strong, I believe the consumer will continue to buy.

Overall, the current market outlook is calling for Pennsylvania

milk prices to be about $2.32 over the 2000 levels. This is based

on a 2001 annual forecast of uniform milk prices for the Northeast

Federal Order compared to $13.04 in 2000.

The recent increase in producer prices experienced in the Federal

order—marketing order’s projection of higher milk price levels for

the second half of this year will give the average Pennsylvania

dairy producer a much-needed boost in meeting its total cost of production. However, recent declines in the Pennsylvania milk production will adversely affect producer’s ability to benefit from the higher levels that they are expected to receive and justify the need for

a continuation of additional income incentives that the Pennsylvania Milk Marketing Board can provide through the mandated

over-order premium. Even with the higher prices that the Pennsyl-
17

vania dairy farmers have experienced and are expected to experience in 2001, producers will continue to be faced with unrelated

competitive challenges. I believe that after—that the positive trend

in milk prices, the Pennsylvania Milk Marketing Board must do everything feasible to provide producers with the best possible price

that the market conditions warrant to help the dairy industry stay

viable in Pennsylvania. Continuation of the board’s over-order premium at a reasonable level will contribute to the recent—contributes to the recent positive trend in milk prices, will help ensure

that Pennsylvania and surrounding State producers will receive a

price that best ensures their future viability without disadvantaging their market share.

Senator SPECTER. Mr. Brubaker, your time has expired. Your full

statement will be made a part of the record. You can take another

minute or so to summarize.

Mr. BRUBAKER. Okay, I would like to do that. If you will go to

the last two charts on the back of my statement, you will see that

this is—the source was the International Association of Milk Control, Retail Price Survey August 2000. You’ll take notice the Pennsylvania farmer receives 52.2 percent of the share of the dollar. He

receives more share of the dollar in Pennsylvania than you can see

in these here States that are on this list. And then if you turn over

the page to the last—the percentage of the retail fluid price received by the farmers in Pennsylvania is 52.2 percent compared to

the national average of 39.4.

PREPARED STATEMENT

So I think we’re pretty proud of that there, and we just wanted

to make sure that you had a copy of that. Thank you, Mr. Senator,

for giving me the opportunity to speak here this morning.

[The statement follows:]

PREPARED STATEMENT OF LUKE F. BRUBAKER

Senator Specter, other invited guests, and members of the audience, good morning. I would like to thank you, Senator, for holding this hearing on farm to retail

milk prices.

I am Luke F. Brubaker from Mt. Joy, Lancaster County, Pennsylvania, and a

member of the Pennsylvania Milk Marketing Board. I would like to tell you a little

bit about our operation, the dairy industry in Pennsylvania and how the Milk Marketing Board benefits not only the producer, but the consumer as well.

As you look at my professional experience and qualifications:

AGRICULTURAL ACTIVITIES

—Overall experience of 30 years in the dairy industry.

—Owner and operator of a 600 cow dairy farm.

—Manager of a 1,000 acre Dairy Agri-Business Partnership.

—Member of the Pennsylvania Farm Bureau since 1970.

—Pennsylvania Chairman of the American Farm Bureau Federation, Poultry and

Meat Advisory Committee: 1992–1996.

—President of the Lancaster County Farm & Home Foundation: 1999–2001

—Member of the Mount Joy Farmers Co-Op since 1990.

—Past President of Donegal Local Milk Producers.

—Member of Interstate Milk Producers for 23 years.

—Participating farmer in the Chesapeake Bay Program.

—Chairman of Farm Service Agency: 1996–2001.

LOCAL GOVERNMENT ACTIVITIES

—Chairman of the East Donegal Township Board of Supervisors: 1993–1998.
18

—Vice-Chairman of the East Donegal Township Board of Supervisors: 1992.

—Member of the East Donegal Planning Commission: 1986–1992.

COMMUNITY ACTIVITIES

—Board of Trustees of Lancaster County Farmland Trust: 2001–2003.

—Chairman of Environmental Resources Coordinators for Lancaster, Lebanon,

York, Dauphin, and Berks Counties, in conjunction with the Pennsylvania Farm

Bureau and the Department of Environmental Protection.

—Ambassador to Russian Republic for dairy management, nutrition, marketing,

and overall expertise—Citizen Network for Foreign Affairs, Washington, D.C.:

March 1997 and 1998.

—Member of an Economic Development team which visited Bolivia to assist in the

development of small business. Active member of the Mount Joy Mennonite

Church. Exchange visit to German dairy farm: July 2000.

STATE GOVERNMENT ACTIVITIES

—Nominated by Governor Ridge to the Pennsylvania Milk Marketing Board for

a six year term: 1998–2004.

AWARDS

—Recipient of the Pennsylvania Dairy of Distinction Award.

—Winner of the 2001 Dairy Stakeholder Pacesetter Award of Pennsylvania.

—Nominated for ‘‘Innovative Dairy Farmer of the Year’’ Award of the United

States by the Pennsylvania Secretary of Agriculture: 2000.

—Brubaker Farms awarded the National Environmental Stewardship Award in

recognition of production practices and concern for community: 1999.

Now, I would like to summarize the primary reasons I am here to speak and what

we look at on our farm and the future of the dairy industry.

POSITION OF BRUBAKER FARMS

—Positive attitude about future of dairy industry in Pennsylvania and America.

—Development of a progressive farm enterprise that is centered on a family partnership and a business philosophy that employs the latest technology to enhance the economic viability of the dairy operation.

—Commitment to environmental stewardship, public education, and production of

high quality consumer dairy products.

—A recognition that we are producing an excellent product—not just agricultural

commodities.

A summary of production innovations, marketing innovations, and the management innovations follow.

Brubaker Farms wants to represent the future of Pennsylvania agriculture and

the dairy industry. We have demonstrated our commitment to operating a dairy facility 4 which was designed for cow comfort, employee performance, and environmental stewardship. Beginning with just 18 cows in 1950 and a 13,000 pound herd

average, we expanded to meet the challenges of a modern dairy business with 600

cows and a 24,000 plus pound herd average. We built our new facility to accommodate future expansion and to capitalize on the benefits of producing large quantities

of quality fluid milk. We have aggressively pursued good markets that recognize the

value of our milk production, volume, and quality management practices.

With the partnership, which includes my two sons, Mike and Tony, and families,

we have devised a business management plan, which capitalizes on the talents of

our family members. One of the strategic goals of Brubaker Farms is to build the

human capacity of the family to adapt and manage in a very competitive business

environment.

As a member of the Pennsylvania Milk Marketing Board, I am very sensitive to

the challenges confronting today’s dairy producer without losing sight of the need

to be understanding of the consumer’s need for safe, nutritious, affordable dairy

products.

Most recent indications of monthly milk production for Pennsylvania indicated in

the National Agricultural Statistics Service Milk Production Report released April

17, 2000 shows that milk production and cow numbers are declining over year-ago

levels. The preliminary report of Pennsylvania production in the first quarter of

2001 indicates milk production in the State is down 4.3 percent over last year’s first

quarter with about 14,000 fewer cows. This report would seem to reflect that lower

milk prices received by Pennsylvania dairy producers over the past year combined

with reported feed quality concerns have taken their toll on milk production in the
19

State. Recent and projected milk price increases combined with the opportunity to

harvest higher quality forages this spring may bring back some production. However, with cow numbers in dramatic decline, it seems likely that the milk supply

will not be returning to last year’s levels anytime soon.

Another factor is the health of the United States economy. If it is moderately

strong, I believe the consumer will continue to buy.

Overall the current market outlook is calling for Pennsylvania milk prices to be

about $2.32 per cwt above 2000 levels. This is based on a 2001 annual average forecast of uniform milk prices for the Northeast Federal Order (Boston) of about $15.36

in 2001 compared to $13.04 in 2000. To adjust this price forecast to Pennsylvania

(Lancaster) reduce the Boston price by $0.35 per cwt.

CONCLUSION

The recent increases in producer prices experienced in local Federal milk marketing orders and incentives that the Pennsylvania Milk Marketing Board can provide through the mandated over-order premium.

Even with the higher prices that Pennsylvania’s dairy producers have experienced

and are expected to experience in 2001, producers will continue to be faced with unrelenting competitive challenges. I believe that despite the positive trend in milk

prices, the Milk Marketing Board must do everything feasible to provide producers

with the best possible price that market conditions warrant to help keep the dairy

industry viable in Pennsylvania. Continuation of the Board’s over-order premium at

reasonable levels which contributes to the recent positive trend in milk prices will

help ensure that Pennsylvania and surrounding State producers will receive a price

that best ensures their future viability without disadvantaging their market share.

The Pennsylvania Milk Marketing Board is authorized by it’s Pennsylvania statute to regulate the entire dairy industry including, wholesale and retail pricing.

In Pennsylvania, prices paid to dairy farmers and resale prices move in lock step

unison with one another. It is vital, therefore, to ensure that resale minimum prices

established by the agency, are adhered to by both milk dealers and retailers. Our

auditors perform wholesale audits to verify that milk dealers are selling milk at or

above minimum prices established by the agency. Enforcement of the minimum

wholesale price provides a stable economic environment free from destructive competition in the form of below cost sales. It follows then that enforcement of 10 minimum retail prices by the agency is equally important. Minimum retail prices for

milk ensure that retailers are not using milk in a price war that eventually may

be funded by the supplying dealer. The supplying dealer may then reduce payments

to their dairy farmers. With this direct correlation between the prices paid by consumers and the price received by dairy farmers, the agency guarantees, through the

enforcement of minimum resale prices, that our dairy farmers are receiving their

fair share of the money spent on milk by consumers.

Our auditors also collect and review financial data supplied by the milk dealers.

This information is combined with information that is submitted monthly regarding

the utilization of milk and is used to establish the dealer’s cost for processing, packaging, and delivering milk. It is from 11 this audited historical cost information that

the agency establishes the minimum wholesale price.

For your information, on Wednesday, May 16, 2001 at 9:30 a.m. in Room 202 of

the Agriculture Building, 2301 North Cameron Street, Harrisburg, the Pennsylvania

Milk Marketing Board will be holding a hearing to establish the level of the overorder premium for third and fourth quarters of this year. We, as a Board, are proud

of our ability to respond quickly to the consumer, farmer, and market needs.

Senator, thank you for allowing me to speak today.
20
21

Senator SPECTER. Thank you very much, Mr. Brubaker. We now

turn to Mr. David McCorkle, president and CEO of the Pennsylvania Food Merchants Association. He has served on the board of

trustees of the Food Marketing Institute and the National Grocers

Association and was chair of the Food Industry’s Association of Executives, a bachelor of science from Bucknell, master of arts from

John Carroll University. Thank you for joining us, Mr. McCorkle.

The floor is yours.

STATEMENT OF DAVID McCORKLE, PRESIDENT, PENNSYLVANIA FOOD

MERCHANTS ASSOCIATION

Mr. MCCORKLE. Senator, thank you very much. It’s a pleasure to

be here today. As you mentioned, I represent the Pennsylvania

Food Merchants Association and the Convenience Store Council,

about 1,700 corporations in Pennsylvania that own and operate

6,500 retail stores, all of them proud to sell milk from the farmers

at this table and from the dairies that process that milk in Pennsylvania.

I would begin by saying that our 6,500 stores selling to Pennsylvania consumers certainly support the dairy farmers, large and

small, where the challenge is defining ‘‘dairy farmer, and understanding just what that term means, because we have many ranges

here, but very many efficient operations. It’s really an extraordinary enterprise in the State of Pennsylvania.

Our association, as I mentioned, supports the dairy farmers. At

this time, we oppose any Federal legislation that would have unknown effects on what is understood to be a very complex and difficult and challenging business. I will say there are a couple of exhibits that I’d like to share with you, Senator, if you don’t mind.

Senator SPECTER. Fine. We will be glad to receive them.

Mr. MCCORKLE. They are a part of my testimony, and that—they

point to a couple of issues that I think bear importantly in this discussion. First of all, the dairy department makes up about nine

percent of the average supermarket sales. That nine percent-plus

in sales is one of the most hotly competitive. Speaking of beverage,

milk is competing with other beverage products; and beverage

products are the fastest growing segment of the supermarket and

the manufacturing industry. Milk is competing with an array of

beverages, from bottled water to fruit drinks of all types. It is a

very, very competitive department.

Consumers are buying more and more beverages in the supermarket. Margins on those beverages are shrinking, generally. And

the margin overall, as you know, in the grocery store, is 1 percent

of sales. That is net profit for the supermarket is a penny on the

dollar, after all expenses are paid and all costs of the product is

paid. So the dairy part is 9 percent of total sales. The supermarket

margin is a very slim—it’s a hotly competitive business. The supermarket owner and operator gets a penny on a dollar profit after

taxes and expenses are paid. In that competitive marketplace the

challenges are immense.

And I shared with you one other piece of information, that being

a graph that tracks the comparison of farm prices paid for dairy

products as presented by the Pennsylvania Milk Marketing Board

to the minimum retail price charged by stores in Pennsylvania. If
22

you look at that graph, you will note that the spread between those

two costs has actually decreased from January of 2000, I believe it

is, to February of 2001, from $1.25 to $1.10.

PREPARED STATEMENT

In Pennsylvania, we have the unique situation of having a milk

marketing board that considers cost of production of the product to

the consumer, cost of processing for the dairies, and cost of operation for the retailer. And because of our unique situation here,

Senator, I think it is possibly a model State for the Senate to study

in regard to cost and expenses and product prices paid by consumers. So I commend Mr. Brubaker who was—this was noted earlier, is a member of the commission, and to the staff of that commission for presenting a full picture in Pennsylvania that might be

a little harder to get into focus as you look at the national picture

for the production and processing of the price of dairy products,

which is very, very complicated and confusing for a number of reasons that were noted by earlier persons testifying today.

Thank you for the opportunity to be here. Our members are

happy to share with you any in-depth additional information that

you would like to have concerning this very complex process.

[The statement follows:]

PREPARED STATEMENT OF DAVID L. MCCORKLE

GENERAL COMMENTS & INTRODUCTION

I am David McCorkle, President of the PA Food Merchants Association and the

PA Convenience Store Council. Thank you Senator Specter, members and staff of

the Agriculture Appropriations Subcommittee for allowing me to provide information on behalf of the members of the association. The membership includes over

1,700 companies operating 6,500 retail locations in the Commonwealth of Pennsylvania and surrounding States. The directors of the association have asked me to

make it clear that we will support any program that will ensure the stability and

safety of Pennsylvania’s milk supply and enhance the business viability of dairy

farmers, milk processors and retailers in the Commonwealth. The family farmer is

important to the economic and cultural future of the Pennsylvania. Moreover, the

product produced by dairy farmers is vitally important to the well being of every

Pennsylvanian.

As I understand it, we are here today to discuss farm to retail milk prices and

the translation of increases or decreases in the payments made to farmers for class

1 product that is ultimately sold to consumers in retail stores. I am pleased to initiate dialogue on that and other topics that emerge from today’s discussion and look

forward to providing the members of the committee with any information that you

desire concerning retail pricing policies followed by Pennsylvania-based companies.

THE SUPERMARKET BUSINESS MODEL

The Food Marketing Institute publishes an annual financial review for the supermarket industry. Many of you know that supermarkets are known as a penny business. That is, to earn a dollar, supermarkets rely on a low mark-up to stimulate

volume sales. Simply, the net profit margin is the net income as a percentage of

sales that remains after paying all expenses, including product cost and the realization of any gains or losses. Over the past decade, the average supermarket industry

profit has been 0.89 percent annually. Competition is extraordinary as the percentage of disposable income spent on food at home for the year 1999/2000 (6.2 percent)

is not much higher than the percentage of disposable income spent on food away

from home (4.2 percent). For the fiscal year 1999/2000, the average net supermarket

profit after taxes was 1.18 percent.

THE PENNSYLVANIA MILK MARKETING BOARD

The milk pricing system in the Commonwealth of Pennsylvania will be interesting

for subcommittee members and staff to review. Act 37 of 1934 and Act 43 of 1935
23

organized the Pennsylvania Milk Marketing Board in a temporary basis. Regulations were made permanent under Act 105, Public Law 417, in April 1937. In 1968,

the Milk Control Commission became the PA Milk Marketing Board. The Board supervises and regulates the entire milk industry of the Commonwealth, including

production, manufacture, processing, storage, transportation, disposal, distribution

and the sale of milk and milk products for the protection of the health and welfare

of the inhabitants. The appointed three-member board and staff review each of the

above areas in six separate regions of the Commonwealth and establish prices to

be paid at each level of the production and distribution system, including establishing a minimum retail price.

The Bureau of Consumer Affairs consults with representatives of consumer

groups, disseminates information relative to activity of the Board, and acts as a liaison to Federal, State and local agencies involved in the dairy industry and milk

marketing. The Bureau has provided a consumer update, which is attached to my

testimony, dated January 2001. A chart from that testimony is provided on ‘‘Milk

Price Comparisons Pennsylvania State, January 2000–February 2001,’’ and it contains a graph comparing the whole milk average minimum retail price and producer

price at the gallon level.

The numbers speak for themselves and generally indicate a direct and immediate

movement of retail prices with the fluctuation of producer prices.

The above fact is not surprising in that milk is generally sold at the minimum

retail price in supermarkets due to the highly competitive marketplace.

Pennsylvania’s milk pricing structure is unique in the nation. Pennsylvania’s consumers can be assured of purchasing quality and competitively-priced dairy products that fairly reimburse producers, dairies and retailers for their efforts.

CONCLUSION

I look forward to reviewing the specific problems identified by this committee.

Once we better understand the problems expressed by dairy farmers in the nation,

industry experts at Penn State University and other research facilities will be able

to work with industry representatives, appointed and elected officials to resolve the

problems.

It is the belief of our association members that marketplace solutions will work

best. However, we are in the process of reviewing legislation introduced in February

by Senator Rick Santorum and Senator Herb Kohl. A national safety net for dairy

farmers may a viable solution.

Industry experts have challenged recent economic studies on the N.E. Dairy Compact. The President of the Food Marketing Institute, Tim Hammonds, noted that

‘‘the bill extending the N.E. Dairy Compact is being introduced in Congress. Votes

for that bill will disappear if the proponents are forced to admit the uncomfortable

truth that it is the Dairy Compact that pushed up prices for consumers.’’

The dairy industry is working diligently with retailers and marketing experts to

develop new dairy products that will increase consumption of milk in America.

Value-added products are the single most important growth area for milk. I know

that Earl Fink will provide you with an update on new products being introduced

in the marketplace by the quality dairies operated by Pennsylvania-based companies. Finally, product development and marketing translates into increased investment by dairies and retailers.

In addition, groups like the PA Dairy Stakeholders are working with dairy farmers to improve on-the-farm practices and efficiencies, which will help farmers improve their bottom line and succeed in today’s very competitive marketplace.

I look forward to working with you so that together we can create a better understanding of the milk production, processing and distribution system.
24

ATTACHMENT I
25
26
27
28
29
30
31
32

ATTACHMENT II

HOW THE SUPERMARKET DOLLAR IS SPENT

Senator SPECTER. Thank you very much, Mr. McCorkle. We turn

now to Mr. Earl Fink, executive vice president of the Pennsylvania

Association of Milk Dealers representing 35 dairies which produce

85 percent of the milk sold in Pennsylvania, a graduate of Penn

State University with a degree in accounting. Thank you coming in,

Mr. Fink. We look forward to your testimony.

STATEMENT OF EARL FINK, EXECUTIVE VICE PRESIDENT, PENNSYLVANIA ASSOCIATION OF MILK DEALERS

Mr. FINK. Thank you very much, Senator Specter, for affording

us the opportunity to be here. Much of what I was going to cover

has already been covered by Mr. Brubaker and Mr. McCorkle, so

in the interest of time, I will make my brief remarks even briefer.

I’ve brought with me sample copies of the International Association of Milk Control Agencies Price Surveys. I have been monitoring these surveys for the past 20 years, and basically what they

show is that in Pennsylvania, the minimum retail price established

by the Pennsylvania Milk Marketing Board tends to be the prevailing price. So, in effect, our prices to consumers move in lockstep

with prices paid to farmers. And, in other words, each month, the

Federal Government announces what the class-one or beverage

milk price will be for the following month. The PNMB posts its reports, and then our price moves up and down in lockstep with that.

I have these reports available. We find that the minimum price

tends to be the prevailing price in every market in Pennsylvania

except the Philadelphia area, which tends to move in step with

southern New Jersey; and their prices tend to be slightly above

minimum. But in all fairness to stores in Philadelphia, when you

look at them compared with the national prices in other markets,

they’re very much in line. Penn State used this information to do

a study some years ago, and their bottom-line finding was that, on

average, Pennsylvania farmers received more for their milk than
33

farmers around the country and, on average, our consumers pay

less. I think that is very compelling evidence and is a credit to the

work that the milk marketing board.

Mr. Tewksbury indicated that the Milk Board has been setting

a premium—I think it was since 1988, Arden, not 1987—and I

would like to point out that our association, which represents processors, has always supported that premium, not always at the

same levels as the farmers, but we have supported their premiums

since its inception in 1988. I would like to point out that this

Wednesday, the Milk Marketing Board will be holding a hearing to

consider the level of premium beyond July 1, and at that hearing

we will be supporting a higher premium, $1.65 where we’ve been

for the last 6 months, the same as a few other farm organizations.

But a couple of the farm groups are actually supporting a price

lower than $1.65. So as processors, we’re supporting a higher level

than some farm groups.

I think that’s all I have. Thank you very much.

Senator SPECTER. Thank you very much, Mr. Fink. Mr.

Tewksbury, you talked about Federal legislation. What Federal legislation would you like to see introduced?

Mr. TEWKSBURY. Senator Specter, last fall former Congressman

Ron Clink introduced a bill in Washington that we helped put together. And my understanding is that Congressman Tim Holden either has or will be introducing a similar bill. And in addition to

that, we have put together a bill somewhat like Congressman

Clink’s bill which basically brings the average cost of producing

milk across the United States, as determined by USDA, into a pricing mechanism. It also allows dairy farmers to produce milk for the

needs of the market without being penalized. And I think, to me,

it is the answer to this pricing problem.

I realize not everybody is going to agree with that, but, you

know, a confusing thing is that a branch of the USDA has been establishing prices on the cost of production for all commodities or

major commodities for many, many years through the act of Congress, I guess, demanding that our market administrator’s report

every month what that cost is by certain sections of the country

and the national average. This is being surveyed all across the

country, and farmers and dairy farmers now themselves realize as

what USDA says the average cost is by the northeast, the southeast, the far west, and the national average.

And we’ve heard today that—and I have been at hearings of the

marketing board over the past years when they do bring in the cost

factors of our processors and so on—and their container costs and

so on in establishing the price-per-gallon of milk, but they pattern

their prices after the Federal orders. So as the Federal order pricing collapses, so does the price in Pennsylvania on the beverage

milk, except for the premium established by the marketing board.

So while the board does—as best I can recollect, does bring in the

cost of other elements into a gallon in—into Pennsylvania, and

they bring in the farm price established by the Federal orders, but

that Federal order does not bring in what the farmer’s cost of operation is.
34

Senator SPECTER. So essentially, Mr. Tewksbury, you would like

to see legislation which took into account the cost of production and

a reasonable profit.

Mr. TEWKSBURY. Yeah, and these figures are established by the

Department of Agriculture, and we have tried to bring them into

an advocacy meeting sometime, and they don’t want to be any real

part of it; but they said if there is a bill introduced and there are

hearings held on it, they will come into the committee hearings in

front of you people and discuss their cost of production records and

how they get there and how they can defend them. I understand

there’s people in USDA at other levels who don’t even support the

USDA’s cost of production figures, yet these figures are put all

across the United States as,’’ Here’s what it costs.’’ I’ve got them

right here, the latest ones for the northeast and so on, and it is

substantially higher than what farmers are receiving. And if you

put total economic costs in there, it shoots way up.

Our policy is that we need a pricing formula that doesn’t go up

and down all the time and cause all of this confusion to consumers

and causes a lot of problem for our stores to make these changes.

And that’s why I’ve heard them say, you know, about milk selling

higher in other States—I watch it in southern—here in New

York—and what I’ve noticed is when—when, in Pennsylvania, if

the prices go up for our dairy farmers, and the price of a gallon of

milk does go up, okay, it does go up as dictated by the board, but

in New York State, they also are raised, because they’re cost is

going up. But now when the price comes down in Pennsylvania,

what I find in Horsehead and Elmira and Corning, New York, and

those places, they hang onto that price that was up here higher

than what it is here in Pennsylvania.

Senator SPECTER. Well, Mr. Tewksbury, they hang onto the price

which is higher, too, according to what Bob Conklin and Mr. Robinson said.

Mr. TEWKSBURY. I’ve seen many times 30, 35, 40 cents a gallon

higher than what you can buy it up in the Athens area. And I’m

sure that’s what goes on across the country. So I think the way to

get away from this, Senator, would be to have a pricing formula

that reflects what the cost is at the farm and has stabilized the

prices.

Senator SPECTER. Dr. Conklin, let me turn to you for a response

to what Mr. Tewksbury has had to say. When the first changes

were made in milk prices, going back into the 1930s, there was a

concern about the sanity of milk, the adequacy of production—I see

you nodding in the affirmative—and there were minimum prices

set in order to deal with the problem of an adequate supply of milk.

It was really done for the consumers, and it took into account what

the farmers were facing.

One of the first jobs I had as a younger lawyer—I’m still a young

lawyer—but when I was a younger lawyer working with Barsdeck,

Price, Meyers, and Rhodes was representing Sealtest National

Dairy Products, we had many hearings before the Milk Control

Commission, and that was still the dominant theme, to provide an

adequate price to the farmer to guarantee adequate supply and

sanitary conditions. So why not figure in the cost of production to

the milk producer as a cost of production plus a reasonable profit?
35

Dr. CONKLIN. Senator Specter, let me begin by noting that—as

Mr. Robinson also mentioned, the structure of pricing milk in this

country has been built on over a half a century of very complicated

policy structures, both at the Federal level and at the State level.

We’ve heard here a little bit about the role of the board here in

Pennsylvania. There are some other States that also have similar

institutions, or ones that play a slightly different role.

Developing policies that use the cost of production to help set

prices, requires caution, because there is no very good way to measure cost at the farm level. Costs vary widely—we can compute average costs, but there is a wide variance around the average.

Senator SPECTER. Well, Dr. Conklin, I understand that you’re

looking for competition. But where you have this very complicated

structure which you’ve testified about, is there any way to simplify

this so-called, quote, ‘‘complicated structure,’’ or are we really heading to a situation where there are not going to be anymore small

farmers? Where you lose 300 to 500 farms a year, and you have

some 9,900, that is a pretty heavy attrition rate. Do we want to

find a situation where we’re relying only on the giant corporations

and milk producers in far-distant places, or is there some value to

society and to the consumer in maintaining the family farm?

Dr. CONKLIN. The judgment, Senator—the judgment about the

value of maintaining the family farm is certainly not one that I am

in a position to make, but I think that is a statement that many

other people here have spoken to today, and that that’s a judgment

that society has to make through the political process and through

the policy process.

Senator SPECTER. Well, you’re the economist—a key economist

for the United States Department of Agriculture, and if you find

some other way to handle it, you have to consider the impact of the

elimination of the family farm or this sharp reduction. A question

which comes to my mind—and maybe we’ll turn to you, Mr. Brubaker—you cite the statistics that Pennsylvania farmers receive a

larger supply—a larger percentage of profits than farmers from

other States. What is happening in the other States? Are they losing more family farms? You cite here that the Oregon farmer gets

only 35.7 percent of the retail price of milk, compared to 53.2 percent in Pennsylvania. Is Oregon losing more of its family farms—

milk producers?

Mr. BRUBAKER. Senator, I can’t answer that question. But one

thing I can answer is some places where they have had a board

similar to Pennsylvania, what I was told is that when they lose the

board, the price usually goes up to the consumer, and the prices

goes down to the farmer. And that is what I consistently have

heard from where States—and I think I’m referring to—maybe

someone can help me out what State that was——

Senator SPECTER. Well, Mr. Brubaker, that generalization isn’t

too helpful, even if it is so. But from the point of view of the Senate

Agriculture Subcommittee appropriations, we’re concerned about

what is happening nationally. And this hearing obviously focuses

on Pennsylvania. But if the Pennsylvania farmers are better off,

say, than the Oregon farmers or the New Jersey farmers, who get

only 40.5 percent of the retail price of milk, I would like to have

a finding, Dr. Conklin, perhaps the Department of Agriculture can
36

give it to us, whether there’s other States—New Jersey and Oregon, illustratively, are losing more of their farms than Pennsylvania. Can you provide that to us?

Dr. CONKLIN. Senator, that is not a question that I can answer

right now. Certainly, I can go back and check the data that we

have to see if we can give you an answer to that question.

Senator SPECTER. I understand you can’t answer on the spur of

the moment, but I would like to see if you could go back and answer the question.

I’m very much concerned with the testimony we have here

today—Mr. Robinson testifying about farm prices going down and

retail costs are constant or higher so that when the farmer gets

less money for his milk, the retail prices are constant or higher.

Now, how can we account for that? Dr. Conklin has testified that

there is retail resistance to lowering prices and the market power—

when prices go up, there is a faster accommodation—you’re nodding in the affirmative—on retail prices rising, when prices go

down to the farmer, they retain constant or even go up among the

retailers. What can be done about that to provide greater fairness

to the system?

[The information follows:]

Farmers’ share of retail prices for Class I milk varies widely across States. Because this share is based on retail prices within an individual State, milk is shipped

across State lines, there is no reason to expect these shares to be consistent across

States. Dairy farm numbers have declined across the nation. At a first glance it appears that the percentage decline in the number of commercial dairy farms is higher

in States where the farmers’ share is lower. Of the six States we examined at your

request, Pennsylvania, New York and Maine had the highest farm shares of retail

fluid milk prices and the smallest percent decline in the number of dairy farms between 1995 and 2000. However, it is worth noting that the three States with the

largest percentage decline in dairy farm numbers, Colorado, Oregon and New Jersey, were all States with a relatively small number of farms at the beginning of the

period so that the absolute decline in farm numbers in these States was quite small

even if the percentage decline was high. A complex set of factors drive dairy farm

entry and exit decisions. In addition to milk prices, these include operator demographics, real estate prices and urbanization. Because these factors vary widely

across the United States it is not possible to conclude from these numbers that

there is a causal relationship between farmers’ share of retail milk prices and the

changes in the number of dairy farms.

CHANGE IN THE NUMBER OF COMMERCIAL DAIRY FARMS 1

Share of retain

price received by

farmers in Class

I milk 2 (percent)

Number of dairy

farms

Change in

number of

dairy farms

since 1995

(percent) 3 2000 4 1999

Maine ................................................................................ 47.9 458 592 (22.6)

New Jersey ........................................................................ 40.5 158 242 (34.7)

New York ........................................................................... 51.1 7,238 8,913 (18.8)

Pennsylvania ..................................................................... 53.2 9,837 12,000 (18.0)

Colorado ............................................................................ 33.9 195 300 (35.0)

Oregon ............................................................................... 35.7 364 522 (30.3)

1 Commercial farms are those actually selling milk as defined in a survey by the American Farm Bureau Federation

carried out annually since 1992. 2 Data from testimony given May 14, 2001 in Philadelphia, PA.

3 Data from July 1 survey of farms within each State actually selling milk published in ‘‘Hoards’s Dairyman’’, October

25, 2000. 4 Data from July 1 surveys of farms within each State actually selling milk published in ‘‘The Western Dairyman,’’ February 1998.
37

Mr. ROBINSON. Well, our work—again, I want to say—confirms,

through empirical information that kind of price behavior and price

relationships.

Senator SPECTER. You say you do confirm that from the empirical data?

Mr. ROBINSON. The empirical data shows that again—as I mentioned earlier, that there’s a pretty weak price relationship between

what happens on the farm nationally—that is the prices farmers

received and what the retail price is in a given market. I might

say, in confirming some of the observations made here earlier, that

among the nationwide picture that we put together, the price relationship was stronger in Philadelphia, Pennsylvania than it was in

the vast majority, if not all, the other markets in the country—so

there may be things going on in Philadelphia, Pennsylvania to

strengthen that relationship, which I can’t say with certainty. All

I can say is that there is a stronger relationship in Philadephia,

Pennsylvania than most, if not all, the other locations.

Senator SPECTER. You say a stronger relationship, but did prices

in the retail stores in Pennsylvania go down as fast when farm

prices were reduced as they went up when farm prices were increased?

Mr. ROBINSON. No, the price relationship is still not extremely

strong. In technical terms, I think it is a correlation coefficient of

about point-six. A perfect relationship would be one.

Senator SPECTER. So you’re saying that although Pennsylvania—

the disparity is not as great in Pennsylvania, there still is a significant disparity that when farm prices go up, the prices reflect at the

retail level, much faster than when prices go down—the prices—

the farmers prices at the retail level go down.

Mr. ROBINSON. Certainly in the end result, there was not a perfect flow. That is correct. The speed with which these things happen is a little difficult to discern. All I can say is that at the beginning of the period and the end of the period, there was not a perfect match, and that during the course of the period there may be

lags.

Senator SPECTER. Just to be sure I understand you, your conclusion is that when prices go up to the farmer, they go up faster in

the retail stores than when prices go down to the farmer, that they

are reduced in the retail stores.

Mr. ROBINSON. When prices go down to farmers, it does not

translate into prices going down for consumers. They, in fact, have

gone up for the most part.

Senator SPECTER. That is true in Pennsylvania, even though

there is less disparity?

Mr. ROBINSON. That is correct.

Senator SPECTER. Okay, Mr. Tewksbury?

Mr. FINK. Mr. Chairman, I beg to differ.

Senator SPECTER. We’ll give you a chance in a minute, Mr. Fink,

but Mr. Tewksbury will get recognition first. In the Senate, it’s the

first senator on to speak who gets recognition.

Go ahead, ‘‘Senator’’ Tewksbury.

Mr. TEWKSBURY. I watch the retail prices very closely in probably

25 stores, maybe more than that, in northeastern Pennsylvania.

Number one, when the dairy farmer prices go up on beverage milk,
38

and that’s good terminology, beverage milk, the prices have to go

up because the marketing board establishes higher minimum

prices at that point. Okay?

Now, when the prices come down to our dairy farmers on beverage milk, the stores that I survey all the time, they come down

the same day, the first of the month. I see it over and over and

over again. So I don’t know about the whole State, but at least onethird of the State that I observe, when the prices come down to the

dairy farmers, on the first of April, say, the prices—the minimum

price comes down, established by the marketing board, and at most

supermarkets, the minimum price becomes the selling price and it

comes right down the same identical time.

Now, the problem that I have, as a dairy farmer, is, while I’m

listening to these statistics as to the better relationship between

what the dairy farmers in Pennsylvania receive and the correlation

to what the consumers pay, but I don’t think those figures take

into consideration the dairy farmers in Pennsylvania whose milk

goes into New Jersey and New York where that isn’t necessarily

true. So while some Pennsylvania dairy farmers, the correlation between their price and the consumer price is better, overall many

of our dairy farmers in Pennsylvania would not fall into that category, in my opinion, and for the dairy farmers in New Jersey, I

don’t think they have even 200 dairy farmers left in New Jersey

to supply almost 8 or 9 million people. So the attrition rate in New

Jersey for many years has been extremely bad, and they can’t lose

many more or they won’t have any at all. But I think my observation is that there is a relationship between the dairy farmers prices

going down and going up with the retail prices in most cases.

Senator SPECTER. So you think the attrition of the New Jersey

dairy farmers is accountable to the fact that they receive a smaller

portion of the retail price of milk, getting 401⁄2 percent, compared

to Pennsylvania, 53.2 percent?

Mr. TEWKSBURY. I think that’s part of it, and the fact that

they’re not getting a realistic fair price overall, and the terrible exposure of the real estate problems in New Jersey has just eaten up

our farms in New Jersey. And if we’re not careful, that same thing

could happen in Pennsylvania and other States, as well.

Senator SPECTER. Mr. Tewksbury, let me see if I understand

your testimony correctly. Do you disagree with Mr. Robinson, and

do you believe that when milk prices go down to the farmer, that

the farmer gets less money, that those are reflected in retail prices

going down?

Mr. TEWKSBURY. I find that true in northeastern and north-central Pennsylvania. But about a half an hour ago, I also said that

I watch the prices in the southern tier of New York, that when the

prices in these stores in Pennsylvania go down, as established by

the marketing board, I find the stores in Corning and Horsehead

and Elmira keeping their prices up there, which would indicate to

the testimony of—that one of the speakers gave that the relationship of what the farmers get is less than the retail price.

Senator SPECTER. So what you find in the southern tier of New

York, you think there is a closer correlation between the retail

prices in northeastern and central Pennsylvania because those retailers are more attuned to what their customers, who are signifi-
39

cantly farmers, know, that the farmers who go into their stores

know that the price is going down on the price paid to the farmers,

so they expect the prices to go down in the stores that are in their

area?

Mr. TEWKSBURY. I don’t know how much it relates back to the

farmers to the prices going down and so on. I think it is the relationship that’s been established between the Pennsylvania milk

marketing board and our retail stores across Pennsylvania, which

I think is extremely good. And I agree that the overall picture in

Pennsylvania is probably better than many States. We also do surveys in California, which I’m sure is in Mr. Robinson’s surveys in

my lands. The prices that the farmers receive in California and

what the consumers pay, I would like to see if he has a breakdown

of that, because that is alarming, not only on beverage milk, but

on manufactured products, as well. If he has that, I think it would

be very good for you people on the committee to study that, because

you’re going to get some amazing statistics.

Senator SPECTER. Mr. Fink, we’ll come to you. And—wait just a

second. I haven’t formulated my question yet. You wanted to reply

to Mr. Robinson. In your testimony, you said that the farmers get

more, and the consumers pay less, and you referred to a stack of

papers which you have in front of you as being a study from Penn

State. Can you——

Mr. FINK. No, no. This is not the Penn State study. This is a

study that is made every month, Senator, and it is published by

the International Association of Milk Control Agencies. It’s available on the Milk Marketing Board’s Web site since January of

2000. It goes back 20 years.

Senator SPECTER. Will you point to the source of that study to

back up your statement that Pennsylvania, the farmers are getting

more and the consumers are paying less——

Mr. FINK. That was a Penn State study done some years ago by

the committee, a copy of it.

Senator SPECTER. Well, that is what I was referring to.

Mr. FINK. Okay.

Senator SPECTER. You referred to a Penn State study, which is

what I had just said, and I thought you had gestured toward that

stack of papers.

Mr. FINK. No, I’m sorry I misled you, Senator. This is simply the

price surveys that are done monthly. And in Pennsylvania——

Senator SPECTER. Well, if you would provide the Penn State

study to the subcommittee, I would appreciate it.

Mr. FINK. I will do that.

Senator SPECTER. Go ahead with your testimony in which you

think—which you represent contradicts what Mr. Robinson said.

Mr. FINK. I know Mr. Robinson has a massive job trying to study

retail milk prices throughout the country, but in Pennsylvania we

have hard data, back probably 20 years, where employees of the

milk marketing board actually go into supermarkets, and record

the prices. And then those prices are published and compared with

their minimum prices. And we found over the last 20 years that in

all areas of the State except Philadelphia, in supermarkets, the

price to the consumer moves in lockstep with the price to the farmer.
40

Senator SPECTER. Well, would you show where in those studies

that conclusion appears?

Mr. FINK. You have to go through—and I’m stating my conclusion. I would like the committee to make your own study of these

reports. And I’m sure you will arrive at the same conclusion.

Senator SPECTER. We will make our own study. But when you

make that representation, if you are able to back it up, I would like

you to. If you can’t at the spur of the moment, I would like you

to provide it to the subcommittee.

Mr. FINK. Okay. Well, if you want to take one report—I will walk

through one report, if you would like, Senator.

Senator SPECTER. Go ahead.

Mr. FINK. Okay. This is for February of this year, February 2001.

Unfortunately, the pages aren’t numbered, but the——

Senator SPECTER. Excuse me. If you have a report for February

2001, let me take a look at it please. Do you have a second copy?

Mr. FINK. I probably gave it to you. If I can take one second—

there’s the minimum retail store prices for six milk marketing

areas for a gallon of whole, low-fat, and skim—and then you move

on back to the supermarket prices in Pennsylvania, and you will

see they have a high, a low, and an average.

Senator SPECTER. Well, are you saying there’s something you

want to compare? And you say there is something you want to compare?

Mr. FINK. Yeah, compare the minimum prices with the various

areas with what the observed prices were at the supermarkets.

Senator SPECTER. Go ahead.

Mr. FINK. Okay. In area two, for whole milk, the low was $2.63; the high was $2.89, the average was $2.63. I would say the minimum was $2.62 for whole milk, correct?

Senator SPECTER. What is your point here, Mr. Fink?

Mr. FINK. That the prevailing minimum price established by the

Pennsylvania Milk Marketing Board, which are these numbers,

tend to be the prevailing prices to consumers in all areas of the

State except area one, which is the Philadelphia area.

Senator SPECTER. Well, how does that correlate with the prices

which are being paid to the producers at this time——

Mr. FINK. Because these minimum prices move up and down in

lockstep with the changes in the prices to the farmers. In other

words——

Senator SPECTER. Where does that appear?

Mr. FINK. That is on another page, and you have to use some

math to get that. Here are the prices paid to the farmers. Excuse

me, that’s not it.

Senator SPECTER. Let me ask you to do this, Mr. Fink, in the interest of time. Would you submit to the subcommittee the analysis,

and if you have to do some math, make the computations. If you

think that these statistics support a conclusion that the prices

which are paid to the producers and dairy farmers match the prices

paid by the consumers?

Mr. FINK. I’d be happy to do that.

Senator SPECTER. It would be very interesting to see what the

General Accounting Office and the Department of Agriculture say.

Mr. FINK. If Arden and I agree, it must be correct.
41

Senator SPECTER. If you and Arden agree, it must be correct?

The subcommittee is not quite ready to delegate the conclusory responsibilities to you, Mr. Fink.

Senator SPECTER. Mr. McCorkle, you wanted to make a comment

here?

Mr. MCCORKLE. Yes, Senator, thank you. I just wanted to say

that what I’ve heard today has been very interesting, but I believe

what I’ve heard from Mr. Brubaker, over to this side of the table,

which happens to be the left side of the table, agree that farm

prices are fairly reflected at retail prices for whole milk products

purchased by consumers in the State of Pennsylvania, which fits

with my testimony that says that in Pennsylvania we have protected the safety of the milk supply and the production of the supply and providing consumers with a quality product at a low price

compared to prices in the region. And I think that is what Mr. Brubaker and Mr. Tewksbury and Mr. Fink and I testified today. And

the testimony, I believe, including this one-page chart, I believe

backs that up in Pennsylvania.

The situation is more complicated as we look to the other States.

I think it was testified earlier, those differences between farm costs

and retail costs are explained to some extent by energy costs, by

packaging costs, by labor costs, by marketing costs, and by broader

factors in the economic——

Senator SPECTER. Well, Mr. McCorkle, you’re saying that there

could be some reflection of this differential, as Mr. Tewksbury says,

if you go to New Jersey; that in New Jersey, the prices which the

consumers are paying go up faster than the prices which are paid,

say, to the Pennsylvania farmers, who are apparently shipping

milk into New Jersey. When the amounts of money paid to the

Pennsylvania farmers go down, that that is not reflected as much

in a reduction in cost to New Jersey consumers?

Mr. MCCORKLE. Sir, I’m not sure. I think it’s very complicated.

What you’ve stated is probably true, but the reverse of that is probably also true, that there are benefits that come from shipping to

other Federal districts that probably can’t be explained very clearly

or justified by an economist.

Senator SPECTER. Well, what are the benefits? If the costs are

higher, what are the benefits?

Mr. MCCORKLE. The payment is higher. The costs stay the same,

but the payment may be higher. And I’m not an expert in any of

those areas, and don’t pretend to be. What I can testify to is to

what’s happening in the retail marketplace in Pennsylvania and to

the positive effect that the milk marketing board has had on the

structure of the dairy production and distribution system in the

State.

Senator SPECTER. Mr. McCorkle, what is your opinion of the

breakdown in the cost of the milk which was testified to about

$2.50? And you are representing the retailers. The farmers get $1,

and the costs are 25 cents, and the wholesalers get 75 cents, and

the retailer gets 50 cents. Does that breakdown seem about right

to you?

Mr. MCCORKLE. I would have to compare that with the breakdown for other products sold in the stores. The average markup in

the supermarket is somewhere in the low-20 percent area. So
42

again, I would have to take a close look at that. But there are extraordinary costs to operating a retail store.

Senator SPECTER. Mr. Fink, 75 percent goes to the wholesalers,

almost as much as the farmer gets. Is that fair?

Mr. FINK. To the wholesalers?

Senator SPECTER. You’re representing the wholesalers here

today.

Mr. FINK. I don’t think 75 cents is almost as much as $1, Senator.

Senator SPECTER. You get 75 cents out of $2.50, the farmer gets $1, the coop gets 25 cents, the wholesaler gets 75 cents, and the

retailer gets 50 cents. Is it fair that the wholesaler gets three quarters as much as the farmer, that produces the milk?

Mr. FINK. I think it is fair, at least in Pennsylvania. Our pricing

is very fair. The pricing is based on the cost of the milk and the

value of the container and the cost of processing the milk in the

plant and delivering it to the store. We don’t do this for nothing.

I think in Pennsylvania at least——

Senator SPECTER. Well, the farmers don’t do all of what they do

for nothing either.

Mr. FINK. Mr. Brubaker’s testimony shows in Pennsylvania, the

farmer gets 53 percent of the retail price, which is higher than the

national figures presented by Mr. Robinson.

Senator SPECTER. Mr. Tewksbury, do you think that’s a fair allocation?

Mr. TEWKSBURY. It’s a fair allocation.

Senator SPECTER. Take the microphone, or Pennsylvania Cable

Network is not going to get your pearls of wisdom, and you have

to get the other one, too.

Mr. TEWKSBURY. I’m not going to dispute any of these figures. I

don’t really know exactly what they are, but I still say that it does

hold true probably for the milk in the State of Pennsylvania, but

it does not hold true for the milk that leaves the State, like most

of the milk in northeastern Pennsylvania. It goes into Brooklyn

and Long Pond, New Jersey. And I think if those prices were segregated out, you would find it would not be 52 or 53 percent; it

would be down in the 40-percent bracket, and that’s because of the

premium structure in Pennsylvania, which is good in Pennsylvania,

but it doesn’t help the milk that leaves the State. So I think that

53 or 52 percent would be lower on your producers in Pennsylvania

whose milk leaves the State. And, of course, that does not reflect

anything on the milk that is used for manufacturing purposes.

Senator SPECTER. So the Senate has to consider whether the national average and the national picture.

Mr. TEWKSBURY. Yes, sir.

Senator SPECTER. Ms. Mittal, you’ve sat through this entire hearing without saying anything. Would you like to speak?

Ms. MITTAL. No, thank you, Senator. I agree with most everything that’s been said so far.

Senator SPECTER. Well, the subcommittee—the Agriculture Subcommittee of the appropriations is going to pursue this matter further. I will be interested to get the analysis from—that Mr. Fink

is talking about, and I would like for you, Mr. Robinson, and Dr.

Conklin to take a look at the point which Mr. Tewksbury is making
43

here about the impact on the Pennsylvania farmer on milk which

is sold out of State, as he cites what has happened in New Jersey,

the southern tier of New York, Brooklyn.

I remain very much concerned about the basic statistics of the

farm prices falling 48 cents a gallon in the period between March

and April of 1999 and the retail price going down only 29 cents a

gallon—a big differential. I’m also concerned about the wide fluctuations in what the farmer gets—$16.27 in January of 1999, down

to $10.27, a month later—as to how we might approach this issue

on milk pricing. It is obviously a very complicated matter.

But from a national perspective, I’m concerned about what is

happening to the loss of farms in New Jersey, perhaps in Oregon.

We will see what those figures show. So I’m certainly concerned

about what is happening in Pennsylvania where, in my travels

among—through Pennsylvania, 67 counties, I hear repeated complaints about the squeeze of the dairy farmer, the squeeze of the

dairy farmer. And my purchases are not scientific, but I haven’t

found the price of milk going down, ever, on the milk that I buy.

And the repeat of the specific time that prices were going down to

the farmer, where I bought milk, it went from $1.95 to $2.29. And

when we talk about economic power in the retailers and the ability

to hold onto more of the profits at a time when the prices go down

to reflect that change in a slower price contrasted with when the

prices go up to the farmer and up to the retailer, the prices go up

much faster.

Milk is very important to the consumers, especially to the children of America, so we intend to pursue the matter further. We

will be looking for the follow-up from Mr. Fink and from Dr.

Conklin and Mr. Robinson. If anybody would like to say anything

further before we conclude the hearing—Mr. Brubaker?

Mr. BRUBAKER. Mr. Senator, thank you for this opportunity.

Again, just to try—and I don’t have this down on paper, but it

would be for the record, just to simplify the situation a little bit—

would be that I can testify to the same thing that was said here.

In our area, when the milk price goes up to the farmer, the store

price goes up about 9 to 10 cents a gallon, and that doesn’t take

into account the percent of fats. But I’m saying on average about

9 to 10 cents per gallon. The price of a gallon will go up if it goes

up $1 to the farmer. If it goes down a $1 to the farmer, that will

follow itself right through, as they stated. I can go into a Mini-Mart

or the super chains—and our store, and that will basically, on the

day of the first of the month, that milk will be back down following

the farmer’s reduction in price. It is just like step-by-step. If the

price goes down to the farmer, the price comes down to the store

at about 9 to 10 cents a gallon as $1 relates to the dollar to the

farmer.

Senator SPECTER. Mr. Conklin, Mr. Robinson, would you be in a

position to extend this study to that precise point? I would like to

see just exactly how that works now.

Mr. ROBINSON. We’d be happy to look at any figures anybody can

provide. I can only tell you the price spread in Philadelphia got

larger. And the only way it gets larger is if farm and retail prices

are not tracking with one another.
44

Senator SPECTER. What I’m asking you—would you be in a position to track the representation just made by Mr. Brubaker?

Mr. ROBINSON. We’d be happy to try. Yes, sir.

CONCLUSION OF HEARING

Senator SPECTER. Okay, thank you all very much.

[Whereupon, at 10:05 a.m., Monday, May 14, the hearing was

concluded, and the subcommittee was recessed, to reconvene subject to the call of the Chair.]

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