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30–524 PDF 2006

REVIEW OF FEDERAL FARM

POLICY

HEARING

BEFORE THE

SUBCOMMITTEE ON DEPARTMENT OPERATIONS,

OVERSIGHT, DAIRY, NUTRITION, AND FORESTRY

OF THE

COMMITTEE ON AGRICULTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

SEPTEMBER 16, 2006, FRESNO, CA

Serial No. 109–39

(

Printed for the use of the Committee on Agriculture

www.agriculture.house.gov
COMMITTEE ON AGRICULTURE

BOB GOODLATTE, Virginia, Chairman

RICHARD W. POMBO, California,

Vice Chairman

TERRY EVERETT, Alabama

FRANK D. LUCAS, Oklahoma

JERRY MORAN, Kansas

WILLIAM L. JENKINS, Tennessee

GIL GUTKNECHT, Minnesota

ROBIN HAYES, North Carolina

TIMOTHY V. JOHNSON, Illinois

TOM OSBORNE, Nebraska

MIKE PENCE, Indiana

SAM GRAVES, Missouri

JO BONNER, Alabama

MIKE ROGERS, Alabama

STEVE KING, Iowa

MARILYN N. MUSGRAVE, Colorado

RANDY NEUGEBAUER, Texas

CHARLES W. BOUSTANY, JR., Louisiana

JOHN J.H. ‘‘JOE’’ SCHWARZ, Michigan

JOHN R. ‘‘RANDY’’ KUHL, JR., New York

VIRGINIA FOXX, North Carolina

K. MICHAEL CONAWAY, Texas

JEFF FORTENBERRY, Nebraska

JEAN SCHMIDT, Ohio

MICHAEL E. SODREL, Indiana

COLLIN C. PETERSON, Minnesota,

Ranking Minority Member

TIM HOLDEN, Pennsylvania

MIKE MCINTYRE, North Carolina

BOB ETHERIDGE, North Carolina

JOE BACA, California

ED CASE, Hawaii

DENNIS A. CARDOZA, California

DAVID SCOTT, Georgia

JIM MARSHALL, Georgia

STEPHANIE HERSETH, South Dakota

G.K. BUTTERFIELD, North Carolina

HENRY CUELLAR, Texas

CHARLIE MELANCON, Louisiana

JIM COSTA, California

JOHN T. SALAZAR, Colorado

JOHN BARROW, Georgia

EARL POMEROY, North Dakota

LEONARD L. BOSWELL, Iowa

RICK LARSEN, Washington

LINCOLN DAVIS, Tennessee

BEN CHANDLER, Kentucky

PROFESSIONAL STAFF

WILLIAM E. O’CONNER, JR., Staff Director

KEVIN J. KRAMP, Chief Counsel

JOHN HAUGEN, Communications Director

ROBERT L. LAREW, Minority Staff Director

SUBCOMMITTEE ON DEPARTMENT OPERATIONS, OVERSIGHT, DAIRY, NUTRITION, AND

FORESTRY

GIL GUTKNECHT, Minnesota, Chairman

RICHARD W. POMBO, California

JERRY MORAN, Kansas

JO BONNER, Alabama

VIRGINIA FOXX, North Carolina

JEFF FORTENBERRY, Nebraska

JEAN SCHMIDT, Ohio

JOE BACA, California,

Ranking Minority Member

DENNIS A. CARDOZA, California

G.K. BUTTERFIELD, North Carolina

TIM HOLDEN, Pennsylvania

HENRY CUELLAR, Texas

JIM COSTA, California

BEN ANDERSON, Subcommittee Staff Director

(II)
(III)

C O N T E N T S

Page

Cardoza, Hon. Dennis, a Representative in Congress from the State of California, opening statement ........................................................................................ 2

Costa, Hon. Jim, a Representative in Congress from the State of California,

opening statement ................................................................................................ 4

Gutknecht, Hon. Gil, a Representative in Congress from the State of Minnesota, opening statement ................................................................................... 1

Nunes, Hon. Devin, a Representative in Congress from the State of California, opening statement ........................................................................................ 6

WITNESSES

Contente, Joaquin, dairy producer and president, California Farmers Union,

Hanford, CA .......................................................................................................... 10

Prepared statement .......................................................................................... 65

Cotta, Richard, senior vice president, government and producer relations,

California Dairies Inc., Los Banos, CA .............................................................. 7

Prepared statement .......................................................................................... 49

Dolan, Jeep, vice president, operations, Driftwood Dairy, El Monte, CA, .......... 34

Prepared statement .......................................................................................... 53

Herrera, Sabino, D.V.M., dairy producer, Alhem Farm Partnership, Hilmar,

CA .......................................................................................................................... 13

Prepared statement .......................................................................................... 58

Giacomazzi, Dino, dairy producer, Western United Dairymen, Hanford, CA .... 15

Prepared statement .......................................................................................... 60

Jeter, John, president and chief executive officer, Hilmar Cheese Company,

Hilmar, CA ........................................................................................................... 39

Prepared statement .......................................................................................... 54

Ornellas, Leroy, dairy producer, Tracy, CA ........................................................... 17

Prepared statement .......................................................................................... 56

Taylor, Sue, vice president, dairy policy and procurement, Leprino Foods

Company, Denver, CO ......................................................................................... 36

Prepared statement .......................................................................................... 74
(1)

REVIEW OF FEDERAL FARM POLICY (DAIRY)

SATURDAY, SEPTEMBER 16, 2006

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON DEPARTMENT OPERATIONS, OVERSIGHT, DAIRY, NUTRITION, AND FORESTRY, COMMITTEE ON AGRICULTURE,

Fresno, CA.

The subcommittee met, pursuant to call, at 9:00 a.m., in the Hall

of Records, Fresno, CA, Hon. Gil Gutknecht (chairman of the subcommittee) presiding.

Present: Representatives Cardoza, Costa.

Also present: Representative Nunes.

Staff present: Ben Anderson, subcommittee staff director; Lisa

Shelton, minority professional staff.

OPENING STATEMENT OF HON. GIL GUTKNECHT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA

Mr. GUTKNECHT. I will call to order this hearing of the Subcommittee on the Department of Operations, Oversight, Dairy, Nutrition, and Forestry for purposes of taking testimony on the state

of the dairy industry here in California and begin to collect more

information and input about what kind of a farm bill we will have.

The farm bill, as many of you know, technically expires at the

end of the growing season next year. Of course, there is discussion

about whether we should extend it, whether we should amend it,

and what ultimately will happen I think would be conjecture on

anybody’s part. If we are talking about dairy policy, it is important

that this subcommittee come to California.

As Devin Nunes told me a couple of years ago, and I apologize

that I did not know up until that point, that you actually produced

more milk in just one county, Tulare County, than we do the whole

State of Minnesota. We like to think we are a pretty good dairy

State in the State of Minnesota, the State that I represent.

Let me also just tell you a little bit about the subcommittee. We

do have wide-ranging responsibilities. We have oversight, for example, over the nutrition programs. We will spend about 40 billion of

your taxpayer dollars this year to make certain that no one in the

United States goes to bed hungry. I think that has been a tradition

of the Agriculture Committee for many, many years and I think it

is something that most Americans support.

Let me just say we have had hearings on that subject of this subcommittee in the past and we are doing a better job of managing

those funds today than ever before. In fact, in every one of the 50
2

States now we no longer have the old food coupons that you think

of in terms of food stamps. We now use debit cards. That is not to

say we can’t have fraud but we are much better at managing those

funds and how the funds are actually spent than ever before.

We also have responsibility for oversight of the entire Department of Agriculture. The Department of Agriculture has 110,000

employees. It is the second largest department in the Federal Government. I can’t say that it is the model of efficiency but we are

trying every day to make it more efficient and more responsive not

only to farmers and ranchers but to the general public as well.

We also have oversight over the national forests. Sometimes people are surprised. People who don’t follow agriculture or whatever

are surprised that the Forest Service is under the wing of the Department of Agriculture.

There is a real important reason for that and that is over 100

years ago the Congress recognized that trees were crops. We could

probably have more hearings just on how we are doing in terms of

managing the forest but we are so busy with other subjects we

have only had one hearing to discuss that and meet with folks from

the forest industry.

Finally, we are here today to talk about dairy. Of all the issues

that we deal with in this subcommittee and on the entire Agriculture Committee sometimes the thorniest of which is dairy. Of

course, there are some reasons for that because the one commodity,

if you will, that has become regionalized and fractionalized and it

started back in 1934 with the Milk Marketing Order System. It is

a little less complicated than it was then but it is still one of the

most complicated parts of agricultural policy. It is one of the only

areas where we literally pit regions against regions sometimes so

it becomes quite controversial.

I want to thank my colleagues from the State of California for

helping to set this up. It is a meeting we have been trying to put

together for some time and I wanted to do it yet this fall so we are

fortunate to be here when the weather is so wonderful here in

Fresno County so I want to thank all of you.

Mr. CARDOZA. It is always this way.

Mr. GUTKNECHT. The last time I was here it wasn’t quite this

hospitable.

With that, I want to recognize Representative Cardoza for any

opening statements he may have.

OPENING STATEMENT OF HON. DENNIS CARDOZA, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. CARDOZA. Thank you, Mr. Chairman. We really appreciate

you coming to Fresno and holding this hearing here. In Fresno

County and through the Central Valley agriculture is the driver of

our economy and dairy consistently ranks as the top producer in

that agricultural economy.

I and my colleagues here with yourself have participated in numerous Agriculture Committee hearings regarding the 2007 farm

bill throughout the country including the one that Mr. Pombo

hosted in Stockton. This hearing, though, gives us the focus on this
3

prized industry that we have in dairy and what we can do to improve our Nation’s dairy policy as we go forward.

The Dairy Price Support Program provides a safety for dairy producers and also benefits consumers in the marketplace. It is also

one of the farm programs that does allow the Federal Treasury to

recoup its inputed cost into the program.

We also have tremendous challenges in California. I would like

to speak briefly about the regulatory challenges that face the dairy

industry. We have more than our fair share of environmental compliance issues including air quality issues, water quality issues, endangered species impacts, water supply impacts. We need to focus

on all those things as we go forward in the farm bill and that is

going to be an integral part of what we try and write into that act.

Undoubtedly there will be an energy title in the farm bill as well.

this will present us both with some unique opportunities to turn

some of these challenges into opportunities and the dairy industry

must be ready to seize on them.

We were up in your neck of the woods not too long ago and I was

amazed to see the agricultural economy really booming there driven mainly by investments that you all have made in alternative energy, the ethanol that was being produced, the vision that you have

towards cellulosic ethanol production. Although it is in the R&D

stages right now, some of those technologies and innovations are

really moving your economy and I think that can happen here in

California, too, if we do it the correct way.

Historically, as you know, Mr. Chairman, California hasn’t received its fair share of funding under the farm bill. Under the 2002

farm bill California ranks sixth amongst States receiving Government payments and 12th amongst States receiving conservation

funding. Even though we have the most environmental conservation challenges and we have the highest amount of production in

the country, we are sixth and 12th.

That needs to change and the farm bill offers unprecedented opportunity to make this change by expanding upon existing programs that work for the dairy industry such as the EQIP program.

We also need to take an increased look at research because through

research and innovation we will be able to meet some of these challenging environmental issues.

With regard to trade, because the continuing challenges that we

have seen with trade and equities, we must look for opportunities

in the farm bill to increase market access to new and expanding

dairy markets such as with the dairy export incentive program and

to provide for an assessment of imports that currently benefit our

research and promotion programs here in the United States.

Finally, today we are also here to talk about disaster assistance.

This summer the California dairy industry suffered devastating

losses. Two or 3 percent of the herds, 1 to 2, maybe 3 percent in

some cases of herds, were devastated by the extreme heat. The

dairy industry suffered over a billion dollars in animal loss and

milk production.

Both the State and Federal Governments have declared extreme

temperature disasters and that has cleared the way for Federal

funds. Those funds, however, don’t come automatically, as you

know, Mr. Chairman. We are looking for existing funding options
4

within USDA and it looks like the best chance right now is the disaster package that is moving through the Senate. We are hopeful

that we can be included in that legislation.

I am very proud to be here with you today and welcome you to

the Central Valley and look forward to hearing the testimony of

these distinguished panel that we have before us today. Thank you,

Mr. Chairman.

Mr. GUTKNECHT. Thank you, Dennis.

Let me just say on that last item I share your view. If we are

going to do disaster relief, we should do it now. To that end I actually talked to some of the people in the administration and the

chairman and others. I think I sent them a letter on Friday—I

hope it went out on Friday—to that extent that we have to get

moving on disaster relief on the House side.

With that I am going to recognize Mr. Costa. We were driving

yesterday. We got here about 4 o’clock. We actually went up to one

of your ethanol facilities to Pacific Ethanol, I think it is called, that

they are building. We were going up there it seems to me I was

driving on a freeway and we saw somebody’s name on the freeway.

It was a wonderful very smooth ride. I want to thank you for that

and thank you for welcoming us here to Fresno County.

OPENING STATEMENT OF HON. JIM COSTA, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. COSTA. Thank you very much, Mr. Chairman. You got on the

road before we put the toll booth in. No, it is a nice thing that my

colleagues did in a previous life. I think I speak on behalf of all

my colleagues that we are pleased that you would take the time

as we try to wind up our session here to come to Fresno, to come

to our valley, to in this morning’s hearing focus on California’s

dairy industry.

We all collectively believe how important it is as a part of our

national agriculture economy. You are with three of the four members of the Portuguese Caucus so we know something about dairy.

At least we believe we do based upon our ancestry and our own

personal experiences. We are very proud of that experience and we

are very proud, of course, of our ancestry and the role that the

dairy industry has played as it has grown in California’s agriculture economy.

We want to thank you because obviously you could be in your

district this weekend and to come here and take the time and to

look at not only the efforts within agriculture and dairy here but

the efforts we are trying to emulate that you are doing in Minnesota with ethanol that we think is important.

I would like to focus this morning and listen carefully from the

witnesses in two areas as it relates to your testimony. First of all,

Congressman Cardoza, I think, made good reference to the disaster

relief efforts. Congressman Peterson has a measure H.R. 1599, the

Emergency Agricultural Disaster Assistance Act of 2006, that

would focus to benefit dairymen in a couple of areas which is important.

First, livestock indemnity program for losses due to death and

second, livestock compensation program which supplements feed

costs to make up for production losses. As our colleague, Dennis
5

just noted, it is just not the 2 to 3 percent losses that were experienced as a result of the heat wave we had in July but when you

look at the counties, and we have our agriculture commissioner

here and we have the Under Secretary of the Department of Agriculture, numbers that have been compiled in the last several weeks

and when we looked at the Valley counties, we have losses as it

relates to not just the animals themselves but we think of the loss

of milk production, the ripple effect as a result of that following

anywhere from the highest of Tulare County, which Congressman

Nunes represents of $144 million, to Fresno County which we all

represent, $39 million plus Merced County which Congressman

Cardoza represents, $77 million.

The totality of the losses in terms of value to the impact of the

industry we currently estimate as a result of our agriculture commissioners to be somewhere in the neighborhood of over $456 million. That is obviously a significant loss to an industry that already

is suffering from below market prices and higher cost of production

prices in every area. Of course, the testimony this morning will

bear me out on that.

Beyond what we may be able to do on disaster relief, and I want

to commend you for your acknowledgement that it is not only a

problem here but throughout the country, and that we should try

to act on it before we leave. You will have my support to try to do

whatever we possibly can in that instance realizing we only have

a couple more weeks before we are scheduled to adjourn.

The other areas obviously, again, Dennis mentioned but they

deal with resetting the table for the 2007 farm bill that we are in

the midst of dealing with. There is a lot of interest as it relates to

various programs that have had success in the 2002 farm bill from

EQIP to market access to trade promotion. We want to see flexibility.

We have had hearings around the country. There seems to be

broad general support for reauthorizing the 2007 farm bill as we

did the 2002 with tweaks and modifications here and there. I am

not sure the administration is going to like that because they

would like us to come back with a farm bill that was significantly

lower in terms of cost. I would like to get your take on what your

opinions are. Secretary Johanns has already, I think, indicated

where he would like to see us begin in that effort.

Then finally, and I think very importantly, we are going to have

an opportunity as was noted to create an energy title in the 2007

farm bill which will be new. It would be the first time that we did

that. When we look at the challenges we have had here this summer in California and elsewhere, and I was very pleased when we

did go to Minnesota in July to see a 1,000 megawatts of wind energy being developed in your State, Mr. Chairman, as well as a

host of other ethanol and agricultural related energy contributions

that are being made in your State, we could learn from that effort,

I believe, here in California.

The fact is that when you look at digesters, for example, we have

over 2,400 dairies in California. If half of those were able to

produce digesters, they could contribute not only to their own energy needs but provide energy to the grid. We have a problem,

though, in California, and I believe elsewhere.
6

We are not allowed to provide any excess energy and to put it

on the grid. We need to look at how we address that because on

the margins, especially when we have shortage of supplies, I think

the dairy industry and other industries can contribute as a part of

an overall solution and we need to examine how that can happen.

My last point, and I am pleased that we have some of our products here, and we want to make sure that we use all of our milk

products. This morning I was trying to do my part to support the

industry. I suspect all of you were. But you noted, I think, very correctly that the programs that have occurred on the Federal and

within individual States go back to the 1930’s to create a safety

net.

When Congressman Cardoza first came to the legislature in the

late 1990’s he was Chairman of the Agriculture Committee and I

was his counterpart on the State Senate. I said, ‘‘You know, we

really need to reexamine the California milk pooling program and

we really need to.’’ Some of you were part of that discussion.

I said, ‘‘Let’s bring the whole industry together and see how we

can modify and look at what is good and working and look at those

areas that need to be modified or changed.’’ I must tell you we held

once-a-month meetings for 10 months. At the last meeting we had

10 months after the first I can tell you we were no further along

than we were in the first meeting that we held.

The contention between producers, processors, co-ops and the

like, we will see, I think, examined even here within California. It

is important for you to note the regional differences that exist. I

would like our dairy witnesses that testify this morning to step

back for a moment of they could in their testimony and say if you

were going to write it all over again how you would instruct us if

we were to have three goals.

Let market principles work; two to provide a safety net; and,

three to look at a national program that reflected the regional differences in a global economy in which our dairymen must compete.

Now, let me repeat that again. If you were to try to let market

principles work unfettered; to try to ensure that we provided a

safety net; and three, create a condition under which on a regional

basis we could compete on a global basis. If you can tell us how

to do that by the end of this hearing today, we will be a lot further

ahead than we could possibly imagine.

Thank you very much again for being here.

Mr. GUTKNECHT. Thank you, Congressman Costa.

Next we are going to go to Devin Nunes. Devin is one of the

newer Members. Well, not so much newer anymore but I want to

thank him for inviting us out here and teaching us more about the

California Dairy Association.

Congressman Nunes.

OPENING STATEMENT OF HON. DEVIN NUNES, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. NUNES. Thank you, Mr. Chairman. I just want to thank you

for your continued support of the dairy industry and your continued commitment to come to California. For those in the audience,

he was actually out here, I guess, 3 or 4 years ago originally and

we spent a day in Tulare County looking at the industry and it is
7

all something that is a little different than Minnesota, although

there is more and more larger farms in Minnesota that keep coming and keeping up with basically just the growth and continued

growth in the dairy industry and continued consolidation.

I want to thank the panelists for being here. I told the chairman

when he was first here and I had 500 dairymen in my district and

you might get a thousand different opinions between the 500. You

will see that, I think, here again today, Mr. Chairman, but I think

I want to echo Mr. Costa’s questioning. I thought that was very

good, those three principles. It will be interesting to hear what you

guys think.

Obviously I have ideas and these guys have ideas and we would

all like to see if we can come up with something that we can add

to or subtract out of the upcoming farm bill next year.

With that, thank you Mr. Chairman. I look forward to the testimony.

Mr. GUTKNECHT. Thank you, Congressman Nunes.

Let me just say before we turn it over to our group of witnesses

that we have a relatively simple model in my office and on the subcommittee and that is listen, learn, help, and lead. I know that

sometimes even my constituents look at me and say, ‘‘But you’re

not listening.’’ What they don’t realize, particularly when you start

talking about dairy policy, we are listening to lots of people all the

time.

As my colleagues have pointed out, they don’t always share the

same opinion. I often say, especially as it relates to dairy policy,

our job is not so much about conflict resolution so much as it is

about conflict management. Trying to keep as many of the forces

moving in the same direction because I think we all do have the

same goal and that is two-fold. First of all, to make certain that

people who were involved in this very important part of what I call

value-added agriculture have a chance to earn a decent living

whether you are in Minnesota or California or wherever you are.

Second, and I think more importantly, is that we don’t lose something that we have taken for granted basically since the United

States was organized and that is an unlimited supply of young people who are willing to go out and take a chance at this business

we call agriculture. We have an important responsibility.

I want to thank my colleagues for being here today and for inviting me to come out. With that I am first going to go to Mr. Richard

Cotta who is the senior vice president for government and producer

relations for California Dairies, Inc., from Los Banos, California.

Welcome, Mr. Cotta.

STATEMENT OF RICHARD COTTA, SENIOR VICE PRESIDENT,

GOVERNMENT AND PRODUCER RELATIONS, CALIFORNIA

DAIRIES INC., LOS BANOS, CA

Mr. COTTA. Thank you, Mr. Chairman, and members of the subcommittee. In light of your 5-minute limit on testimony, I have

written about 20 minutes worth so I will cut it down to 5 and then

the other 15 will be somewhere on the paper.

California Dairies is the largest dairy cooperative in the largest

dairy State in America. Our co-op is the result of a successful 1999

merger of three of California’s most financially successful coopera-
8

tives; California Milk Producers, Danish Creamery, and San Joaquin Valley Dairymen, which all had roots dating back to the turn

of the 20th century. Today our producer-owners have over $100 million in equity invested in the co-op.

We ship over 16 billion pounds of milk annually. Our owners

have dairies located from San Diego County in the south to Marin

County in the north, with most of the production occurring in the

San Joaquin Valley from Kern County to San Joaquin County. We

also have five processing plants strategically located in our production regions and plant No. 6 is currently under construction in

Visalia.

We have two wholly-owned subsidiary: Challenge Dairy Products,

and also Los Banos Foods. We are a major shareholder in Dairy

America which handles about two-thirds of all the milk powder

produced in the United States and we currently export milk powders to over 40 countries in the world.

Dairy Policy and the next farm bill. I appreciate the opportunity

to testify about the current status of national farm policy important

to dairy cooperatives and our recommendations for the next farm

bill. No. 1, trade policy. I think it is important to first talk about

the next farm bill in the context of trade.

With the recent events surrounding the Doha WTO round, it

looks like there will not be a new trade agreement in place before

the next farm bill is written. However, we continue to support the

U.S. proposal that was submitted to the WTO back in 2002, which

calls for the elimination of export subsidies and correction of inequities in market access and domestic support. The rational for

the U.S. proposal is as important and relevant today as it was 5

years ago:

The 1994 WTO Uruguay Round agreement created many trade

disparities because many countries were allowed to continue with

extensive levels of support, which continue to exist today. These inequities have left the U.S. market relatively open to subsidized

competition from abroad, while denying our dairy industry the

same opportunities to develop new markets overseas.

Second, the U.S. proposal is designed to correct inequities,

through a balanced approach to three key areas: elimination of export subsidies, increases in market access, and reductions in domestic support.

Many of our training partners, the EU, Japan and Canada, still

maintain triple digit tariffs that are simply a de facto export ban

because the tariffs are so prohibitive.

There are a wide variety of non-tariff trade barriers, sanitary

and phytosanitary issues and food labeling, to name just a few,

that continue to create barriers for us in finding new markets, and

we appreciate the efforts of USTRS and USDA in dealing with

these situations when they arise. Absent a new trade agreement,

we urge Congress to reauthorize the Dairy Export Incentive Program in the farm bill.

The final issue I want to refer to relating to trade is the import.

There are two areas that I want to briefly discuss. The first is the

issue of assessing dairy imports for our research and promotion

programs. This was included in the 2002 farm bill but never imple-
9

mented because of concerns of whether it would pass muster under

WTO.

We urge Congress to take whatever action is necessary in the

next farm bill to get this corrected so that the dairy importers can

be assessed their fair share.

The other issue is milk protein concentrates. We think the U.S.

policy should be one that encourages and allows growth in our domestic capability to produce MPCs rather than outsource yet another portion of an industry to other countries. This could be

achieved by either establishing a tariff on imported MPCs or

through some kind of processing subsidies for domestic MPC production.

The Commodity Credit Corporation Price Support Program

works and should remain intact. We believe that the current dairy

price support program, under which CCC supports the price of milk

at $9.90 per hundredweight and the price of nonfat dry milk at approximately 80 cents per pound, have served the industry well and

should continue into the next farm bill.

These support levels do not guarantee a profit for any dairy producer; indeed, these purchase prices are still below everyone’s cost

of production. However, the price support program does give industry an avenue for dealing with situations where supply and demand are out of balance.

We believe the price program also represents a good Federal policy because the benefits outweigh the costs.

The Milk Income Loss Compensation Program should be terminated. The MILC program is fairly divisive within our industry due

to the fact that it mainly benefits small producers.

Conservation programs are vital. California and the San Joaquin

Valley in particular is at the forefront of just about every environmental issue being faced by agriculture producers today. We are

very supportive of the Environmental Quality Incentives Program

which was authorized as part of the 2002 farm bill.

Environmental research is a high priority. The last several farm

bills have continued to emphasize the need for good research in a

variety of areas all of which are important to agriculture. For the

next farm bill we believe that we need to significantly increase the

focus of our research efforts in the environmental area.

Federal Marketing Orders. We do not participate in the Federal

Marketing Orders program. Because of this we do not take positions on proposals to reform or change Federal Milk Marketing orders. If you make changes to the Federal Marketing Order structure that would necessitate a change in our system, our system allows both producers and processors to request a hearing by the

California Department of Food and Agriculture.

Within 60 days we could have a decision on whether a change

would or would not be necessary to the California system. We may

not always like the results but at least we have a system where

we can get an answer in a relatively short period of time which

would minimize any potential adverse effects that might be created

by significant changes in the Federal Order System.

Mr. Chairman, thank you for the opportunity today and I would

be happy to answer any questions and you have a copy of our text.
10

[The prepared statement of Mr. Cotta appears at the conclusion

of the hearing.]

Mr. GUTKNECHT. Thank you, Mr. Cotta. I read your testimony on

the plane out. We had plenty of time. I had plenty of time. It is

a long flight. I didn’t know how lucky I was that I could fly home

in a matter of a few hours rather than have to fly to Phoenix and

get here. I am very fortunate in that regard. Thank you.

Next we are going to go to Mr. Joaquin Contente, a dairy farmer

and president of the California Farmers Union from Hanford, California. You have testified at least twice, I think, out in Washington

so welcome again to this panel.

STATEMENT OF JOAQUIN CONTENTE, DAIRY PRODUCER AND

PRESIDENT, CALIFORNIA FARMERS UNION, HANFORD, CA

Mr. CONTENTE. Thank you, Mr. Chairman. Also thank you to the

rest of the distinguished panel that we have here today. I am very

proud to have my fellow Portuguese people right here in front of

me. It is quite an honor.

Today’s presentation that I am going to present is going to be

somewhat candid and I am not going to read anything. I am just

going to go through and skim some of the stuff here. It is going to

be from a producer perspective more than probably any other panelist here today.

Some of the challenges that are facing us as producers here in

California and also across the United States is we are having rising

imports constantly for the last several years that are impacting us,

concentration in the marketplace, and we are seeing that today

with our low milk prices that we have which leads to lack of competition.

I have a sheet that is towards the back of my presentation that

shows the tremendous amount of volatility that we have experienced over the last 7, 8, 9 years that we did not have before previously. Forty years back we didn’t have that volatility and that

really impacts us as producers and it is hard to manage any type

of bank structure with that kind of volatility.

Interestingly the California Milk Advisory Board has recently

come up with a report on the State of the California dairy industry

and I would encourage each and every one of you to get hold of that

report and go through it. There are some pretty interesting facts

that they have come to a conclusion on.

The main facts are basically that we have about a 4 percent annual production increase in California and they expect that to continue and only about a 2 percent market gain. How do we deal with

that in the future for California? How do we come up with the capital necessary for plant expansion and so on? It is a very interesting report.

Producer prices, as someone has noted, are below the cost of production. It is about 30 percent below cost of production. The average 1,000 cow California dairy is losing anywhere between $50,000

and $70,000 a month. That is hard to sustain for very long periods

of time.

CDFA has at the last hearing come up with some numbers that

says that we are paying 16.4 cents per hundredweight in sur-
11

charges on feed and transportation. That is being added because of

the increased input costs that we are facing on energy.

Back in 1996 Congress asked California to see if we wanted to

join the Federal Order. At that time there was very little support

from California to do that. Consequently, the Federal Order reformed itself to mimic California and adopt a California style

make-allowance structure. In my mind that has been somewhat

devastating for us as producers because we are basically now operating in a somewhat socialistic climate that guarantees plants

those margins and us producers are basically at the whim of the

market forces of capitalism.

Recently there was an article in the Cheese Reporter that stated

the difference between the milk price in producers in California

and another state which produces about the same make-up of class

I and about the same production of cheese was Wisconsin. The milk

price difference between those two regions, mailbox milk price difference, was $1.47 difference that we are getting less in California

as producers.

One of the results of the style system that we have in California

is that plants are decoupled from the market place. The signals

that we receive as producers by low markets are not transitioned

into the plants as they are to us. Yet, it is the plants that keep

telling us that they need more milk and more production. How do

we deal with that?

One of the solutions that, in fact, I testified to back in 2000 was

by implementing a variable make-allowance. We can make that

make-allowance structure actually work to be market oriented.

When the market demanded products, the make-allowance would

send a signal to the plant and encourage more production of those

products.

Contrary when the market denied a good price for those products, then the make-allowance would also reflect that.

Trade policies. You would have to go back to 1993 Uruguay

Round to look at what happened to dairy trade policies that were

left out that probably should have been included. That would be

the use of caseins in a structure such as the cheese, butter, and

powder that we have on tariffs that would address those products

coming in in the same manner and would have a tariff structure.

Casein has been left out completely. In my testimony I believe

it’s on page 4 we have a chart and in that chart it shows the milk

equivalent of casein coming into the country for each year. It is the

largest category. It is even larger than the cheese imports that are

coming in. If you add MPC to that it is huge.

Yet, that is one area that we are totally neglecting. We have

tried to implement some tariff legislations for those products but

there is a lot of resistance by some of the industry. The other part

of the casein issue is that the utilization of casein in products we

feel are not equivalent to milk since the process actually eliminates

most of the vitamin B6 and some of the calcium and other nutrients so we don’t believe it is even the same product as milk.

Next I would like to refer to the last page that I have. It is a

volatility and in that volatility chart if you notice the recent volatility you probably could go to 94, 95. We became a net deficit country around 1995. Part of the recent we have the volatility is be-
12

cause of that tightness of supply even though the market price

today is dictating that we are not that tight.

I believe the current market price is a result of some extremely

good spring weather that we had back in January and February

here in California and across the country. We also had a lot of cows

calving fresh in December and January that put on a lot of production. We had close to 6 percent increase at the beginning of the

year. Those have all evaporated.

As those have evaporated, we are in a situation now where powder is tight. My co-op tells me that butter is tight. All the butter

they have is committed. Yet, barrel cheese is also short and the

market is not reflecting even though we had the tremendous heat

wave in the third week in July which should have had a response

to the market and it didn’t even flinch.

On page 8 I have the retail spread difference showing the consumers what they are contributing to our cause and they are doing

their part. It keeps going up but there is a huge spread between

what the retail and the producers are receiving and that continues

to get wider and wider. That is because of lack of market power

by the producers.

The last two pages that I had put in there deal with the supply

and the utilization numbers. There is a misconception in this country because most people think that we do produce more than we

consume and it is not true. The people that do the work at ERS

and we have talked to them recently just to make sure that we are

on the right page and they have told us there is no utilization numbers that are brought in for the casein and MPC going into the

marketplace.

Those are not figured in the utilization numbers. The papers that

you have there would show at the bottom of the sheet for 2005 176

billion pounds of production. If you go to the far right of the sheet

it would have 178 billion pounds of utilization. What they left out

on the import side they only have 5.2 billion pounds of imports. If

you throw in the utilization of casein and MPC, that number would

increase significantly, perhaps double or even higher than double.

You can see that in this country we are quite short. If you go

back before 1995 we didn’t have that issue. I believe it is due to

the policies that we have implemented from the 1980’s forward on

dairy policy that have actually got us to a point where now we

have an unsustainable dairy industry in this country.

Solutions. The Milk Regulatory Equity Act, which the chairman

actually helped bring that Act forward a few years back, would be

one of them. The CME today is controlled by a very thin volume

of product and also a very few people that are actually there. If you

also look into the players that are in the futures market, that is

also very thinly traded perhaps by the same people that are at the

CME and so we need to have some reform there.

Back in California in the early 1990’s we used to have a cost of

production factor that we were able to implement for class I milk.

This is just a thought and an idea but that is perhaps something

we could look at where we could have some sort of a factor for cost

of production along with the CME combined maybe perhaps with

some sort of CPI for dairy as a combination to where you would

take out some of the volatility. That is just a thought.
13

The last thing that I am going to mention is probably going to

be somewhat controversial but increasing the support price to

$12.50. Of course, we would like to see that done not through the

Federal Government’s efforts but as far as on the money side we

would say that you could run a program somewhat similar to what

we had back in the late 1980’s when we had the Gramm-Rudman

provision come in to where we were assessed a certain amount. If

we did not exceed last year’s production, we would have that assessment refunded back to us so it would be an incentive there to

watch our supply site.

I hope that I have covered most of the issues that we have here

before us and I would be glad to answer any questions. Thank you.

[The prepared statement of Mr. Contente appears at the conclusion of the hearing.]

Mr. GUTKNECHT. Thank you, Mr. Contente. Yes, you have covered them and your charts are very constructive. Thank you.

Next we are going to go to Dr. Sabino Herrera who is a dairy

producer with Alhem Dairy Partnership and he also represents one

of the cheese companies. I am sorry. Which one is it?

Dr. HERRERA. Hilmar Cheese.

Mr. GUTKNECHT. Hilmar. Welcome.

STATEMENT OF SABINO HERRERA, D.V.M., DAIRY PRODUCER,

ALHEM FARM PARTNERSHIP, HILMAR, CA

Dr. HERRERA. Thank you. Good morning, Mr. Chairman, and

members of the committee. Thank you for holding this important

hearing today and welcome to the great State of California.

My name is Sabino Herrera and I am a veterinarian and dairy

producer shipping our milk to Hilmar Cheese. I didn’t grow up on

a dairy farm. I grew up in the inner city of Los Angeles but learned

the love of dairying and dairy medicine at the large scale operation

in California’s Central Valley.

I may have a different perspective than others on the panel,

maybe even other dairymen as I am not a proponent of the socalled dairy safety net program. I am here today to convey to this

committee just how important it is for us to revisit our current twopart dairy support program and for us to make meaningful and

sensible reforms that are fair to all farmers.

As you already know, there are currently two subsidy programs

in place, both with the goal of helping producers like myself. One

is not very popular in States with large dairy operations like California, the Milk Income Loss Contract Program. The other program

is the USDA’s Dairy Price Support Program that has existed for

decades andworks at cross purposes with MILC. But, together they

lower milk prices and decrease dairy productivity.

Let me explain why MILC is so unpopular in this growing part

of the dairy world. MILC is not a true safety net for all dairy farmers. Instead it encourages farmers to produce more milk because it

keeps some farms in business that are not profitable on their own.

At the same time, the price support program buys up whatever

surplus cheese, butter and non-fat dry milk produced by these

same farmers as another form of support.

And to make matters worse, USDA then has to find means to get

rid of the surplus by reselling these dairy products or simply giving
14

them away. This, in turn, significantly disrupts the marketplace,

which affects all farmers. Even the USDA has said that the two

programs are at odds with each other and decrease farmer income.

This situation should not be allowed to continue.

Nearly $2 billion had been spent on MILC payments prior to the

recent extension. That amount far exceeded the original estimates

for the program. And truthfully, the money has only helped a limited group of farmers. One reason milk prices were so low for so

long in 2002 and 2003 was because of MILC payments. These artificially low dairy prices were the direct result of a Federal system

that failed to protect all farmers.

Committee members, I urge you to do away with the current system and start fresh with the creation of a single, sensible dairy

program that achieves the purpose of providing dairy farmers with

a safety net while protecting prices for consumers. This change is

vital for the sustainability of many dairy farmers across the country and needs to happen sooner rather than later. I hope Congress

can find the right vehicle to implement this overhaul.

Let me be clear on one thing. By advocating for a single system

and not the current dual programs, I am not suggesting that dairy

farmers need less financial help and funding. Rather, I believe that

resources saved from the consolidation of the two existing programs

can instead be used to support farmers in many other important

areas. Dairy farmers are constantly struggling to keep up with the

changing times and will continue to need help and resources dedicated to address new issues.

In the immediate future, dairy farmers, as a group, will have to

concentrate on finding innovative ideas for sound environmental

management practices and conservation. We also have to tackle the

implementation of new technologies and meet the demands of creative promotion of our products. I did not know when I was young

that I would be a vet and a dairy farmer.

I entered this business after a very positive experience at a wellrun dairy farm operation. We need programs to help young people

get into the business of agriculture. Dairy farming is hard work,

but it is a business and we should not have to be dependent on

Government programs to make our livelihood. What dairy farmers

need is help dealing with real on-farm issues.

In the West, we struggle with water conservation and environmental compliance. Federal dollars could help us met these challenges, as well as help us become energy independent through the

use of methane digesters. As a vet, I can tell you we could use more

Federal dollars for Johnes disease research and eradication, and to

guard against foot and mouth and mad cow diseases. What we

don’t need is to be tied down with the same unfair and costly support system that we have been saddled with for years while real

on-farm needs go neglected.

I want to make sure you know I am not talking about giving us

more and more money. We just need your help to make sure that

Federal dollars are targeted at helping dairy farmers across the

country. We certainly do not want money to go to new, hastily created programs like MILC or arcane, outmoded programs like the

price support, but rather to programs that help grow our business.
15

Mr. Chairman and members of the committee, I am optimistic

about my future and about the health of dairy in the Central Valley, but I am deeply concerned about the current dairy subsidy system. An overhaul of the dairy program in the next farm bill is essential for creating effective policy that will stabilize the dairy industry and enable us to continue to have healthy, high quality

farms and produce dairy products that the public wants and enjoys.

I thank you again for holding this hearing here in California’s

Central Valley and I look forward to your questions.

[The prepared statement of Dr. Herrera appears at the conclusion of the hearing.]

Mr. GUTKNECHT. Thank you. Back where I come from veterinarians who work with large animals are called docs so thank you, Dr.

Herrera, for your testimony.

Next we are going to go to Dino Giacomazzi who is a dairy producer with Western United Dairymen from Hanford, California. We

welcome you. Thank you.

STATEMENT OF DINO GIACOMAZZI, DAIRY PRODUCER,

WESTERN UNITED DAIRYMEN, HANFORD, CA

Mr. GIACOMAZZI. Thank you very much. I am an Italian dairy

producer so I am a little south and to the east of Portugal but, you

know, we all like good food and wine so we are not that far apart.

Good morning, Mr. Chairman Gutknecht and Mr. Nunes, Costa,

and Cardoza. I want to thank you for holding this hearing today

and hearing the issues of the dairy industry. I really appreciate

that. My name is Dino Giacomazzi and my family has been milking

cows and farming in Hanford, California since 1893. We currently

milk 915 Holstein cows and farm 500 acres of forest crops.

My written testimony has a lot of details on farm bill issues and

I wanted to narrow my talk today down to sort of a barometer

reading of the current State of California dairy and talk about

some issues that are farm bill related and some issues that are not

farm bill related but are important to us as dairymen all the same.

The past 5 years have been quite a roller-coaster ride for the industry. We have had volatile milk prices, high energy cost, high

feed cost, high animal replacement cost, high cost of doing business

with taxes and workman’s comp insurance, high cost of regulation

and environmental compliance.

To quote my 93-year-old grandmother who was born on a dairy

and lived on one her entire life, she said, ‘‘Never before have we

had to do so much with so little.’’ She recently said that and I kind

of explained to her the situation with the industry. She has been

around a long time and has very much seen it all.

On top of that, the past year has been filled with natural disasters including a heat wave costing the lives of more than 30,000

dairy animals and causing the dairymen close to half a billion dollars. That is just in the eight counties of the San Joaquin Valley.

Looking into the future we are confronted with two major issues,

large scale environmental regulations and milk supply out pacing

demand. To answer the question that was posed to us by Congressman Costa, as dairymen what we are really looking for is a handshake, not a handout. We want to keep more of our money to build

our own safety nets. Let’s reduce taxes.
16

Let’s reduce the cost of Government. Lets change the structure

of capital gains tax which in its current form promotes sort of artificial growth within the industry. We need to be able to ship money

out of dairy for high value land into other types of industries. We

need to shift away from the paradigm of it moves tax it, if it keeps

moving regulate it, if it stops moving subsidize it. You all probably

know who said that.

We milk 950 cows which may seem like a lot to dairies in the

rest of the country but in my county we are actually below average

size. With the environmental regulations that are coming down the

pipe, it is projected that only 6 percent of all dairies are profitable

enough to absorb the high cost of compliance. That means in order

to survive the coming storm of regulation, your dairy would have

to have more than 2,500 cows.

What this clearly indicates is that pretty soon California dairymen of all types will be knocking on the doors of Congress looking

for help. As it happens in California, soon it will happen in the rest

of the country. Following right behind us will be 75,000 dairymen

from Wisconsin and dairymen from the great State of Minnesota as

well.

Allowing us to continue to use check-off money for environmental

research is a good way to help us help ourselves. Improving the

way America views its dairy families has an impact on the demand

for our products.

Here is another idea. Let’s harmonize regulations, regulators,

and reporting. We don’t really need inspectors from the county, region, State, and Federal Governments coming to our dairy and

measuring how much poop we have on site. There is no reason

these agencies couldn’t develop an MOU and share information, develop a standard reporting process that we can fill out and distribute to all the agencies. After all, we want clean air and clean

water. That is our goal as well. Let’s spend less money on regulatory bureaucracy and more money on technology to actually help

the environment.

We appreciate and understand the need for a Federal price support system and I encourage Congress to keep the current system

in place. I keep mentioning handouts today. I don’t think the price

support system is actually a handout. It is a safety net. In fact, it

is the only farm program that I am aware of that actually pays for

itself. It ultimately will pay itself back. It is a low-cost program.

The MILC program is what I consider more of a handout.

This program does nothing to help increase the milk price. In

fact, there is evidence suggesting that it actually slows price recovery. What we need is more and fair access to foreign markets with

the ability to compete on the global stage. Rather than handout

cash to dairy producers we would rather take that money to level

the world playing field through the dairy export incentive program.

There is money available for use today but it has been tragically

under utilized. One thing you could do to help the dairy farmers

right now is to see that the money gets spent. Let’s use it.

Another great example of a no-cost program you could implement

today that would have an immediate impact on the price of milk

would be to increase the minimum non-fat solid standards of milk

nationwide. Matching the California standards, for example, would
17

not only contribute to a healthier American population but would

also contribute to a healthier American pocketbook by reducing

Government purchases of nonfat dry milk.

I took it out of my speech because I thought it would be too long

but I feel it is important to say this. If we were to take and increase the standards of the Federal Government to what California

is today, based on a 1993 study, and we produce a lot more milk

today than we did in 1993, that would take a half a billion pounds

of solids and put it into the consumers instead of into storage.

If you were to look at that in terms of how many loads of solids

that is, that is almost 10,000 truck loads, semi-truck loads. If you

consider that it would take an average of 8 hours to transport that

powder from its origin to its destination, you would be looking at

almost a million gallons of diesel just to transport that product.

Here you have a no-cost program that would not only help the

health of the country increase the price of the dairyman but it also

would reduce our dependence on foreign oil.

It would help clean the air. It would improve our national security. Like I said, dairy producers are looking for a handshake. We

are in a tight-knit partnership with our Government and need to

utilize more self-help programs to promote a healthy industry.

It has been an honor to speak to you today. There is much more

information on these topics and others in my written testimony and

I invite any questions that you have at this time.

[The prepared statement of Mr. Giacomazzi appears at the conclusion of the hearing.]

Mr. GUTKNECHT. Thank you very much, Mr. Giacomazzi. I think

you have offered a couple of very, very interesting suggestions and

I hope my staff has written them down. I will try to remember

them.

Mr. GUTKNECHT.

Next we have Mr. Leroy Ornellas who is a dairy producer from

Tracy, California. Welcome, Leroy.

STATEMENT OF LEROY ORNELLAS, DAIRY PRODUCER, TRACY,

CA

Mr. ORNELLAS. Thank you, Mr. Chairman. First of all, let me

thank you for inviting me here, Mr. Chairman, and thank you for

coming here to California for this hearing. Let me say that I am

proud to be here in front of my Azorian cousins. I don’t think any

of us are mainlanders. We are all from Azores. Aren’t we? There

you go.

My name is Leroy Ornellas. I am a dairy farmer from Tracy,

California. My wife, Jennie and our three sons, Kevin, Mark, and

Mathew, operate two family dairy farms near Tracy. Our family

milks a total of 650 cows and produce nearly 14 million pounds of

milk over the most recent 12 months.

I am the third generation dairy farmer. Our sons are fourth our

grandkids are the fifth on the same dairy. We originally came from

the Hanford area. My dad as a young man and grandfather moved

from their to Tracy in the 1930’s so we have had a long history

here in California.

Our family over the years has marketed milk to Carnation,

Hilmar Cheese, and currently we market our milk Dairy Farmers
18

of America. I am a member of Western United and I have the privilege to be San Joaquin County Board of Supervisors. In the Midwest a lot of times it is called county commissioners. That is a fulltime job also so between that and the dairy business my days are

full.

I appreciate the opportunity to testify at this hearing today. I

have a written testimony document that is more detailed on all of

the points that I will touch on today. I would like to submit that

document for the committee’s reference.

While organizations that I serve have not officially established

positions for all of the 2007 farm bill issues, I would like to share

my thoughts on some of the major themes that will define the dairy

sections of the bill.

DFA members are participating with all the other members of

the National Milk Producers Federation’s Dairy Producer Conclaves to develop a consensus position on farm bill issues. We will

keep you and your staffs informed of our efforts and seek your

counsel on issues as we discuss them.

Because we do not think there will be radical shifts in policy direction as a result of the 2007 farm bill we support the view that

an extension of the current farm bill which will work well for most

of the Nations dairy farm families.

We feel the next farm bill should maintain some form of an economic safety net for dairy farmers. Safety nets prevent prices from

falling so low that businesses become unviable. Past Congresses

have maintained safety net provisions for the dairy industry. We

hope this Congress will continue these policies. The most important

safety net provision we have is the dairy price support program.

We favor continued operation of the dairy price support program at a targeted $9.90 U.S. average manufactured milk price. We

would oppose granting the Secretary of Agriculture any discretion,

which would reorient its intended purpose away from supporting

income to farmers just to result in minimizing Government costs

and we may need Congress to instruct the Secretary of Agriculture

of this fact in some official manner.

Up until the last several months the CCC has purchased some

NFDM doing what safety nets are supposed to do. The last time

milk prices fell to safety net levels was in 2000 when the average

class III price for the year was $9.74 below the safety net price of

$9.80 for milk of 3.5 percent butterfat test.

The 10-year average class III price is $12.62. Because the price

support program is in place and working we hope to avoid a price

crash like in 2000 but if it wasn’t around and prices did fall to that

level, the Ornellas farm would face a loss in income of $402,439 on

the most recent years production. It would be hard for our business

to withstand.

We are very interested in stable policies that help to keep reasonable prices and a safety net that maintains some level of viability for a dairy farm family. Unfortunately not all of the Nation’s

dairy farmers have funded and are operating a self-help program,

cooperatives working together.

Dairy farmers voluntarily pay 10 cents per hundredweight on all

milk produced in order to structure the size of the Nation’s dairy

cow herd and more closely tailor milk supply to demand. Addition-
19

ally, the program works to assist exports of dairy products in an

attempt to market and promote domestically produced dairy products to the world.

Over the 3-year period of the CWT program, participating dairy farmers have contributed over $213 million, which to date was

used to remove a total of nearly 3.2 billion pounds of milk from our

domestic market. However, the CWT program is not intended to replace Federal farm programs and can never do so because there

will always be those who choose to take advantage of the programs

benefits but never pay their share.

Even after 2 years of successful implementation there are still

over 25 percent of the country’s dairy farms that choose not to pay

in. In spite of our success we still need Congress’s help in providing

policy support to our industry.

I want to thank you Chairman Gutknecht for cosponsoring H.R.

4341 as part of a bipartisan effort to clarify that animal manure

is not a hazardous waste under the Superfund law or its counterpart, the Community Right-to-Know Act. Congress should clarify

that it never intended to jeopardize American agriculture by imposing strict, joint, several, and retroactive CERCLA liability on farmers for their traditional farming practices, including the use of manure as a beneficial fertilizer. I would ask you to urge your colleagues to support this important legislation.

In closing, Chairman Gutknecht, I want to thank you and the

House Agriculture Committee, specifically your subcommittee, for

having this field hearing. We know we can’t explain all of our concerns here in detail but want to make you aware of them so that

when we do provide you with additional details, you will better understand our concerns. I will be happy to answer any questions.

Thank you.

[The prepared statement of Mr. Ornellas appears at the conclusion of the hearing.]

Mr. GUTKNECHT. Thank you, Mr. Ornellas

Let me start the questioning. I will try to keep my questions to

the 5-minute rule. You all have been pretty good at keeping your

testimony fairly compressed.

I would just ask all of you just as a general view, and we are

not going to hold you to this, is there interest among California

dairy producers in terms of becoming part of the Federal Milk Marketing Order System? What is your sense? We are not going to

force you, I don’t think.

Mr. COTTA. If you get more than one answer, there will be a difference of opinion I am sure. That is true anytime you have more

than one dairyman in a room. From CDI’s perspective at this juncture we are not interested in the Federal Order unless the Federal

Order were to make changes that somewhat mimic some of the

things we do here in California and that is allowing change in a

relatively short period of time.

I would talk about the hearing that was held last January in the

Federal Order System. The hearing was called Quickly so you could

have a quick decision on Federal make-allowances. This is September. The hearing is being reconvened. Hopefully there will be an

end to the hearing by January and who knows when you may get

a decision.
20

John Block was the Secretary of Agriculture when there were

some rules having to do with the amount of cheese on pizza and

the amount of meat and that sort of thing. I think USDA is still

sitting on that decision and that was 1980 so from that standpoint,

it does not pique our interest to be in the Federal Order unless

those kind of changes could be made.

Mr. CONTENTE. Mr. Chairman, our views are a little bit different

than that. We look at the big picture and the big picture suggest

that California’s formulas continue to deteriorate the CME price

because we always have either little transportation allowances or

other gimmicks that come in.

If you look at the chart that I had on the comparison between

California and the Federal Order prices, you will see as you move

away from the year 2000 California has done a good job of having

those hearings and adjusting those formulas. We just had one June

1 on whey. According to the Cornell study that just came out recently, the cost for whey across the country, I think there are 12

plants, and the weighted average was around 19 cents.

Yet, we just adjusted ours in California to 26.7 cents. Once you

put in the rest of the formulas, 5.8 is the number of pounds in 100

pounds of milk times that difference. The 19 to 26.7 is about 7

cents times 6 so that is about 40 cents or, in our situation with the

usage, about 20 cents on all milk difference that we have just

taken away from producers.

You can see that the California system undermines the price at

the CME because the CME eventually will pick up that lower

mechanism that we have in there and it will ratchet itself down.

It is not a very good system in my opinion. It be like a football

game that has rules that California gets to have 11 players and the

rest of the country only gets to have 9. We all need to be playing

by the same rules in my opinion.

Dr. HERRERA. I agree with Mr. Cotta. We in California would

like to understand what we are getting into and the Federal Order

seems a little complicated. The expedient nature of California’s

dairy pricing and the quickness of how it responds to problems is

a big factor versus the Federal.

Mr. GIACOMAZZI. Speaking for myself, I am sort of a libertarian

by nature and anything that moves from local control to Federal

control is something that I generally would be against. I think in

the State here we appreciate the ability to have a reasonable

amount of influence over our system and hopefully will get it to be

more efficient than it is today but I think going Federal would

magnitude the complexity. Multiply it by magnitudes I guess is

what I mean.

Mr. GUTKNECHT. Thanks.

Mr. ORNELLAS. There are aspects of the Federal Order that I

think all of us would support and admire. I think our California

system allows us to petition the State much quicker than, say, the

Federal Government and to get a response back even though it is

not always favorable but we can get a response back quicker.

I don’t think we would be in a rush to leave that system so I

would say we currently like the system that we have. Speaking for

myself, I think we are always open to new ideas, new thoughts,

and we can keep discussing this as a possibility.
21

I did also want to add that my colleague mentioned about changing the standards in the United States and I support that wholeheartedly. That would just make a huge difference even though

that is not the question you asked. Thank you.

Mr. GUTKNECHT. I just want to ask one more question and then

I will turn it over to my colleagues. Mr. Contente, you talked a little bit about concentration and that is something that I worry

about for a whole variety of reasons. I mean, the number of food

companies that are out there is getting smaller and the companies

are getting bigger.

You also mentioned MREC and I am also a little worried about

that. In part because I am also a licensed and bonded auctioneer

and I know you get better prices if you get five buyers than if you

only have two buyers. I mean, that is generally the way it works.

Although, if you have two good buyers, you can get pretty good

prices at an auction.

What do you think we should do about that? I mean, that is a

big question and maybe you can’t answer it in the 30 seconds I

have left on my time.

Mr. CONTENTE. Mr. Chairman, the antitrust laws that we have

on the books if they had been followed over the last 25 years we

wouldn’t get to the position that we are at today so they haven’t

been followed. To turn that around and say that tomorrow we are

going to enforce them all, that is not a reality either.

This is something that is going to take some time to resolve itself

and I believe it is going to be a tough, tough battle. To give you

an example, I ship to Land O’ Lakes and we’ve got some cheese

production facilities, three of them in California. We have a very

large one just newly constructed a few years back.

At the end of the day less than 5 percent of the cheese coming

out of these plants has a Land O’ Lakes sticker on it. Somebody

else’s name is going to be on that product. My neighbor down the

street he ships to Hilmar. Hilmar doesn’t have their own label.

They sell to other people. At the end of the day there is basically

three major players in our industry.

You’ve got Dean Foods that has about 70 percent of the fluid in

the metropolitan areas, the milk. And you’ve got my neighbor,

Leprino, who has a large share of the food service, and Kraft has

probably about 35 percent of the retail market. Those three guys

basically control at the end of the day where our milk goes and

they are the marketers.

Now, the almond industry in this State is huge. It has been

growing leaps and bounds every year. It has been successful. In

May I was at an Agriculture Day in Sacramento and I happened

to ask one of the industry leaders there about the almond industry.

I said, ‘‘How many buyers do you guys have in the almond industry?’’ He said, ‘‘Between 80, 90, to 100 independent buyers.’’

I think like you said yourself earlier, if you’ve got multiple buyers and sellers, you’ve got capitalism functioning. We don’t have

that in our industry. I don’t believe that anyway.

Mr. GUTKNECHT. Thank you. I have taken more than my 5 minutes.

Mr. CARDOZA. Thank you, Mr. Chairman. I wanted to say something before I start asking questions. I wanted to give my colleague
22

Devin Nunes some big credit for pushing the bill that helped us

maintain our California order in the cross-border shipment question. You did some great work there. A lot of you in the audience

know about that work and I just want to applaud him personally

in his hometown area for the work he did in that effort. It was

really an important one.

Mr. COSTA. He spent over 2 years in that effort.

Mr. CARDOZA. A lot of blood on the House floor as well.

Mr. NUNES. I think you are being very kind, Mr. Cardoza, being

that all of us played a large role in that including the chairman

and, of course, Chairman Goodlatte. Thank you for your work.

Mr. CARDOZA. It is interesting as I listen to you all talk. Mr.

Giacomazzi, you mentioned something that I think is really important, and that is the layers of the regulation that small, medium,

large producers all have to deal with.

I want to tell a quick story because I think it is instructive for

all of us who deal with Washington. When I was in the legislature

I went back on a trip and met with the Clinton administration and

suggested that the levels of over-lapping regulations, California’s

environmental rules, Federal environmental rules, how you have to

meet all these different standards and deal with everything.

I suggested that the Federal Government should just say if the

State of California meets the standards that they have set, that

they should only have to meet the California standards and it

would be certified as such. The Clinton administration fellow that

I was meeting with at the time said, ‘‘Mr. Cardoza, we can’t do that

for a number of reasons.’’ I said, ‘‘All right.’’

Then I went back 2 years later and had a different administration in the White House. I am thinking these Republicans they

think Government shouldn’t overlap so I am going to ask my same

question. The Bush administration gentleman who I asked in the

same room that we had met with the Clinton Administration 2

years before, same question, he goes, ‘‘Oh, Mr. Cardoza, we couldn’t

do that’’ for the same reason the Clinton administration gave.

What I am trying to say is it is not so much party but it is a

matter of the question of mentality once we leave the State. It goes

to your question also about which Marketing Order is better because when we lose the ability to affect our own climate and not

be able to respond, I think that is a big problem for our local producers. It is a very tough thing. Until we can overcome that challenge, you are very smart in questioning getting involved in the national order in my mind.

The second thing I want to mention is you have a person in the

room, A. J. Yates, who has dealt with both the Federal and State

situations. As we go forward, Mr. Chairman, in discussing how we

are going to deal with this, I would encourage you to consult with

A. J. in the back of the room. He was assistant secretary in both

the Federal and California. He served under both Republican and

Democratic administrations as I recall. I just wanted to applaud

and acknowledge the fact that you are here today, A. J., and thank

you for your work in the industry over the years.

Finally, I want to ask a question of all of you and that is when

we were dealing with the farm bill throughout the country, there

are three areas that we are really focusing on in some ways other
23

than the programs that you have already talked about. That is

EQIP, marketing orders and research.

If you were going to prioritize those, how would you prioritize

them and could you just briefly each speak on the importance of

those three areas and how they affect your end operations and

whether you are profitable or not and can even do business in the

State of California.

Mr. Cotta.

Mr. COTTA. Well, I think you probably catch me a little short but

I think we have got to protect our marketing orders because that

is what gives the industry the ability to have some sort of system

that you can manage that producers can deal with from coast to

coast.

I think the other issue, EQIP with the new regulations coming

down the pike on water, on air, and a host of other issues including

energy production. EQIP needs to be high on the agenda and then

research. You can’t separate, at least I don’t believe you can separate EQIP and research. You have got to know what happens before you can fund projects and you know what those end results

are.

It is a dilemma we are operating under in California right now

where we have had air regulations that have been put into place

without proper research. When we get the research done then those

air regulations are then amended. It could have been devastating

to the industry a year ago if we had implemented what at least the

San Joaquin Valley air control district was recommending for all

large areas in the Valley, million dollar plus investments.

When we get the research back we find out that wouldn’t have

done anything for air anyway. I don’t think you can separate the

EQIP dollars available and the research necessary so that you can

fund the right portion or the right system. Methane digesters may

work for some. They don’t work for everyone. They are not going

to be the entire answer and you have little problems within the

system.

PG&E will buy energy from a dairy at 3 cents a therm and they

12. Our attitude has always been, ‘‘Wait a minute. At 3 cents we

lose money. At 6 cents we maybe break even. At 8 or 9 cents it

probably makes the project worth doing.’’ Until we find those areas

and make those changes, it is very difficult for us to separate out

which direction do we go or what do we tell our producers to do.

We want them to make investments that indeed meet the criteria

but you can’t get there unless you have the right research that tells

you what that criteria is.

Mr. CARDOZA. You brought up a great point and I want to get

back to this. Mr. Chairman, I am sorry. I am probably going over

my time but in the chairman’s district there are State mandated

certain energy requirements and that the energy they produce has

to be able to go to the public benefit.

In California we have said that utilities don’t have to take the

alternative energy that we produce and that is why they are ahead

of us instead of us being the pioneers that we could be in this field.

Mr. COTTA. We had a group of folks up 2 weeks ago at a methane

cover lagoon system up in the Lodi area. Quite frankly, that system

does work. However, the producer can double that but he won’t be-
24

cause he has to sell it at a loss to the PG&E people. Those rules

and regulations——

Mr. CARDOZA. When we had the California energy crisis and we

were paying 28 or 40 cents we could have sure used some more digesters in the State to bring the cost down.

Mr. COTTA. You bet, but you can’t build them for fun.

Mr. GUTKNECHT. Actually, this is one of my favorite subjects. I

believe if you just give alternate energy sources access to market.

I mean, the problem is the big oil companies control the distribution network for the gasoline supply and the power companies control the access to the market for electricity. Frankly, I am one who

doesn’t believe you really have to subsidize these things.

You just have to make sure that they have access to market so

that is basically the strategy that we have deployed in Minnesota.

Those who were at the hearing in Marshall I think got a chance

to see that it is bearing some real fruit not only for farmers but

I think in terms of having a more diverse energy portfolio so we

are not totally dependent on one source for energy. I would be

happy to give you as much time as you need on that one.

Mr. COTTA. I wish every member of the California legislature

would go to Marshall, Minnesota and see what Jim and I and the

rest of them there saw because it really would change the face of

what we are doing here in California over night if they just went

and visited.

I will get back to my original question very quickly. I know the

chairman’s is trying to keep us on time.

Mr. CARDOZA. Just to save time I would concur with Richard’s

comments on everything. The marketing orders is something we

definitely need, especially with the concentration issues that we

have.

Dr. HERRERA. I did research for about 6 years at UCLA and I

know research doesn’t take a year. It takes a long time. These regulations are jumping on these premature results of research. It is

really sending us mixed signals about what we should be doing and

what we need to do so I put research up on the list very highly and

then EQIP funds below that because once that sound research is

reliable, then we can do a lot with those EQIP funds.

Mr. GIACOMAZZI. You sort of opened a can of worms with me. I

have quite a few opinions about this but I think Mr. Cotta said it

almost perfectly about the problems with regulation and putting

regulation before research. I think that is pretty common sense

across the board. We really need to get away from these sort of

shoot from the hip laws that are a reaction to lawsuits and what

not and try to create a business climate that is more sensible.

In terms of EQIP we have to think of dairies—I think there is

a tendency out there to consider dairies as this—well, I will put it

this way. We tend to exclude the fact that we are also farmers

when we talk about dairy. There is a lot of conservation efforts

being done in farming in California right now that are mirroring

some of the things that are happening in the Midwest through conservation tillage programs, for example.

Right now I am involved in an EQIP program where we are get- ting $30 per acre to try to reduce passes in the field. The solution

we came up with was through strip tilling our corn crop we are
25

able to reduce 80 percent of the passes that we make in the field

just for that one crop saving diesel, saving emissions, saving particulate matter, reducing our cost of labor, reducing our ownership of

equipment.

What it really boils down to is that environmental solutions don’t

necessarily have to cause you to sacrifice. There are environmental

solutions that exist that are beneficial to the economy and beneficial to the environment at the same time. I think that environmentalists tend to believe that you have to suffer for the environment as is evidenced by our mitigation efforts for our air emissions

regulation.

We came up with this huge suite of possibilities that dairymen

could select to reduce BOCs and BFAa and particulate matter from

their dairies. It essentially boiled down to a good dairyman, an efficient dairyman is doing most of these practices anyway. The

enviros won’t accept that. They want to keep suing it saying, ‘‘You

know, if all they have to do is become more efficient to save the

environment, that is not good enough.’’

I think that is something that has kind of burned up my backside because we really all have the same goals in mind. I believe

EQIP funding for conservation tillage programs in California

should continue, if not increase. I think there is a lot of data out

there now that supports the conservation tillage programs.

Also with the cost of mitigating water quality issues like liners

for lagoons and the need to track nutrients that are applied to the

field through lagoon water we are going to require pipelines and

meters and a lot of expensive high-tech equipment in addition to

the reporting. I think EQIP plays an important role but obviously

it all comes after. There are sound science to support the fact that

what we are doing actually has an impact.

I have a whole other opinion about ethanol but I will save that

for another day.

Mr. ORNELLAS. What was the third choice? I know EQIP and research. What was the third? I didn’t hear the third choice.

Mr. CARDOZA. Marketing programs.

Mr. ORNELLAS. All right, marketing.

Mr. CARDOZA. Actually it was marketing programs but I was appreciative of the Marketing Order testimony as well.

Mr. ORNELLAS. Thank you. I am just going to touch a little bit

on EQIP. For one thing, I think we need to streamline the process

a little bit. I attempted to apply for the EQIP program on a couple

of pieces of equipment and then just gave up on it it was so complicated. I think my colleague, Mr. Cotta, hit it. This is a very difficult State to do business. Extremely difficult. We do generally like

our marketing system. We generally don’t like our State government because of what it does.

You can put in a piece of equipment today and the laws change

so rapidly that it is outmoded, outdated, inefficient, and no longer

meets the requirements. There are constant requirements being

changed. I know in county government we are seeing, for example,

regulations in the State of California are changing so rapidly that

a water system that is put in today is outmoded and perhaps illegal years down the road.
26

But the EQIP program I would say is a very important program

for those who can take advantage of it and use it. Digesters, you

have to be very cautious when you put half a million dollars worth

of equipment on your dairy that may or may not work in a few

years. For every digester that is in there are probably two or three

that are no longer running. Anyway, I would probably right now

put EQIP down. Thank you.

Mr. GUTKNECHT. Thank you. Mr. Cardoza. Mr. Costa.

Mr. COSTA. Thank you very much, Mr. Chairman. I have a question I would—a different question for each of the witnesses here.

First, Mr. Joaquin Contente, in your testimony I looked and you

suggested that make-allowances could be altered to benefit both

producers and processors. However, as I see it, with the variable

make-allowance the producer and processor relationship represents

both the supply and demand side of a free market equation.

How exactly would you propose that we change the variable

make-allowance that would, in essence, benefit both the producer

and the processor?

Mr. CONTENTE. You would establish the cost of production for

milk as a zero point and that is already established. You would

also establish the cost of production for a powder or butter or

cheese plant and those numbers are out there. Those are the two

zero points.

As supply moves, as the market moves, if the market starts to

increase demanding more product, then the variable make-allowance would also increase to the plant. They would receive a higher

make-allowance. Thereby producers are receiving the market price

increase as a signal from the market. The plant would receive the

make-allowance increase which would be related to the market so

that would be tying the plant to the market.

Mr. COSTA. I think we ought to try to talk with our processor,

for instance, to find out whether or not there is a basis there for

a solution.

I would like to move on. Dr. Herrera, I agree with the chairman.

Our veterinarian as the years I grew up on our farm, we had a

dairy, kind of got stuck not only taking care of our large animals

but also got stuck taking care of our dogs and cats and everything

else we brought to him. They even did some home medication.

When we talk about the challenges with BSE and e-coli and

other issues involving animal health and the concerns that today

are in the public right now, of course, with the e-coli issue, I would

like to get your take regarding animal health. As a veterinarian as

well as a producer, what do you think is the largest animal health

and food safety threat today to our milk supply?

Dr. HERRERA. Let’s not just narrow it down to milk supplies.

Broaden it up to agriculture in general. As we lose more and more

farm ground here in the United States, I think we are going to

have to resort to a third-world country growing our food and I

think we are going to see more and more incidents like the one we

are having right now with e-coli.

Mr. COSTA. So you are concerned about the balance of trade with

regards to agricultural products? Is that the point you are making?

Dr. HERRERA. I guess my concern is our overall safety in the food

industry and where we are getting our food from. If we can’t grow
27

it ourselves, we are going to have to resort to purchasing food from

other countries. That is going to open up a whole——

Mr. COSTA. We already are. Last year for the first time in our

Nation’s history we imported more agricultural products on a cost

basis than we exported.

Dr. HERRERA. Is that going to get any better?

Mr. COSTA. I think many of us on a bipartisan level as we are

looking at the 2007 farm bill are very, very concerned that 10 years

from now—and that is the question I ask myself, and I ask witnesses every time during these hearings, where do we want U.S.

agriculture to be 10, 20 years from today?

Dr. HERRERA. Exactly.

Mr. COSTA. That ought to be what the bottom line is in my opinion.

Mr. Ornellas, you mentioned the need for greater funding for

EQIP but talked about difficulties faced. As I said in the outset in

my comments, the administration is going to suggest, and has already suggested, that the cost of the next farm bill be far below

what the 2002 farm bill was even though experts agree that the

2002 farm bill was $14 to $17 billion below what was anticipated.

Of course, that is because commodities in many areas were better and, therefore, safety nets were not used but we know what the

strategy was earlier this year with our negotiators with the WTO

and the offers to slash a host of programs.

If you are sitting in our seats and you are, as you indicated, a

locally elected official, what financial choices would you make in

terms of cutting other areas of the farm bill to continue EQIP at

its current level or market assess or others?

Mr. ORNELLAS. I have never used EQIP. I have attempted to.

Mr. COSTA. You told us it was too difficult.

Mr. ORNELLAS. So maybe it is not fair for me to say but I don’t

think the world would come to an end if the EQIP program was

either cut back or——

Mr. COSTA. What would your priorities be in the farm bill?

Mr. ORNELLAS. To reduce?

Mr. COSTA. Well, to reduce, maintain, or to increase.

Mr. ORNELLAS. Well, I think a certain fair safety net for the

dairy industry. I mentioned earlier about $9.90 as a support price.

Mr. COSTA. It is not clear. Did you support MILC? I was reading

your testimony.

Mr. ORNELLAS. I did.

Mr. COSTA. You believe, unlike your other witnesses, that it must

be maintained?

Mr. ORNELLAS. It is hard for me to imagine that a 60-cow dairy

farmer in the Midwest that the program is going to keep them

going for another year or two. It is just not that much. I know it

helps and it helps us here in California. With the tremendous

amount of losses that we have when we receive those checks that

helps. We are talking about the MILC?

Mr. COSTA. Right. So you want to keep it?

Mr. ORNELLAS. Yes.

Mr. COSTA. All right.

Mr. ORNELLAS. I don’t have a problem with it.
28

Mr. COSTA. Mr. Cotta, you spoke a great deal in your testimony

about the trade policy. Some of us had the interesting experience

Thursday morning to have three former Secretaries of Agriculture

testify on their view on how we ought to write the 2007 farm bill.

We had former Secretary of Agriculture Block, we had former Secretary of Agriculture Clayton Yeutter, and we had former Secretary

of Agriculture Dan Glickman.

I asked the three of them, I said, ‘‘One of the complaints that my

farmers, ranchers, and dairymen continually make to me is that

they understand they have to compete on a global market. They

understand that trade is a very vital, important part of our Nation’s economy. Their constant complaint is that free trade doesn’t

translate into fair trade.’’

They all kind of deferred to former Secretary of Agriculture Clayton Yeutter who responded to me in very strong terms, as you

might expect, that we had to reduce all trade barriers and tariffs,

that we had to comply with the WTO. Obviously it was a different

opinion than many of my agriculturalists reflect. I said, ‘‘You say

that but you say the tools are in place for us to fairly compete.’’

He said, ‘‘Yes. The tools are there.’’

Unfortunately, sometimes we don’t use the tools properly.’’ I

would like to get your take as one of the largest co-ops of MILC

not only in the State but in the Nation. You produce a whole lot

every year. You try to export your product to the degree that you

can. What tools is Mr. Yeutter making reference to that we are not

using properly to have an ability to export our dairy products?

There is a graph here that I think Mr. Contente submitted that

showed the gap between the amount of imported milk products

that we do each year annually versus what we export. Unfortunately, the gap continues to grow. Is that your take on it?

Mr. COTTA. I think that is correct. I think if you look at the top

of my testimony, page 3, we think there are three key areas, elimination of export subsidies, increases in market excess, and reduction in domestic support. I think those are probably the same areas

that Secretary Yeutter was referring to.

Unfortunately, there seems to be very little ability for us to enforce those rules that are in place. Let me give you an example. A

year ago we had 50 million pounds of powder committed to Mexico,

specifically committed and made for Mexico, when they increased

the tariffs by 30 percent as a retaliation for our tariffs on cement

and steel.

I am not sure what cement and steel have to do with milk powder but the point is that is not in our business plan. We can live

with the rules if you write them right but it is not in our business

plan. We get notification yesterday. We also put in a multi-million

dollar line to do milk powders with blends that we can export and

that is a lot of the import problems we have coming into this country. They don’t come in under dry milk powder or whatever.

They come in as blends so they are not really controlled. We have

put in a multi-million dollar line to make blends and have been

making blends and exporting them. Again, the Mexico situation

comes up. We get notification yesterday that there will be a new

tariff on blends but they think it will only last until October 31.
29

Interestingly enough, it seems to coincide with how much milk is

available in Mexico at the time.

Even though they used the steel and the cement argument, at

that point there was a little more milk in Mexico than they needed

and they wanted to cut back on exports so that was the deal. If you

look right now there is a little more milk in Mexico than what they

need. I just find it incredible that we would again be informed that

we have this new set of tariffs put on product we currently have

in inventory, but it looks like it will expire on October 31 which

kind of looks like when they will probably be about out of powdered

milk product there.

I mention Mexico because that is close but that goes on all the

time. We do export a lot of butter. Powder goes to about 40 countries of the world. Until someone enforces the rules for everyone

the same, we are really spinning our wheels and our business plan

doesn’t account for spinning wheels.

Mr. COSTA. Obviously that is something that goes beyond the

subject of the reauthorization of the 2007 farm bill. I think it is

something that this subcommittee and, frankly, that the House Agriculture Committee needs to focus on as we talk about trade.

Trade is such an increasingly greater part of how American agriculture ultimately is going to succeed or not succeed, in my opinion,

over the next 10 to 20 years. I just think that the playing field, as

we like to use the terminology, is not being evenly dealt with.

Mr. COTTA. You are correct.

Mr. COSTA. Until this administration or any future administration, and that criticism I could level for the previous administration, I like to tell my farmers too often it is the tail wagging the

dog. Our foreign policy ends up dictating the effects of what our agricultural policy will be. We understand the need to maintain our

foreign policy.

Nonetheless, it is a difficult way to treat American agriculture,

I believe. Until we get serious about it being evenhanded with our

trade policy as it relates to agriculture, I think we are going to continue to have this problem regardless what administration we are

talking about. It is something we need to do a better job of.

My final question would go to Mr. Giacomazzi. It is not really

kind of part of the hearing here today but I know you deal with

it. Last month I was in a hearing that we had here in the district

on immigration. As you know, it has been a very important focused

issue. It has been a contentious issue in Washington in the last

year and a half.

I want to get your take because when they talk about agriculture, notwithstanding the fact that agriculture employs I know

less than 20 percent. I heard the numbers 16 and 17 percent of the

illegal workforce that is here in America today. Too often when

they talk about agriculture it is viewed as seasonal harvest work.

I would like to get your take on whether or not you from a dairy

perspective, because we all know dairies operate 365 days a year.

Those cows have got to be milked at least twice a day and some

dairies do it three times a day. You are talking about a permanent

workforce. Do you believe that we in Washington need to be focused on comprehensive immigration reform, Mr. Giacomazzi?
30

Mr. GIACOMAZZI. I guess the answer to the question is yes, I do

believe you need to work on comprehensive reform. I don’t support

the hiring of illegal immigrants. I believe that anybody who is willing to work should have the ability and shouldn’t have to go

through such a complicated process to come to this country and get

a job and pay their taxes and try to achieve the American dream

which all of our ancestors came here and obviously did achieve.

I will relay a personal story that really expresses my opinion

about this issue. I have an employee who was one of my best guys.

He came to us about 10 years ago and he didn’t speak a word of

English. He was fresh off the boat, I guess, they used to call the

Italians.

Mr. COSTA. FOB.

Mr. GIACOMAZZI. FOB and WOP, too. I am not sure if he was

WOP or not but he had started out milking cows kind of at an

entry-level job and eventually moved. They kept moving him up because he was such a great guy to the degree where he was practically managing the farming operation. He spoke great English

and was really integrated into the company. We tried to provide for

him and his family as much as we possibly could.

Well, 2 weeks ago he came to me and said, ‘‘I have an opportunity to go work for a cheese plant in Tulare for almost three

times what you pay me. They are providing me and my entire family health insurance and a retirement plan.’’ I said, ‘‘I understand

that you have to do what is best for your family. I am sad to see

you go.’’

The result of this is that is essentially the trend. In a permanent

business we take people relatively unskilled and we bring them

into the system. We train them up to become skilled labor and then

they move up and out of the industry. I believe it is necessary for

us to have a supply of people who are willing to do the entry-level

jobs, not just the management jobs.

Also we are in a difficult position because I personally don’t believe that the agriculture universities in California are doing an

adequate job of training managers that could come out of the university and go directly to a large-scale dairy operation and work in

a management role. We are really faced with growing people up

through the ranks starting them out entry level positions and

bringing them up so comprehensive reform, yes.

Mr. COSTA. I think you made the point. The fact is that not all

agriculture jobs are seasonal. Many of them are year-round and

with under 5 percent unemployment in this country and you take

away those who can’t work or won’t work, in many areas we have

tremendous shortages of employees and we need to address this

issue. Thank you very much.

Thank you, Mr. Chairman.

Mr. GUTKNECHT. Thank you, Mr. Costa.

Mr. Nunes.

Mr. NUNES. Thank you, Mr. Chairman. I want to talk a little bit

about milk protein concentrate and the imports that have continued to come in to this country because I think it has a huge impact

on milk price. All of you mentioned in some form or fashion the impacts of trade, our trade policy on our milk markets.
31

I want to talk about some of the solutions. I want to start off

with the assumption that we are not going to be able to change our

trade policy. I know a lot of you here want to change our trade policy in terms of putting import quotas and tariffs on imports.

In the past I have supported that and I still do because I think

that in 1993 we did not know what was going to happen in terms

of new technology that would be developed so that instead of a certain form of milk powder they would change it a little bit similar

to what Mr. Cotta called a blend. Pretty soon some people estimate

it could be as much as 10 percent of our milk supply is actually

foreign milk.

With that I think I will leave that question open to all of you

making the assumption that we can’t change the trade policy.

What can we do to compete worldwide and why don’t we just start

off with Mr. Cotta and work down the line.

Mr. COTTA. Well, when you say you can’t change trade policy, I

am assuming that you can’t enforce current policy and that doesn’t

require a change. That being the case, then we need to take a look

at milk protein concentrates or caseins. They were obviously overlooked initially when the tariff proposals were put on the table.

I think we need to reexamine that issue. There are a lot of other

areas where milk comes into this country. Chocolate block is a good

example. Comes in and doesn’t count as a milk substitute but,

nonetheless, as you know, milk chocolate is primarily milk. I think

those areas will certainly need to be looked at.

The other is we can either make up our mind to continue outsourcing MPCs, which is not a good idea for the U.S. dairy industry, or we can look at developing our own domestic system. We

have been in favor of developing a domestic system and by using

some sort of temporary processing subsidies, we think under WTO.

If you develop a system to be used directly in your country, that

would be a legal scheme under WTO. For export we could use it

to build a system in this country.

Mr. NUNES. Mr. Cotta, I know one of the misnomers out there

is that New Zealand and Australia are not subsidized in terms of

their dairy industry. But, in fact, and I think you may have a couple of examples of this that you have shared in the past with me,

they have subsidized their milk protein concentrate business.

Could you talk a little bit about how they have been able to do

that?

Mr. COTTA. Understanding that we are in a partnership agreement with the New Zealand people right now, it makes it difficult

to speak about our partners. Certainly they have done some things

there. They have a national trading enterprise we think that violates some WTO regulations. We think, yes, they do some things

that are very interesting, particularly in New Zealand whereby

they take certain components out of milk, microcomponents that

are very valuable, remove those, sell them on the market.

Lactoferrin is a good example. Put the milk stream back together

and dry it as either milk protein concentrate or nonfat dry milk

powder. That we are not allowed to do in this country. It gives us

a disadvantage right off the get-go. Certainly those are the types

of things we need to look at. I believe your committee and working
32

with the industry needs to look at and we need to get by those kind

of barriers that currently get to us.

Mr. NUNES. Thank you. Mr. Contente.

Mr. CONTENTE. Congressman Nunes, this is an issue that I have

been working on for several years and have studied extensively. I

think we’ve got to be honest with ourselves and ask the question

why is the usage of MPC increased over the last several years?

One I alluded to earlier was that this country no longer has the

ability to produce the milk that it needs so, therefore, it has to rely

on some imports. Second, the EU has a scheme that it pays the

plants a subsidy to convert powder into casein and then the plants

can sell that. And it will fluctuate depending on their supply of

extra milk, residual milk, and also currency.

There is a relationship with currency. It has been up to as high

as 40 percent of the value of that product. So then you can see that

to a processor in this country there is a no-brainer. Let’s get some

of that cheap protein and let’s put it in our vats and we can increase our yields.

The second part I think we’ve got to look at is regulatory function of our Government. FDA up until now has not bought into the

fact that it is a legal ingredient to use in cheese processing in

standardize cheeses which is most of the cheeses that you will find

in the grocery store shelf. Why would we want to go down and pursue something that is of less quality, less nutrition. We have invested over $5 to $6 billion over the last 20 years in our checkoff

programs to promote the wholesomeness and goodness of dairy

products. Why would we want to pursue an avenue that takes us

down a cheap alley? I think that would be a blow to dairy producers.

Mr. NUNES. Thank you. Dr. Herrera.

Dr. HERRERA. Great question. Without halting the income of milk

protein concentrates the only way to get rid of ours is to move it.

As Mr. Contente mentioned earlier, the McKenzie study showed

clearly that we really need in this industry the investment and innovation and the use of our products in a variety of new things.

I think the mobilization and utilization of these products and innovative products is going to be the key to utilization without halting

imports.

Mr. NUNES. Thank you, Dr. Herrera.

Mr. Giacomazzi.

Mr. GIACOMAZZI. I understand the part of the concern over trade

policy has to do with WTO regulations or what may or may not be

legal within WTO but I think there has been some creative programs within other countries that tend to work around WTO regulations. For example, in Switzerland they have moved a lot of their

direct payments for commodity crops to conservation payments.

Rather than paying the farmer directly for the crop, they are

paying them to implement environmental practices or to conserve.

Therefore, they are getting around WTO issues with these green

payments. I believe that some form of subsidized plant construction

in the country is what it is going to take to displace imported MPC

to give us the ability to compete with outside product. I can’t say

how that would work. Maybe there is some way to integrate the

MPC plants into an environmental program.
33

Mr. NUNES. Incubate, not subsidize.

Mr. GIACOMAZZI. That’s right.

Mr. NUNES. We don’t like that word.

Mr. GIACOMAZZI. Well, look at the U.S. ethanol market. How are

we improving the price of the corn market for the corn farmers? We

are building the ethanol plants and giving them some place for the

corn to go. We could do something modeled on that for the dairy

industry.

Mr. NUNES. Thank you, Mr. Giacomazzi.

Mr. ORNELLAS. Thirty or 40 years ago our industry prided itself

in providing product for this country and not chasing foreign markets. I realize the world has gotten smaller so now we are more in

a global world and global marketing and such. I still think our priority ought to be domestic markets.

I think we have to be very concerned as we continue to expand

our industry whether it is the producer or the processor to chase

foreign markets. I think we are asking for trouble. I think our priority ought to be to fill our needs here first and then when we are

into an excess amount that we can then perhaps choose to go after

other markets.

I realize having said that if we are then short, then it opens the

flood gates for foreign products in here. I think one of the problems

that U.S. agriculture has, I believe 25 percent of all the corn, soybean, other type crops that are grown are grown for export. We

have never had that problem in the United States with our dairy

industry because we tailor ourselves for this Nation.

As we begin to look, and I hear in testimony about expanded

markets, other countries. We should be a little concerned about

that, that we are not building to fill those other markets because

I don’t know that we could compete with others. I can compete with

my neighbors. I can’t compete with other countries. Thank you.

Mr. NUNES. Thank you, Mr. Ornellas.

I think my time is up, Mr. Chairman, so I yield back.

Mr. GUTKNECHT. I want to thank you and I want to thank this

panel. Let me just for the record say that one half of the soybeans

grown in my congressional district, and I think depending on the

year we grow more soybeans in my district than any other congressional district. We are No. 1 or 2 every year. Half of the soybeans

that are grown in my district ultimately wind up in export markets. It is an interesting concept that we really haven’t started to

explore in terms of potential export markets for dairy products.

I want to thank all of you for coming and we will allow you folks

to leave the panel and we will bring up our next round. Thank you

very much.

In the interest of time I am going to go ahead and start with the

next panel. Our first panelist is Mr. Jeep Dolan who is the vice

president of operations for Driftwood Dairy from El Monte, California.

Welcome, Mr. Dolan. We want to thank and welcome your son,

Shane, as well for coming up to join the hearing today.
34

STATEMENT OF JEEP DOLAN, VICE PRESIDENT, OPERATIONS,

DRIFTWOOD DAIRY, EL MONTE, CA

Mr. DOLAN. Thank you very much. Thank you very much, Mr.

Chairman, and the other members also. Mr. Chairman and members of the committee, I want to thank you for the opportunity to

testify. My name is Jeep Dolan, again. Like you said, I am vice

president and co-owner of Driftwood Dairy. We are a regional

creamery. At one time we did have dairy cows and operated dairy

farms but now we are an entire creamery operation.

I wanted to talk a little bit about how some of the dairy policy

relates to smaller individually private and family-owned businesses. Driftwood Dairy has been in the business, like I said, both

dairy and creamery since the early part of last century. My great

grandfather ran a dairy in Los Angeles through the 1920’s and

1930’s and later moved to El Monte. In 1946 my uncle picked up

where he left off at Driftwood Dairy and that is where we remain

today located in El Monte about 12 miles to the east of Los Angeles.

Primarily 70 percent of our business is in food service and copacking products for other dairy processors. Driftwood is probably

the No. 1 or 2 school supplier of milk to school food service

throughout the country. We have 95 school districts from Camp

Pendleton all the way up to the Santa Clarita Valley.

We may be considered a small player on the industry stage. Our

presence in local communities in the State is large. Our industry

is a critical link to the farm to table economy that ultimately supports dairy producers. We are focused to operate under some Federal policy constraints, however, that prevent us being more efficient in our role as linking product to consumer.

Let me discuss a few of the concerns here today. Congress needs

to ensure there is a level playing field so everyone can compete

fairly whether they are a large national company, small creamery,

co-op, cheese plant, Congress needs to ensure that the Federal regulatory system is more responsive to industry changes. We feel

they need to review and phase out ineffective marketing and distorting dairy price support programs. We need help to assist the industry to help guard the dairy’s franchise and wholesomeness and

nutrition through the pure dairy foods that we manufacture here

in the United States.

Again I would like to thank the members of the committee for

helping level the playing field by passing the Milk Regulatory Equity Act. We operate in the Southern California State Order and

Arizona Federal Marketing Order, FMO. so we have had firsthand

experience with the problems created by the uneven playing field.

Whether you are big or small, co-op, or processor, there shouldn’t

be any preferential treatment, especially when it impacts marketplaces in a negative fashion.

Also, the other concern of ours was the almost 2-year time frame

that it took to resolve the issue. It kind of indicates the time that

the Federal Government in their agricultural policies have as it relates to rectifying problems and fixing problems in a timely fashion

which we do have available here in California.

We have been able to correct market conditions numerous times

in the time it takes the Federal Government to act on one issue.
35

The processors and farms are fundamentally business operations

and really should be treated as such. This committee really strives

to be fair to everyone in the industry and not just think good policy

can result from a particular region or particular group over another.

Also, Congress needs to ensure that the Federal Regulatory System is more responsive to industry change. If Congress should decide that the Federal Milk Marketing Order should continue to regulate price, then the system needs to function in a manner that allows the market to operate. I do not believe Congress should have

to step in and fix every problem. USDA and the Marketing Order

regulators should be able to do it but they need to act in a timely

fashion.

The producer-handler issue is a good example. It took USDA

years to resolve the problem like I mentioned earlier.

Third, Congress needs to look at the old subsidy program, the

Dairy Price Support Program, and phase it out. The concept of an

economic safety net for producers is a sound and appropriate goal

for Federal dairy. The current price support program is creating

distortions in commerce.

We used to be a commodity processor and produced commodity

products, primarily nonfat dry milk, in the 1980’s and we saw firsthand the problem and unintended consequences of the give-away

and allocation programs of nonfat powder ultimately from USDA to

the States to the schools and then they would forward the product

to us for process.

What happened in that program is that we would receive dry

milk powder that was over a year old on the floor of trucks. In today’s environment with HACCP and GMPs we could no longer receive that type of product and it is not fit for a grade A product

that goes into school milk.

We can’t continue a program that creates a secondary market for

dairy products that may foster cutting corners to make a dollar.

The image of the dairy industry is one dedicated to quality and

meeting consumer demands is just too important for our industry.

Cynics might ask, ‘‘Why would processors care about the Government buying up the surplus milk powder?’’ The answer is simple;

we are in the business of being the link between dairy farmers and

90 percent of all consumer households in America. Government

does not operate well in this free enterprise.

However, this is exactly what is happening with the dairy price

support programs and it is not working. There has got to be a better way to support all dairy farmers equitably without having the

Government attempt to stabilize prices by purchasing surplus dairy

products.

Lastly, instead of price controls strict regulations, Government

intervention in the marketplace, and expensive subsidies Congress

needs to help the industry guard dairy’s franchise in wholesomeness and nutrition. Dairy is one of the most nutritious and beneficial foods in the marketplace.

You might not believe it but we are under increasing competition

with soda companies and other beverage companies. What you

reach for when you are thirsty may be a dairy related beverage but

it may be an unregulated dairy beverage. We are so strictly regu-
36

lated as it relates to our ingredients and prices it frustrates our

ability to compete with these other soda and beverage companies

that are not subject to the myriad of regulations that we are.

The issue of a level playing field should apply here, too.

As I mentioned when I started, we are a leading supplier to

school food service programs in the country. Therefore, what happens to us on the milk and agriculture front ultimately affects our

ability to provide school children with stable pricing for milk, juice,

and other dairy related products.

We are a small processor in a big industry. Congress has an obligation to help businesses like ours and the big dairy companies as

well and co-ops. My family has been involved in the dairy for four

generations, long before Driftwood was around, and I am dedicated

to making it profitable and successful for future generations of our

family.

We see a myriad of opportunities to grow and prosper but we

need your help to level the playing field and break down some of

the old bureaucracy that is standing in our way. We cannot be

hamstrung with old regulations or a view of the industry that does

not comport with the realities of today’s marketplace.

Mr. Chairman and members of the committee, thank you for the

opportunity to testify.

[The prepared statement of Mr. Dolan appears at the conclusion

of the hearing.]

Mr. GUTKNECHT. Thank you, Mr. Dolan. If I have a chance, we

will come back to that point you made about competing against the

soft drink industry because they are incredibly competitive and

they understand marketing and advertising. We are a little slow to

really be able to compete with those guys.

Next we have Ms. Sue Taylor who represents a little company

called Leprino Foods. I think they are in the mozzarella business

but we will hear more about that.

Welcome.

STATEMENT OF SUE TAYLOR, VICE PRESIDENT, DAIRY POLICY

AND PROCUREMENT, LEPRINO FOODS COMPANY, DENVER, CO

Ms. TAYLOR. Yes, we are. Thank you very much, Mr. Chairman.

Mr. Chairman and members of the committee, thank you for the

opportunity to appear before you today. My name is Sue Taylor and

I am vice president of dairy policy and procurement at Leprino

Foods.

Leprino Foods is a family-owned company that has grown from

making small batches of ricotta and mozzarella cheese for local delivery to the world’s largest producer of mozzarella cheese. We operate nine plants in the United States, manufacturing mozzarella

cheese and whey products. Six of the 9 plants receive milk pooled

in the Federal Milk Marketing Orders. We operate three

manufacturingfacilities that are regulated under the California

State order.

Before discussing issues related to the next farm bill, I would

like to thank members of the committee for passing the Milk Regulatory Equity Act earlier this year. It was a critical piece of legislation and we appreciate your efforts.
37

In an effort to prepare the dairy industry for future competitiveness here and abroad as part of the next farm bill, we suggest Congress mandate that USDA act with speed in its regulation of the

Federal Milk Marketing Orders to keep up with changes in the

dairy marketplace; give all producers and processors risk management tools like forward contracting; and resolve the conflicting nature of the two existing Federal dairy safety nets.

First, I want to thank the chairman for his support of updating

the make-allowance to allow the milk pricing formulas of the Federal milk marketing order to reflect current manufacturing costs.

I have just returned from the USDA hearing on the make-allowance and I hope the Department will act quickly on the hearing

record and finalize the formula update within weeks and not

months.

The delay and politization of the make-allowance update is of

great concern to Leprino and other dairy manufacturers across the

country. The make allowances in the current formula are based

upon cost data from the late 1990’s. With the significant rise in energy, healthcare and other costs since the late nineties, the industry was closing in on a financial crisis by 2005.

Going to the marketplace to recover the increased costs is not an

option. The make-allowance hearing was requested and granted on

an ‘‘emergency’’ basis last year. A 4-day hearing was held last January and yet, here we sit with no decision from USDA some 9

months later. A year of deliberation is simply not acceptable when

the industry is losing millions of dollars a month.

Mr. Chairman, I hope you will continue to urge USDA to finish

what they started and not be distracted by calls to link this simple,

straightforward exercise with other proposals that are unrelated to

the pricing of milk for manufacturing.

Congress should urge USDA to take a page from the playbook

here in California. The California State milk marketing order also

has hard and fast deadlines for considering and making changes to

its State order. Changes are implemented within 60 days after concluding its public hearing, as required by law. This system has allowed California processors and producers to be more responsive to

commercial demands while the rest of the Nation lingers under the

cumbersome bureaucracy of USDA.

Price volatility has become an increasing concern to domestic and

international customers alike. I believe that the ability to forward

price significant volumes of product is key to driving demand for

American dairy products. Unfortunately, multiple food service customers have told me that they are frustrated by price volatility

over the years and, as a consequence, are minimizing the use of

cheese in menu items. Neither producers nor processors win when

our ultimate consumers turn away from our product because of

volatile prices.

Leprino routinely uses the risk management tools available to

offer forward prices to our customers, but futures market liquidity

on the Chicago Mercantile Exchange where dairy is traded still

makes accumulation of significant volumes cumbersome. Congress

can help address this need by reinstating the dairy forward contracting program.
38

In addition to the demand issues that will be addressed by forward contracting, I can tell you as a former agricultural banker

with continued ties to that community, forward contracting is an

important tool in the producer arsenal.

Reforming Current Federal Safety Nets. Finally, I would like to

briefly comment on the current Federal safety nets. Leprino is very

concerned that the Milk Income Loss Contract Program impedes

the industry’s transition to becoming a more competitive long-term

player. The program’s current structure with a very high target

price and limitations on eligible production shields smaller producers from market forces, resulting in greater production and

loweroverall market prices.

At the same time, mid-sized and larger producers are primarily

gaining their revenue from the depressed markets, placing these

more efficient producers that represent the future of our industry

under financial stress. The MILC program runs headlong against

the U.S. industry’s need to become more competitive.

Moreover, the current dairy price support program is not operating as intended. The dairy price support program has also become

more disruptive to the marketplace. For example, the accumulation

of over a billion pounds of nonfat in USDA’s coffers a few years

back was very disruptive. Given limitations on distributions for

international food aid, USDA started giving away surplus milk

powder accumulated through the dairy price support program for

livestock feed in drought areas.

The more powder that came out of Government storage, the more

prices in the free enterprise whey market were undermined.

Leprino’s whey and cheese business is hurt when the Government

is buying product and dumping it on the marketplace when it is

not needed.

I would like to add a comment to my written testimony on the

concept of the development of a milk protein concentrate subsidy

program that was explored earlier in this hearing with the producer panel. The committee should not adopt more market distorting subsidy programs in the farm bill. The height of concern on

milk protein concentrate imports came at a time when world market prices were significantly below domestic markets encouraging

importation.

Additionally, milk domestic production of MPC was available.

Since that time progress in trade reforms have continued to increase international market prices due in part to reforms implemented through the Uruguay Round of the WTO and partially due

to the EU budget constraints along with growth and worldwide demand.

Additionally, a domestic milk protein concentrate production industry is developing to satisfy the domestic demand. The milk protein concentrate processing industry is growing in response to market signals and should be allowed to continue to do so.

Leprino is operating under the laws of supply and demand but

the current dairy programs with these two conflicting safety nets

are not. The price support program and the MILC program work

against one another and stifle innovation and growth in the dairy

industry.
39

In conclusion, today in dairy we have a Federal pricing scheme

that is complex and unresponsive to markets. We have to deal with

greater volatility and production of unwanted, surplus products.

This web of programs combines to put the U.S. dairy industry farther behind our competition.

However, with your help in modernizing these dairy policies, we

will have a greater opportunity to expand domestically and earn a

greater share of international markets. We need Federal dairy policies that help pave the way, rather than impede our progress to

flourish in the long-term. Thank you.

[The prepared statement of Ms. Taylor appears at the conclusion

of the hearing.]

Mr. GUTKNECHT. Thank you, Ms. Taylor.

Next we are going to hear from John Jeter who is the president

and CEO of Hilmar Cheese Company in Hilmar, California. Welcome

STATEMENT OF JOHN JETER, PRESIDENT AND CEO, HILMAR

CHEESE COMPANY, HILMAR, CA

Mr. JETER. Thank you, Mr. Chairman, and members of the committee. My name is John Jeter and I am CEO of Hilmar Cheese

Company. Hilmar is a unique company. We are a producer owned,

private company and really a hybrid in the industry in the sense

that we are producer owned, yet we are not a co-op.

We currently buy over 10 percent of all the milk in California.

We are now in the process of building a new plant, a cheese processing plant in Dalhart, Texas. This new cheese and why protein

processing plant in Texas will be the company’s first processing

plant outside of its Hilmar, California facility and corporate headquarters.

We were founded to increase the prices producers receive for

their milk, and we have been very successful, despite Federal regulations and programs that were originallyintended to help producers but actually stand in the way and handicap the whole of the

U.S. dairy industry.

The next farm bill provides Congress with a tremendous opportunity to bring more cohesion to our fractured dairy programs and

to recognize and rectify the unintended consequences of the wellintentioned but flawed programs in place today.

Let me start by offering one example of such a well-intended program that is actually retarding natural growth and progress in the

industry: the Milk Income Loss Contract program otherwise known

as MILC. It is symptomatic of Federal dairy policy today and I am

sure the committee has heard differing opinions on the program. I

am here to report that I believe the program is counterproductive,

expensive, and it is unnecessary.

The MILC program is counterproductive because it works at odds

with the dairy price support program. The price support program

was once intended to clear the market of excess production, but

now it simply stimulates excess production and keeps prices low.

The MILC payment compounds the market distortions by subsidizing the excessproduction and further lowering overall price levels,

which is detrimental to all in dairy. These two programs are simply

incompatible.
40

USDA’s 2004 analyses of the programs confirm this determination. USDA’s Deputy Chief Economist Dr. Joe Glauber explained it

this way at a recent Senate hearing on dairy policy. He said the

MILC programs works ‘‘at cross purposes with the underlying market price support program if you’re creating incentives to produce

more milk, well then that can potentially cause a price decline.’’

He explained when this happens, ‘‘The Government steps in and

purchases product.’’ He went on to testify the current system creates, ‘‘stock piles that end up growing quite large’’, ‘‘potential product imbalance’’ and distortion in the markets. This is all from

USDA.

On top of all this, the MILC program is also expensive. It was

meant to be a temporary assistance payment to dairymen; a transition program from the failed Northeast Dairy Compact, conceived

in 2002 during the farm bill debate, but by the time it was implemented it was extended retroactively to 2001.

Based on its March 2004 estimate, the Congressional Budget Office projected that the cumulative cost of the MILC program over

its expected 4-year life was going to be approximately $3.8 billion.

This is significantly higher than estimates offered in 2002 during

the farm bill debate, when the CBO estimated total direct payments of only $963 million over the life of the program.

MILC was supposed to sunset in October 2005, but Congress extended this program through 2007. Ironically, it was the budget

savings bill, the measure to cut Federalspending, which extended

MILC at a cost of another $1 billion, at least.

MILC is unnecessary and counterproductive. There exists another program designed to prop up farm gate prices of milk, the

Federal dairy price support program. In the next farm bill, we need

to resolve which of these programs, if any, to keep and which to

get rid of. Neither are ultimately truly helping producers, processors, or consumers. In fact, by the time the MILC payments kickin, after the price support program, taxpayers have paid for the

same milk twice.

While as I said at the outset, Hilmar is dedicated to delivering

better prices to dairy producers, we do that through adding value

to their milk and supplying the market with what consumers want.

That is how Hilmar is different, we do not expect the Government

to help us meet expenses or guarantee a profit. That is not a formula for success in our free enterprise system.

Our focus is on making world class cheese and value-added whey

products, so to me the current two programs we have now in dairy

do not make sense. Why are we paying producers to make a product, i.e. non-fat dry milk, that is not being demanded by the marketplace but that has the best return when it is sold to USDA to

be stored in awarehouse?

The Dairy Price Support Program may be guaranteeing a price

to producers, but it is not adding value to their milk, nor is it serving consumers who ultimately determine the value of milk and

dairy products. What the Dairy Price Support Program does accomplish is to stand in the way of innovation in products and in the

way of investment in technology and is probably is one of the main

reasons that we have not grown our MPC markets or produced that

domestically.
41

Fundamentally, what Federal dairy policy does today is ignore

the law of supply and demand. It focuses in on getting more money

to the producer that in most cases means more production. A critical missing point in our policy discussions is: where will this milk

go?

In the next farm bill I would urge you ask a simple question. Is

it really sustainable to subsidize production with the MILC program and then take that milk off the market through the dairy

price support program and keep it in Government warehouses? As

far as I can tell, the ‘‘demand’’ for non-fat dry milk by Federal

warehouses is probably pretty limited. Obviously our view is that

both those programs depress producer prices.

On the other hand, the demand from the market for cheese, new

and innovative consumer demanded, value-added dairy products,

domestically and globally has barely been tapped in any real and

significant way. In addition to U.S. consumer demand for new, interesting and quality products, there is a demand for specialty protein products from foodmanufacturers and there is a growing export demand.

Consider this: the U.S. exported percent of its production last

year a big increase from a few years ago when we werepretty much

stuck at 4 percent but compare that to other commodities, which

export 20, 30, or 40 percent of their production. Our industry needs

to look at the shores of Asia, consumers in Europe and markets in

South America, not the caves of USDA or the subsidy payments of

MILC to ensure our prosperity, stability and future.

One step in the right direction for Federal dairy policy beyond

rectifying the two overlapping subsidy programs is to expand the

ability to forward contract to those in federally regulated marketing orders rather than limiting it to co-ops and let producers and

processors work together to develop new markets and new ways to

bring value to milk. It’s a simple matter of fairness.

In closing, Mr. Chairman, U.S. dairy farmers and processors can

succeed in a free market. We just need to remove some impediments to change and to innovate by looking down the supply chain

at ways to add value to milk instead of ignoring these market signals in favor of Government subsidies.

I appreciate the time the committee has taken to come to California to hear our views and to provide us with encouragement and

support of our effort to sell high quality dairy products made from

U.S. milk to consumers here and abroad. Thank you very much.

[The prepared statement of Mr. Jeter appears at the conclusion

of the hearing.]

Mr. GUTKNECHT. Thank you, Mr. Jeter.

Members, I am going to try to get you out of here by noon so if

we will all sort of kind of keep an eye on the clock and hold ourselves to 5 minutes and I will try to be a good example. I really

don’t have so much a question but a couple of comments for the

panel.

First of all, Mr. Jeter, I often say this, partly as an auctioneer,

that in Washington we can repeal laws and we can amend laws but

there is one law that is very difficult for us to either repeal or

amend and that is the law of supply and demand. I think some-
42

times we find ourselves trying to fool around with that and the

cure is worse than the disease.

Second, Mr. Dolan, you talked about leveling the playing field

and we hear that an awful lot but I learned many years ago when

I was a young legislator in the State legislature an old State senator said, ‘‘Whenever you talk about leveling the playing field always remember there are about 50 percent of the affected parties

who don’t want to level the playing field. They have an advantage.’’

That is another thing that we learn as we try to deal with this.

Finally, just for your benefit, I want to say that I am a strong

believer in forward contracting and I’m going to say a tribute to

Cal Dooley who represented this area for a number of years. He

and I worked together very closely and we came very close to coming together with a compromise so that wherever you sold your

milk you would have the access to forward contract.

I want to thank you for testifying and I won’t use anymore of my

time and hopefully I can make a closing statement with that. I will

turn to Mr. Cardoza.

Mr. CARDOZA. Thank you, Mr. Chairman. I want to thank this

panel. While I don’t always agree on the question of forward contracting for some other reasons that we have seen in the past, the

people that are represented here truly are innovators in their field

and do a fabulous job for California and the country in providing

quality products. We have great relationships.

There was a question I had of the previous panel and I want to

sort of raise it with you all because from the business side of the

industry, the marketing side or whatever, I want to know how it

will affect you. I believe that California standards taken nationally

will both improve consumer acceptance.

I will tell you that there is nothing more frustrating for me than

at certain times of the year to get milk in Washington, DC that

tastes like water. I love the California standards here that improve

both the quality and the consumer acceptance and the health benefits of whole fluid milk. I am just interested what you think about

the proposal that was broached earlier about California standards

nationwide.

Mr. DOLAN. Representative Cardoza, as a company we prefer the

California standards. It is hard for us to speak for the rest of the

country as to what their preferences are. I do know that some other

dairies throughout the United States are equipped to handle California standards on a physical plant level but from our company

we are in favor of them.

Ms. TAYLOR. As a cheese maker I am not in the midst of that

discussion but I just have a couple of observations.

Mr. CARDOZA. I am sort of interested in how it would affect your

operation. That is why I asked the question if it would hurt it.

Ms. TAYLOR. In terms of before I get to our own operations, my

understanding from some of the consumer research is that those

preferences are typically rooted in what you are exposed to as a

child so those people who grew up in California are probably more

sensitive to the lack of the higher solids levels in fluid milk outside

of California.

However, who grew up without the fortified milk have a negative

impression sometimes on the more fortified milks. It is not as cut
43

and dried as you might think in terms of an overall consumption

impact. As far as how it would impact our business, I don’t think

that it would negatively impact the Leprino business in any form

or fashion. We continue to have a surplus of nonfat solids in this

country and those would be absorbed and really neutral probably

to us.

Mr. JETER. I am not sure I can add anything to that. Being in

the cheese business I am not sure it affects us dramatically. We

tend to use more full-fat milk. I tend to agree with you personally

I like the milk we have here and it is very good. When I am in

other places it isn’t the same so I react to that but I am not sure

I could add anything more on how that would impact our business,

at least in California.

Mr. CARDOZA. We asked the question earlier about research and

EQIP and the marketing programs. I think I got a little bit confused as far as the international marketing programs that we do.

Out of those programs are you accessing any of those in any way

and do they help you?

Mr. JETER. Certainly the marketing programs. We have a local

marketing program in California, CMAB, Real California Cheese,

that I think has clearly benefited our company and the dairymen

that ship milk to us and really all the dairymen in California. We

tend to be very supportive of those in general.

Research, we tend to approach that. We put a lot of our own

money into proprietary research and try to partner with, for instance, universities who are more dairy oriented. Then we do work

heavily with DMI, Dairy Market, Inc., producer funded, to try and

leverage what we do back and forth. Those are probably the extent

of what we do in our business.

Ms. TAYLOR. We also had a very strong research program that

we conduct internally at the company. However, I would say that

the research programs that are funded both through DMI as well

as university research I think is very important to the industry

both on the finished product side as well as obviously the supply

is very critical to us.

If I were to put a priority on how the dairy industry be supported, I think some of those programs whether it is research or

environmental programs help facilitate the industry to continue to

advance to be more competitive. Those are very, very important

programs.

There is some funding that goes to the U.S. Dairy Export Council

that helps facilitate us getting into the international markets and

those markets are very important to Leprino. They are going to

continue to become more important to the U.S. dairy industry. I

think those things are very, very important.

Mr. DOLAN. We are a regional creamery and we receive most of

our milk from within a 350 degree radius. We don’t currently export. The only impact the exports do have on us is just ultimately

how it filters down through the class changes here in the State.

Any wide variations to that do affect us in our marketing in regards to food service and school food service. When we have times

of increase in costs the school are complaining. When prices go

down they love us. A lot of that does filter down through some of

the policies.
44

Mr. CARDOZA. Thank you.

Mr. GUTKNECHT. Thank you, Mr. Cardoza.

Mr. Costa.

Mr. COSTA. Thank you very much, Mr. Chairman.

Mr. Dolan, thank you again for acknowledging the efforts of Congressman Nunes and those of us who supported his efforts on the

milk regulatory act. As you know, it was not easy.

In your testimony it wasn’t clear to me. Do you export any—you

said you are a regional creamery. Do you export any of your product?

Mr. DOLAN. We do not export any product.

Mr. COSTA. OK. Ms. Taylor, do you export any of your product?

Ms. TAYLOR. Yes. The export market is very important to us on

the whey product side in particular with whey protein concentrates

and lactose. We have been in that market and developing it since

the early 1970’s. It is increasingly important on the cheese side. We

supply many of the major——

Mr. COSTA. What percentage would you say?

Ms. TAYLOR. On the cheese it is less than 10 percent. On the why

products it is more than a third.

Mr. COSTA. And do you think that our Government is appropriately using the tools necessary to allow you to export your products?

Ms. TAYLOR. I believe they are. I very much endorse the attempts

to get a leveling of the playing field, so to speak, through the WTO

negotiations and think that is critical in terms of expanding our exports. Also in terms of retaining a rational domestic policy because

there is still enough disconnects between world markets and domestic markets. We need to get reforms.

Mr. COSTA. Do you think there is a distortion or unfairness of the

milk products that are imported between what we export?

Ms. TAYLOR. Currently I would say no. Well, actually I will qualify that. U.S. tariff levels are significantly below those of major

other markets, EU, Canada, Japan. We have become more of a

magnet for product than what we should be long term under further trade discipline. From that perspective, yes.

Mr. COSTA. Notwithstanding that we other programs that end up

bulk supplying milk product here, it seems like the two are kind

of in conflict with each other.

Ms. TAYLOR. I am not sure I am understanding your question.

Mr. COSTA. We have other programs within the dairy industry

both Federal that have as warehousing a product is what I am saying. The two policies would seem to be in conflict.

Ms. TAYLOR. Yes, I would agree. I would agree.

Mr. COSTA. Yes. Maybe we can figure out that some day.

Mr. Jeter, what percentage of your product do you export?

Mr. JETER. On our whey products it is probably on a tonnage

basis 80 percent and on cheese pretty small. I think on a tonnage

basis one of the largest agricultural exporters in California. Every

day we probably have eight or nine containers a day leaving our

facility for the port. It is a big business to us. In the last 60 days

we have our own staff in Brazil, China, India, Pakistan, Vietnam,

and Japan. That is a fairly regular thing for us.
45

Mr. COSTA. Do you think we are evenly applying the efforts on

trade with those markets you are accessing?

Mr. JETER. It depends on what products you are going into. For

instance, the baseline products like cheese tend to be protected, a

lot of barriers. Whey products is a lot more fun. There are a lot of

opportunities in whey all around the world. It tends to be a much

less protected.

Although an example in the EU we pay 70 cents a pound for our

high protein whey protein concentrate going into the EU in tariff

for human consumption and theirs coming in pays nothing. Beautiful market in Europe. Beautiful. Those are not fair. Yet, that is

historical longstanding. We blinked at some point and that is the

case.

Mr. COSTA. Final question to both Ms. Taylor and Mr. Jeter and

you made reference to it. We are not going to resolve it here this

morning but having been involved in it a bit when I was in the

State legislature and the chairman made reference to previous efforts, you both alluded—you both testified in support of forward

marketing. I think both of you attempted, maybe you to a greater

degree, Mr. Jeter, that there could be a win-win situation.

I would like in a minute or two to once again try to explain to

me what the win-win situation is. I know what the win-win situation is from your perspective but for co-ops that feel that they have

difficulties in meeting some of their challenges, I think this is an

issue that they have obviously felt very strongly about.

Mr. JETER. Well, we think it really is a win for everybody. I

think we acknowledged here our customers just want a more stable

price so we have customers——

Mr. COSTA. But for them.

Mr. JETER. And so what they do is they offer us that stable price.

What we are then able to do is offer it back to our dairymen and

they can say yes or no, whatever they want. At a time like this we

have had customers coming to us and offering to pay, as an example, $1.40 for cheese when the market is $1.15 over an extended

period of time.

Obviously they are anticipating markets going up. That offer to

a dairyman may be the difference between him getting refinanced

or not. It goes to the bank and the bank says, ‘‘What’s your price

this year?’’ He looks confused or he can say this and he goes, ‘‘OK,

I will refinance you.’’ It does tremendous benefit and for dairymen

it is a tremendous benefit. They have always been just price getters. They just kind of get what is there and forward contracting

would allow them——

Mr. COSTA. Most of agriculture are price takers.

Mr. JETER. Well, but they do have markets that they can go into.

I agree it is not like they are marketers that are creating markets.

On the other hand, I think in the dairy industry 85 percent of the

milk is co-op milk and co-ops are formed strictly to make markets.

I think that is a tremendous benefit that can be used, too, to make

markets. Obviously forward contracting would level that playing

field.

Mr. COSTA. Ms. Taylor, second chance at the plate.

Ms. TAYLOR. OK. As I mentioned in my testimony, I believe that

forward contracting, being able to offer fixed-forward price to cus-
46

tomers does drive demand which benefits both producers and processors in terms of additional demand driving higher prices.

From the producer perspective I agree with John. It is an issue

of they have the option of either floating with the market or they

can accept this stable price that is offered. There is no requirement

that they accept this fixed-forward price offer. If the banker would

like to, or if they would like to manage their risk to sign on or they

can opt to continue to float with the market so there is no downside. I can tell you that the co-ops continue to have a great demand

for this and offer up to their producers because they recognize that

producer need.

Mr. COSTA. So tell me, Ms. Taylor, why the members, the dairymen in those co-ops, who make up those co-ops and the board

members on those co-ops are made up of dairymen, don’t think that

is a good idea?

Ms. TAYLOR. Well, I will be very blunt. They do think it is a good

idea in terms of them offering that option up to their own producers. What they don’t think is a good idea is allowing proprietaries

to do that because they would prefer to maintain a procurement

edge in the marketplace signing up independent milk. They recognize it is a desired service.

Mr. COSTA. An advantage.

Ms. TAYLOR. Yes.

Mr. COSTA. Thank you.

Mr. GUTKNECHT. Mr. Costa, I would go back to a comment I

made earlier that whenever you talk about leveling the playing

field I understand there is usually half of the audience that doesn’t

really want to level that playing field. This may be one of those examples.

Finally I will turn to Mr. Nunes.

Mr. NUNES. Thank you, Mr. Chairman.

Mr. Jeter, I guess I will go to you first. In regards to forward contracting what stops you or anyone in this room or any dairyman,

et cetera, et cetera, from going to the CME and buying or selling

a milk contract?

Mr. JETER. I don’t think there is anything that would stop that,

only in terms of volume and liquidity. The sheer size of that market is limiting so, for instance, we make 480 million cheese a year.

We couldn’t cover that in that market. That would be a lot to cover

so the market is just not large enough.

Mr. NUNES. But it is growing. Does your company participate

in—do you buy or sell contracts today?

Mr. JETER. Yes. We developed some innovative ways to facilitate

forward pricing. We just have to. I am not one that likes to not

compete so we do that and we do some other things that are fairly

innovative and legal. We do a lot of different things because to us

what our customers need and really what our dairymen want is

critical.

Mr. NUNES. So, if I am understanding you correctly on one point,

you say the liquidity is not there in terms of there is not as much—

not enough open interest available for you guys to utilize the CME?

Mr. JETER. I think that would be true of large buyers and sellers.

Mr. NUNES. But wouldn’t an expansion of forward contracting be

an impediment to enlarging the open interest on the CME?
47

Mr. JETER. We don’t think so. What we found with dairymen, for

one thing, they were just not comfortable with any type of forward

pricing. I mean, you would come and talk to them in a business

issue sense and they were uncomfortable with it. We have gone

through an iteration process of them just getting more comfortable,

understanding it, not thinking somebody is trying to steal from

them.

It is really a risk management process. We think by having that

alternative it will make it easier for some to get involved and,

therefore, facilitate even more on the futures market. I think that

is the general feeling, at least from proprietaries in the industry,

that we need several different vehicles to use. We have found that

year by year people get more comfortable with it. In the beginning

this was just not almost right, and yet there was no reason other

than it had not been done before.

Mr. NUNES. I agree with the assessment that farmers aren’t comfortable with something new but, you know, in terms of pork bellies

or corn or wheat they are very used to dealing with that. Then we

have proprietary businesses like in my district that are grain companies that essentially forward contract feed to dairymen, or the

dairymen forward contract, buys the feed contract and they go on

to the different boards that are available whether it be Board of

Trade or CME and make contracts because there is plenty of open

interest and they can do that.

I think it would be much more productive in fixing some of the

issues that may or may not be there with CME that were not only

in this panel but the previous panel that were mentioned. As Ms.

Taylor was very blunt in her testimony about the co-ops wanting

the procurement advantage, that possibly is somewhat true but I

think you have to remember that dairy farmers own the co-ops and

dairy farmers want to work within the co-op.

Since they are owners they would much rather—I think they

trust their co-op before they would trust another proprietary business. I think that is the big difference there is that they themselves

are making these decisions for themselves in terms of how they are

going to forward contract. I understand that you guys could be a

little bit disgruntled there but I think there is a difference between

a co-op and a proprietary business like yourselves that are not

owner operated.

I know you are a little bit of a hybrid, Mr. Jeter, but in terms

of most of your milk does come from dairymen that are not owners

of your company. As we go down this road I respect your opinion

and I know there are a lot of opinions on this forward contracting

issue but know that some of us who have a lot of dairy farmers

that are members of co-ops they want to protect their businesses

that they own. I think it is no different than Leprino or Hilmar

Cheese. It will be a hotly debated topic as the farm bill continues.

Mr. Jeter can answer this question but, Ms. Taylor, you talked

a little bit about milk protein concentrates. You are both very

smart. You said that you were in the banking industry before. How

is it that the European Union is able to ship in milk protein concentrate so cheap and basically undercut our market here in the

United States?
48

Ms. TAYLOR. I suspect that you might be referring to markets

that existed a few years ago at which time there were heavy subsidies on casein and milk protein concentrate production. For the

most part those subsidies have been eliminated. It is in part due

to the reforms that have been kicked in due to the Uruguay Round

and also in anticipation of further progress. In part due to their

budget realities.

I think the price surface has risen substantially on the international market and we no longer have that level of a disruption.

I will also throw in there explicitly that Leprino does not purchase

milk protein concentrate. We don’t use it so I can’t quote you the

exact competitive price but in the discussions that I have heard in

looking at the international marketplace, that disruption is not occurring.

Mr. NUNES. But, however, the plants that produce milk protein

concentrate that have been now in existence for probably as much

as a decade or more are mostly likely at this point paid for and

were subsidized heavily by the European Union and that equipment is now paid for which I think puts us at a huge disadvantage

in terms of building our own milk protein concentrate industry

here in the United States.

Ms. TAYLOR. The prices for milk protein concentrate internationally will be driven by supply and demand and, yes, maybe those

folks will have a little bit more profit margin because those plants

have been paid for. Nonetheless, they have no incentive to dump

milk protein concentrate into the U.S. market at prices below that

which they could achieve in other places. The fact that those plants

are paid for does not automatically result in that product being

sold at a lower price.

Mr. NUNES. I understand.

Mr. Jeter, would you like to comment?

Mr. JETER. Just to clarify, we do not use milk protein concentrate

either and, again, it is something we have never done period as far

as bringing it in. United Dairymen of Arizona have been making

MPC for quite a while, you know, on the open market. They do a

great job and selling a lot of it into Mexico. I know we were trying

to market their product.

MPCs are great products and we were excited about it domestic

and just doing that, running it through UFs and creating MPCs.

We just think it is a great product. Milk protein is beautiful, diverse, unbelievable food ingredient. We should be making it here.

I think, frankly, the focus on the support program and other products are the main impediment. I think if we didn’t have that focus

it would be—I think we should have people looking for markets to

make and be competitive and be a little more risk takers than

maybe they currently are. We think that might be healthy.

Mr. NUNES. The challenge is, though, what happens to the dairy

farmers in the short-term of making that adjustment.

Mr. JETER. I should say that any change like that should be well

thought out and done over a long period of time. A lot of physical

assets have been put in place and we would certainly need to recognize any big change because we have had these rules we played by.

If we did make a change like that, we would need to say where do
49

we want to end out here at some point in the future and then lay

out a program to get there.

Mr. NUNES. Thank you.

Mr. Chairman, I want to yield back. I know that you have a lot

of tough work to do on the farm bill but I hope that we will be

able—I think there was a lot of good testimony today and I hope

that we can take some of these ideas that were from all—you had

a wide-ranging variety of ideas and I am sure if we were in your

district we would have even wider range of ideas. I think there are

some things that we can all agree on and I hope that we can move

forward on those issues. Thank you again for coming to the San

Joaquin Valley.

Mr. GUTKNECHT. Thank you. Let me just say real quickly about

milk protein concentrate. I would invite all my colleagues to learn

more about what is going on in West Texas and in New Mexico

where we literally have groups from the outside, both Kiwis and

now from Ireland, who are making significant investments in the

United States to make milk protein concentrate here in the United

States. I think there is an irony there that sometimes the outsiders

have more confidence in our ability here in the United States to

compete in a world marketplace than sometimes perhaps we do.

Maybe we can learn something from them.

I want to say a special thank you to my colleagues from California for helping to put this together. I especially want to thank

them and particularly Mr. Nunes for his work on the producer-handler issue. We have a term that I use in my office about being

pleasantly persistent. I think that describes his activities over the

last several years and continuing to deal with one particular chairman and that can be extremely frustrating. But he stuck with it

and ultimately we did prevail on that.

I also want to conclude this field hearing by thanking all of the

witnesses. The testimony is excellent. I would encourage my colleagues and their staff to take with them the binder of the written

testimony. I think you will find some interesting nuggets in there

that perhaps were not covered in the oral testimony.

I want to thank the county board here in Fresno County for allowing us to use their facility. Without objection the record for today’s hearing will remain open for 30 days to receive additional

material so if you have letters or comments you would like to put

in the official record of this hearing, please forward them to the

Subcommittee on Department Operations, Oversight, Dairy, Nutrition, and Forestry.

With that I will announce that the subcommittee’s meeting is adjourned.

[Whereupon, at 12:05 p.m. the subcommittee adjourned.]

[Material submitted for inclusion in the record follows:]

STATEMENT OF RICHARD COTTA

Good Morning Chairman Gutknecht and members of the subcommittee. My name is Richard Cotta. I am the senior vice president for Government and Producer Relations for California Dairies,

Incorporated. I am testifying today on behalf of the 680 dairies who

are the owners of California Dairies, Incorporated.
50

CALIFORNIA DAIRIES, INC. BACKGROUND

We are the largest dairy co-op in the largest dairy state in America. Our co-op

is the result of a successful 1999 merger of three of California’s most financially successful cooperatives; California Milk Producers, Danish Creamery and San Joaquin

Valley Dairymen, which all had roots dating back to the turn of the 20th century.

Today, our producer-owners have over $100 million in equity invested in the co-op.

We ship over 16 billion pounds of milk annually. Our owners have dairies located

from San Diego County in the south to Marin County in the north, with most of

the production occurring in the San Joaquin Valley from Kern County to San Joaquin County. We also own five processing plants, located strategically throughout

our production regions and plant 6 is under construction in Visalia.

We also have two wholly-owned subsidiary companies: Challenge Dairy Products,

which produces a complete line of butter products to the retail trade and food service business; and Los Banos Foods, which manufactures and sells cheddar cheese

for manufacturing.We are also the major shareholder in Dairy America, Incorporated, which handles about 2/3 of all the milk powder in the U.S. and exports

milk powder to over 40 countries.

DAIRY POLICY AND THE NEXT FARM BILL

I appreciate the opportunity to testify about the current status of national farm

policy important to dairy cooperatives and our recommendations for the next farm

bill.

Trade Policy. I think it is important to first talk about the next farm bill in the

context of trade. With the recent events surrounding the Doha WTO round, it looks

like there will not be a new trade agreement in place before the next farm bill is

written. However, we continue to support the U.S. proposal that was submitted to

the WTO back in 2002, which calls for the elimination of export subsidies and correction of inequities in market access and domestic support. The rational for the

U.S. proposal is as important and relevant today as it was five years ago: • The 1994 WTO Uruguay Round agreement created many trade disparities because many countries were allowed to continue with extensive levels of support,

which continue to exist today. These inequities have left the U.S. market relatively

open to subsidized competition from abroad, while denying our dairy industry the

same opportunities to develop new markets overseas. • The U.S. proposal is designed to correct inequities, through a balanced approach

to 3 key areas: elimination of export subsidies increases in market access, and reductions in domestic support. • A very key point regarding progress in these areas is the relative levels with

regard to each of these issues. For instance, the European Union continues to be

able to provide over 1 billion dollars in dairy export subsidies annually, which is

100 times more than U.S. levels. Correcting inequities in this instance will require

more than a simple agreement for both of us to cut our subsidies by 50 percent,

for instance. That would still leave the EU with the ability to spend $500 million,

while the U.S. would essentially have no export subsidy spending. • Similarly, many of our trading partners-the EU, Japan, and Canada for instance-still maintain triple-digit tariff rates that are simply a de facto export ban,

because the tariffs are so prohibitive. Because U.S. tariffs are relatively low, if a

trade deal simply calls for a percentage reduction by everyone, there will continue

to be severe trade inequities that exist. • Finally, with respect to domestic support, we feel strongly that allowing other

countries to maintain ‘‘Amber’’ box and ‘‘Blue’’ box spending that is higher than our

allowable aggregate levels would be extremely detrimental to our dairy producers.

Remember that our limit is around $19 billion; the EU can access $60 billion in

amber box payments and has an unlimited ability for blue box programs, both of

which are trade distorting.

In light of the continued concerns we have about existing inequities in world dairy

trade, we are very supportive of the efforts of USTR and USDA in enforcing our

rights in our existing trade agreements. Mexico is a big market for us, and we are

keenly interested in the situation with Mexico this year. The Mexican government

significantly delayed issuing import licenses for dairy products, which it is obligated

to do under both WTO and NAFTA.Additionally, there are a wide variety of nontariff trade barriers-sanitary and phyto-sanitary issues and food labeling, to name

just a couple-that continue to create barriers for us in finding new markets, and we

really appreciate the efforts of USTR and USDA in dealing with these situations

when they arise.Absent a new trade agreement, we urge Congress to reauthorize the

Dairy Export Incentive Program in the next farm bill. More importantly, we would

urge Congress to consider some modifications to the program to ensure that it is
51

effectively and aggressively used by USDA to us continue to develop new markets

and compete in markets where U.S. products are otherwise not competitive because

of the presence of subsidized products from other countries. Additionally, we support

the reauthorization and funding of the Market Access Program, and the Foreign

Market Development Program.

The final issue relating to trade that I want to mention is imports, and there are

two areas that I want to briefly discuss. The first is the issue of assessing dairy

imports for our research and promotion programs. This was included in the 2002

farm bill but never implemented because of concerns about whether it would pass

muster under the WTO rules. We urge Congress to take whatever action is necessary in the next farm bill to get this corrected so that the dairy importers can

be assessed their fair share. They have been getting free rider benefits from our research and promotion activities for years, and it is past time to correct this inequity.

The second import issue is milk protein concentrates (MPCs). Imports of MPCs have

increased phenomenally in the past few years, and these products are clearly displacing domestic milk products. We have the capacity to produce MPCs ourselves,

but we cannot do so under current market conditions, which are largely due to heavily subsidized imports. We think the U.S. policy should be one that encourages and

allows growth in our domestic capability to produce MPCs, rather than outsource

yet-another portion of an industry to other countries. This could be achieved either

through establishing a tariff on imported MPCs, or through some kind of a processing subsidy for domestic MPC production. We urge you to consider this during the

next farm bill.

The Commodity Credit Corporation Price Support Program Works and Should Remain Intact. We believe that the current dairy price support program, under which

CCC supports the price of milk at $9.90 per hundredweight and the price of nonfat

dry milk of approximately $.90 per pound, have served the industry very well, and

should be continued in the next farm bill.

These support levels do not guarantee a profit for any dairy producer; indeed,

these purchase prices are still below everyone’s cost of production. However, the

price support program does give our industry an avenue for dealing with situations

where supply and demand are out of balance without leaving dairy producers in permanent financial ruin.

We believe that the price support program also represents a good Federal policy

because the benefits outweigh the costs. The best recent illustration of this occurred

right after the 2002 farm bill was signed. The gross cost of the dairy purchase program between July 2002 and June 2003 (a period of 25-year low dairy prices) was

approximately $600 million, excluding revenues received by USDA for selling product back into the market and the value of any products used in donation programs.

However, industry estimates are that, without the dairy price support program, producer prices would have been about one-third lower, which would have resulted in

$2.4 billion reduction in income for dairy farmers during that time.When dairy

prices are above the CCC purchase levels, there is no cost to the Federal Government. There have been almost no CCC purchases or costs during fiscal year 2005

and the first half of fiscal year 2006, proving that the program is truly a stand-by

safety net program. The National Milk Producers Federation, of which we are a

member, estimates that the dairy price support program, as of June 2006, has prevented a $3.5 billion loss in dairy farmer income, at a gross cost of product purchases of approximately $1.1 billion.

One other issue within the dairy price support program that merits some attention is what is commonly called the ‘‘butter powder tilt,’’ which is the relative support prices between butter and nonfat dry milk. The 1996 farm bill allowed the Secretary of USDA to make adjustments to the tilt not more than twice a year, and

this same authority was continued in the 2002 farm bill. We understand the need

for the Secretary to have some discretion in adjusting relative prices in order to

minimize costs to CCC, as he is directed to do by the law. However, from a business

perspective, changes to the butter/powder tilt are extremely disruptive. When there

is even a rumor about the Secretary contemplating a change to the ratio, there is

often a chilling effect on pending dairy product sales and purchases, because even

a small change in the tilt can have a dramatic economic effect on pending transactions. Accordingly, we are in favor of continuing to limit the authority of the Secretary to make no more than two changes per year, and would support a limit of

once per year.

The dairy price support program is efficient and effective, and we believe that it

is the most equitable dairy program because it treats all producers the same, regardless of size or location. We strongly support the continuation of the dairy price

support program at current levels in the next farm bill.
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The Milk Income Loss Compensation Program Should Be Terminated. During the

formulation of the 2002 farm bill, we were supportive of NMPF’s efforts to include

a supplemental payment component for class III (cheese) and class IV (butter and

nonfat milk powder) as part of the dairy safety net even though California has its

own state marketing order system. However, as you well know, Congress enacted

the MILC program instead.

The MILC program is fairly divisive within our industry, due to the fact that it

mainly benefits small producers. Because the producers in our co-op do not receive

much benefit from the program, we believe that the Federal resources that have

been devoted to the program would be more effectively used in other ways. Put another way, we are certainly not in favor of extending the MILC program if it comes

at the expense of the dairy price support program.

Conservation Programs Are Vital. California, and the San Joaquin Valley in particular, is at the forefront of just about every environmental issue being faced by

agriculture producers today. We are constantly being faced with a barrage of issues

dealing with clean air and clean water, with the end result usually involving more

regulatory costs of compliance to our producers.

We are very supportive of the Environmental Quality Incentives Program (EQIP),

which Congress reauthorized as part of the 2002 farm bill. Projects funded by this

program in California are helping our producers to cope with the continually-increasing costs of complying with environmental regulations. We can assure you that

any additional funding or increases in the cost-share allowance you can provide for

this program will be put to good use.

Because The Conservation Security Program (CSP) is so limited in the number

of watersheds in which it is being used, we do not have any way to evaluate its

effectiveness. We would hope that, if the program is continued in the next farm bill,

we can work with Congress to expand the program so that it can be beneficial to

dairy producers who want to contribute to watershed quality improvements, which

we all do anyway.

Environmental Research Is a High Priority. The last several farm bills have continued to emphasize the need for good research in a variety of areas, all of which

are important to agriculture. For the next farm bill, we believe that we need to significantly increase the focus of our research efforts in the environmental area. For

example, in California we are currently doing air quality research on dairy farms

to determine the sources and levels of volatile organic compound emissions. One research initiative actually involves measuring methane emissions from dairy cows inside of a sealed chamber; other efforts include looking at methane emissions from

feed piles. The dairy industry has recognized this need nationally as well. Last year

the industry asked Congress to allow us to use a small portion of our dairy research

and promotion check off dollars for environmental research associated with EPA’s

consent agreement, which is vitally needed by the industry to get some good science

as we continue to look for ways to control and understand how greenhouse gases

work.

We think the need to focus research into this area will help us to better direct

our conservation program dollars. For instance, if our current research ends up

showing that different management practices with respect to silage piles can result

in more methane emission reductions than covering a manure lagoon, the eligible

activities under EQIP could be expanded to include dairy feed management practices in order to encourage producers to adopt these practices.

The dairy industry, along with the rest of the agriculture sector, knows that our

best bet in being able to minimize the costs of environmental regulation is to make

sure we have good science to back up any of the decisions we make with respect

to air and water quality. By including environmental research as a priority in the

next farm bill, you will be helping to ensure that we have sound science to back

us up as we address environmental issues.

Federal Marketing Orders. Our producers operate under California’s state milk

marketing order program. Because of this, we do not take positions on proposals to

reform or change Federal milk marketing orders. If you make changes to the Federal marketing order structure that would necessitate a change in our system, our

system allows both producers and processors to request a hearing by the California

Department of Food and Agriculture. Within 60 days, we could have a decision on

whether a change will be made or not. We may not like the result, but at least we

have a system where we can get an answer in a relatively short time, which would

minimize any potential adverse effects that might be created by a significant change

in the Federal order system.

Thank you for the opportunity to testify today.
53

STATEMENT OF JEEP DOLAN

Mr. Chairman, members of the committee, thank you for this opportunity to testify. My name is Jeep Dolan, I am vice president of operations and co-owner of Driftwood Dairy and I want to thank you for coming to California. I want to share with

you my unique perspective on some of the challenges of the current dairy policy as

it relates to small, family-owned dairy businesses.

I understand our time today is short; the issues are complex and I am far from

a policy expert—so I will try to get to the heart of the matter in a straightforward

way. First of all, however, let me set some context by telling you about Driftwood

Dairy and our role in supporting dairy producers.

Driftwood Dairy has been in business since the early part of last century. My

great grandfather ran a Dairy in Los Angeles in the 20’s, 30’s and later moved to

El Monte in the thirties until his retirement in 1942. Uncle purchased Driftwood

Dairy in 1946 at our current location. Driftwood Dairy sells fluid milk products,

juice, cream and ice cream mixes. Seventy percent of our business is food service

and co-packing for other manufacturers. Driftwood is probably the number one or

two supplier to School Food Service programs in the country. While we may be considered a small player on the industry stage our presence in local communities, in

the state and nationally is large.

Clearly, our industry is a critical link in the farm-to-table economy that ultimately supports dairy producers. We are forced to operate under some Federal policy constraints, however, that prevent us from being more efficient in our role as

linking producer to consumer. Let me discuss a few concerns here today: • Congress needs to ensure there is a level playing field so everyone can compete

fairly. • Congress needs to ensure the Federal regulatory system is more responsive to

industry change. • Congress needs to review and phase out the ineffective and market distorting

dairy price support program. • Congress needs to help the industry guard dairy’s franchise on wholesomeness

and nutrition.

First, I would like to thank members of the Committee for helping to level the

playing field by passing the Milk Regulatory Equity Act. Driftwood operates in the

California state order and the Arizona Federal Milk Marketing Order (FMMO). So,

we have first hand experience with the problems created by an uneven playing field.

Whether you are big or small, coop or processor, no one should have preferential

treatment. No one, whether producer-handler, large processing company or large cooperative, should be able to use legislatively created advantages to ‘‘run the table’’

on other processors and producers. This was wrong when it was tried by producerhandlers and Congress was right to step in and fix it. Dairy processors and dairy

farms are fundamentally business operations and should be treated as such. I would

advise the Committee that you should strive to be fair to everyone in the industry

and not think good public policy can result from giving an advantage to one group

or region over another.

Second, Congress needs to ensure that Federal regulatory system is more responsive to industry change. If Congress decides that the Federal Milk Marketing Orders

should continue to regulate price, then the system needs to function in a manner

that allows the market to operate. I do not believe Congress should have to step

in and fix every little problem. USDA and the Marketing Order regulators should

be able to do it, but they need to act in a timely fashion. The producer-handler issue

is a good example. It took USDA years to resolve some of the issues associated with

producer-handlers. While all along these farmer-processors used the delay to gain

an unfair advantage in the marketplace. Regulation should be helpful—not harmful.

Economics and the laws of supply and demand should dictate the rules in the marketplace, not regulatory delay or bureaucracy. It takes USDA an average of 9

months to make the smallest of changes to the Federal Milk Marketing Orders. Why

is that? This is not ‘‘rocket science.’’

Third, Congress needs to look at the old subsidy program, the dairy price support

program, and phase it out. While the concept of an economic ‘‘safety net’’ for producers is a sound and appropriate goal for Federal dairy policy, the current price support program is creating major distortions in commerce. Driftwood used to be a commodity producer in the 1980’s and saw first-hand, the problems and unintended consequences of the USDA ‘‘give away’’ programs because of the surplus purchases

under the dairy price support program. I remember that the non-fat dry milk we

received sometimes was probably a year old or older, and it arrived at our plant

on the bed of the floor of a truck because USDA wouldn’t exchange pallets. Nowadays, I would refuse such a delivery because it violates Federal safety standards,
54

such as HACCP, and good manufacturing practices (GMPs). We cannot continue a

program that creates a ‘‘secondary market’’ for dairy products that may foster cutting corners to make a buck. The image of the dairy industry as one dedicated to

quality and meeting consumer demand is too important to jeopardize.

Some cynics might ask, ‘‘Why would processors care about the Government buying

up the surplus milk powder?’’ The answer is simple; we are in the business of being

the link between dairy farmers and 90 percent of all consumer households in America. Government does not operate well in this free enterprise environment. However,

this is exactly what is happening with the dairy price support program and it isn’t

working. There has got to be better ways to support all dairy farmers equitably

without having the government attempt to stabilize prices by purchasing surplus

dairy products and then getting rid of them in ways that cause real disruptions in

the flow of commerce. The program should be phased out.

Fourth and lastly, instead of price controls, strict regulations, government intervention in the marketplace and expensive subsidies, Congress needs to help the industry guard dairy’s franchise on wholesomeness and nutrition. Dairy is one of the

most nutritious and beneficial foods. You might not believe that we are competing

with soda companies but we are. What do you reach for when you are thirsty? Our

industry is changing and the nature of our products needs to change with consumers. But we are so strictly regulated as it relates to our ingredients and prices, it

frustrates our ability to compete with other companies that are not subject to the

myriad of regulations that dairy companies are. The issue of a level playing field

should apply here, too. As I mentioned when I started, Driftwood is a leading supplier to School Food Service programs in the country. Therefore, what happens to

us on the milk and agriculture front ultimately affects our ability to provide schoolchildren with milk, juice and other dairy related products.

We are a small processor in a big industry. Congress has an obligation to help

businesses like Driftwood as well and the big dairy companies and coops. My family

has been involved in the dairy for four generations even long before Driftwood and

I am dedicated to making it profitable and successful for future generations of our

family. We see a myriad of opportunities to grow and prosper but we need your help

to level the playing field and break down some of the old bureaucracy that is standing in our way. We cannot be hamstrung with old regulations or a view of the industry that does not comport with the realities of today’s marketplace if we are going

to remain vital and successful.

Mr. Chairman and members of the Committee, thank you for this opportunity to

testify.

STATEMENT OF JOHN JETER

Mr. Chairman, and members of the Committee, thank you for the opportunity to

testify here today. My name is John Jeter, and I am the CEO of Hilmar Cheese

Company.

Hilmar is a unique company. We are a producer owned, private company that

buys over 10 percent of all the milk in California. We are now in the process of

building a new cheese processing plant in Dalhart, Texas. This new cheese and

whey protein processing plant in Texas will be the company’s first processing plant

outside of its Hilmar, California facility and corporate headquarters.We were founded to increase the prices producers receive for their milk, and we have been very

successful, despite Federal regulations and programs that were originally intended

to help producers but actually stand in the way and handicap the whole of the US

dairy industry.

The next farm bill provides Congress with a tremendous opportunity to bring

more cohesion to our fractured dairy programs and to recognize and rectify the unintended consequences of the well-intentioned but flawed programs in place today.

Let me start by offering one example of such a well-intended program that is actually retarding natural growth and progress in the industry: the Milk Income Loss

Contract program—otherwise known as M-I-L-C. It is symptomatic of Federal dairy

policy today and I am sure the Committee has heard differing opinions on the program. I am here to report that I believe the program is counterproductive, expensive, and it is unnecessary.

The MILC program is counterproductive because it works at odds with the dairy

price support program. The price support program was once intended to clear the

market of excess production, but now it simply stimulates excess production and

keeps prices low. The MILC payment compounds the market distortions by subsidizing the excess production and further lowering overall price levels, which is detrimental to all in dairy. These two programs are simply incompatible.
55

USDA’s 2004 analyses of the programs confirm this determination. USDA’s Deputy Chief Economist Dr. Joe Glauber explained it this way at a recent Senate hearing on dairy policy—he said the MILC programs works ‘‘at cross purposes with the

underlying market price support program if you’re creating incentives to produce

more milk, well then that can potentially cause a price decline.’’ He explained when

this happens, ‘‘the government steps in and purchases product.’’ He went on to testify the current system creates, ‘‘stock piles that end up growing quite large’’, ‘‘potential product imbalance’’ and distortion in the markets.

On top of all this, the MILC program is also expensive. It was meant to be a temporary assistance payment to dairymen; a transition program from the failed Northeast Dairy Compact, conceived in 2002 during the farm bill debate, but by the time

it was implemented it was extended retroactively to 2001. Based on its March 2004

estimate, the Congressional Budget Office projected that the cumulative cost of the

MILC program over its expected four-year life was going to be approximately $3.8

billion. This is significantly higher than estimates offered in 2002 during the farm

bill debate, when the CBO estimated total direct payments of only $963 million over

the life of the program.

MILC was supposed to sunset in October 2005, but Congress extended this program through 2007. Ironically, it was the budget savings bill, the measure to cut

Federal spending, which extended MILC at a cost of another $1 billion, at least.

MILC is unnecessary and counterproductive. There exists another program designed to prop up farm gate prices of milk—the Federal dairy price support program. In the next farm bill, we need to resolve which of these programs, if any, to

keep and which to get rid of. Neither are ultimately truly helping producers, processors, or consumers. In fact, by the time the MILC payments kick-in, after the

price support program, taxpayers have paid for the same milk twice.

While as I said at the outset, Hilmar is dedicated to delivering better prices to

dairy producers, we do that through adding value to their milk and supplying the

market with what consumers want. That is how Hilmar is different, we do not expect the government to help us meet expenses or guarantee a profit. That is not

a formula for success in our free enterprise system.

Our focus is on making world class cheese and value-added whey products, so to

me the current two programs we have now in dairy do not make sense. Why are

we paying producers to make a product i.e. non-fat dry milk that is not being demanded by the marketplace but that has the best return when it is sold to USDA

to be stored in a warehouse?

The dairy price support program may be guaranteeing a price to producers, but

it is not adding value to their milk, nor is it serving consumers who ultimately determine the value of milk and dairy products. What the dairy price support program

does accomplish is to stand in the way of innovation in products and in the way

of investment in technology.

Fundamentally, what Federal dairy policy does today is ignore the law of supply

and demand. It focuses in on getting more money to the producer . that in most

cases means more production. A critical missing point in our policy discussions is:

where will this milk go?

In the next farm bill I would urge you ask a simple question. Is it really sustainable to subsidize production with the MILC program . and then take that milk off

the market through the dairy price support program and keep it in government

warehouses? As far as I can tell, the ‘‘demand’’ for non-fat dry milk by Federal warehouses is probably pretty limited.

On the other hand, the demand from the market for cheese, new and innovative

consumer demanded, value-added dairy products, domestically and globally has

barely been tapped in any real and significant way. In addition to US consumer demand for new, interesting and quality products, there is a demand for specialty protein products from food manufacturers and there is a growing export demand. Consider this: the US exported 7 percent of its production last year . a big increase from

a few years ago when we were pretty much stuck at four percent . but compare that

to other commodities, which export 20, 30, or 40 percent of their production. Our

industry needs to look at the shores of Asia, consumers in Europe and markets in

South America, not the caves of USDA or the subsidy payments of MILC to ensure

our prosperity, stability and future.

One-step in the right direction for Federal dairy policy beyond rectifying the two

overlapping subsidy programs is to expand the ability to forward contract to those

in federally regulated marketing orders rather than limiting it to co-ops and let producers and processors work together to develop new markets and new ways to bring

value to milk. It’s a simple matter of fairness.

In closing, Mr. Chairman, US dairy farmers and processors can succeed in a free

market. We just need to remove some impediments to change and to innovate by
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looking down the supply chain at ways to add value to milk instead of ignoring

these market signals in favor of government subsidies. I appreciate the time the

Committee has taken to come to California to hear our views and to provide us with

encouragement and support of our effort to sell high quality dairy products made

from US milk to consumers here and abroad.

Thank you.

STATEMENT OF LEROY ORNELLAS

I am Leroy Ornellas, a dairy farmer from Tracy, California. My wife, Jennie and

our three sons, Kevin, Mark, and Mathew, operate two family dairy farms near

Tracy. Our family milks a total of 630 cows and produce nearly 14 million pounds

of milk over the most recent 12 months. I am the third generation on the farm my

sons are fourth generation and our grandkids are the fifth generation, all working

on the farm. We market our milk through Dairy Farmers of America, Inc. (DFA),

a national milk-marketing cooperative based in Kansas City, Missouri

I am a member of Western United Dairymen. I am on the Board of Supervisors

for San Joaquin County. I am a member of the Council of Government, the Local

Agency Formation Commission, and the Delta Protection Commission.

I appreciate the opportunity to testify at this hearing today. I have a written testimony document that is more detailed on all of the points that I will touch on today.

I’d like to submit that document for the committee’s reference.

While organizations that I serve have not officially established positions for all of

the 2007 farm bill issues, I would like to share my thoughts on some of the major

themes that will define the dairy sections of the bill.

(1) DFA members are participating with all the other members of the National

Milk Producers Federation’s Dairy Producer Conclaves to develop a consensus position on farm bill issues. We will keep you and your staffs informed of our efforts

and seek your counsel on issues as we discuss them.

(2) Because we do not think there will be radical shifts in policy direction as a

result of the 2007 farm bill we support the view that an extension of the current

farm bill which will work well for most of the nations dairy farm families.

(3) We feel the next farm bill should maintain some form of an economic safety

net for dairy farmers. Because dairy products are such an excellent source of nutrition for our nation and due to the high fixed cost of becoming a dairy farmer and

the fact that milk production assets have limited use in any other agriculture enterprises, past Congresses have maintained safety net provisions for the dairy industry. We hope this Congress will continue these policies.

The most important safety net provision we have is the dairy price support program. We favor continued operation of the dairy price support program at a targeted

$9.90 U.S. average manufactured milk price. We would oppose granting the Secretary of Agriculture any discretion, which would reorient its intended purpose

away from supporting income to farmers just to result in minimizing government

costs—and we may need Congress to instruct the Secretary of Agriculture of this

fact in some official manner. Under President Bush’s proposed agriculture budget

the Secretary of Agriculture would be allowed to adjust buying prices for products

made from milk (cheese, butter, and nonfat dry milk) so as to reduce the cost to

the CCC for products purchased. This could allow for a reduction in targeted support price from that $9.90 as specified in present legislation.

Additionally, I would request that the Commodity Credit Corporation (CCC) take

action and adjust the support program purchase price levels for cheese, butter and

nonfat dry milk to reflect the significant additional costs manufacturers face when

selling products to the CCC. The current CCC purchase prices for dairy products

do not reflect any costs beyond those incurred for commercial sales. As a result,

market prices for individual products have, from time to time, fallen below support

levels, allowing the price of milk used to produce them to fall below the statutory

support level for milk of $9.90 per hundredweight at average test. NMPF has provided information to CCC but thus far CCC has been unwilling to take action. The

result is that manufacturers will sell to buyers other than CCC at prices below the

support level in order to gain a higher value than the support purchase price and

the support price targets are not maintained.

Up until the last several months, the CCC has purchased some NFDM—doing

what safety nets are supposed to do. The last time milk prices fell to safety net levels was in 2000 when the average class III price for the year was $9.74 (below the

safety net price of $9.80 for milk of 3.5 percent butterfat test). The 10-year average

class III price is $12.62. Because the price support program is in place and working

we hope to avoid a price crash like in 2000—but if it wasn’t around and prices did
57

fall to that level the Ornellas farm would face a loss in income of $402,439 on the

most recent years production. That would be hard for our business to withstand. We

are very interested in stable policies that help to keep reasonable prices and a safety net that maintains some level of viability for a dairy farm family.

The second safety net provision is the Milk Income Loss Compensation (MILC)

program, which DFA supports as long as there are no caps limiting access to the

benefits. My farm is affected by the payment limitations, restricting my ability to

fully take advantage of this program. Like the price support program I view the

MILC program as a valuable safety net for producers pay prices. Its key benefit is

that it puts cash in the hands of farmers at the very point it is needed most—the

lowest point of the price cycle.

In general the guidelines for a safety net program should be that the program:

• not discriminate between farmers of differing sizes;

• not discriminate between farmers in different regions of the country;

• not be high enough to encourage additional milk production.

The government’s safety net policy should only operate at a point where a collapse

of producer prices could force too many producers out of business and our nations

milk-producing infrastructure would be damaged.

(4) We support continuation of regulatory milk marketing order programs like the

California State Order and the Federal Milk Marketing Order system. Marketing

Orders are important to us as they undergird all of our marketing and pricing efforts all over the country. Orders assure dairy farmers a minimum price, assure

that all competing milk buyers pay the same minimum price, assure that all dairy

farmers share equitably in the returns of the marketplace and assure that the terms

of trade are uniform throughout the Order’s marketing area. These objectives remain very important ones in the dairy marketplace. Moreover, despite the claims

that they are outdated and not relevant, the primary reasons for the institution of

milk orders still exist: There are many more buyers than sellers and the average

sized milk buyer is much larger than all but the very largest dairy farms. Milk production is still very seasonal. Milk demand has a weekly and seasonal purchase pattern that requires substantial costs to balance producer supplies with buyer demand. Individual dairymen, and even large groups of dairy farmers, continue to

need the stability of Orders to deal with these marketing challenges.

(5)A majority, but unfortunately not all of the nations dairy farmers, have funded

and are operating a self-help program—Cooperatives Working Together (CWT).

Dairy farmers voluntarily pay 10 cents per hundredweight on all milk produced in

order to structure the size of the nations dairy-cow herd and more closely tailor milk

supply to demand. Additionally, the program works to assist exports of dairy products in an attempt to market and promote domestically produced dairy products to

the world. Over the three-year period of the CWT program, participating dairy farmers have contributed over $213 million, which to date, was used to remove a total

of nearly 3.2 billion pounds of milk from our domestic market.

However, the CWT program is not intended to replace Federal farm programs and

can never do so because there will always be those who choose to take advantage

of the programs benefits but never pay their share. Even after two years of successful implementation there are still over 25 percent of the country’s dairy farms that

choose not to pay in. In spite of our success we still need Congress’s help in providing policy support to our industry.

(6) Dairy Farmers also see policies outside of the farm bill impacting their future

such as: Environmental Policies

The implementation of conservation practices on our farm is extremely important

to our operation. Increasing the funding for the Environmental Quality Incentives

Program (EQIP) in the 2002 farm bill was very significant. Without the cost sharing

mechanism it would have been difficult to fund some of the necessary and recommended practices.

I want to thank you Chairman Gutknecht for cosponsoring HR 4341 as part of

a bipartisan effort to clarify that animal manure is not a hazardous waste under

the Superfund law or its counterpart, the Community Right-to-Know Act. Congress

should clarify that it never intended to jeopardize American agriculture by imposing

strict, joint, several, and retroactive CERCLA liability on farmers for their traditional farming practices, including the use of manure as a beneficial fertilizer. I

would ask you to urge your colleagues to support this important legislation.

My family has always taken our responsibility to protect the environment very

seriously. Dairy farmers and other agricultural producers for years have been regulated and required to have permits under the Clean Water Act, Clean Air Act and

numerous state laws and regulations—but never under the Superfund Law. It is essential that Congress protect farmers and businesses that depend on agriculture

from this potential threat to their livelihoods.
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ESTATE TAX ISSUES

We favor the elimination of estate taxes. If this is not possible, we would be in

favor of any compromise that reduces the estate taxes.

(7) Another reason we support extending the current farm bill is so that we can

have a more clear view of the WTO trade talks. We can see no reason to change

our programs until we know what the world trade rules will be and more importantly perhaps who will play by them. • We support multilateral trade talks that level the playing field of dairy export

subsidies, tariff protections, and domestic support programs. • We can’t support a final agreement unless it represents a net increase in our

ability to compete against our more heavily subsidized and protected competitors in

the EU, Canada and Japan, as well as more balanced trading opportunities with

key developing countries. • We support the continuation of the dairy price support program with or without

a successful Doha Round. We strongly disagree with those who claim that the price

support program must be phased out or eliminated upon completion of the Doha

Round. • DFA’s dairy farmer Board endorsed a renewal or an extension of the President’s

Trade Promotion Authority to advance the U.S. dairy industry’s trade interests. • We support additional legislation to make the import assessment for dairy promotion (15 cent check-off) WTO-compliant by including dairy producers in Alaska,

Hawaii, District of Columbia and Puerto Rico. Their inclusion will allow the collection of the promotion assessment on imported dairy products as authorized in the

2002 farm bill. Such legislative action is obviously long overdue.

(8)We support the Dairy Export Incentive Program (DEIP) and the requirement

that the Secretary of Agriculture be directed to see that the allowable amounts of

cheese, butter and nonfat dry milk be afforded export assistance equal to what we

are allowed under the current WTO agreement. Currently no government export assistance is being offered, even though, by law, the Secretary is directed to do so,

and by agreement we are allowed to do so under the WTO agreement.

(9)Finally we support Senate Bill 1417 offered by Senator Craig that impose tariff

rate quotas on certain casein and milk protein concentrate products. Our current

tariff rate quota schedules for dairy products were written before these products

were mainstream dairy ingredients. Like all other policy areas this section needs

to be reviewed and updated to reflect today’s economic realities. Regulatory personnel are dragging their feet on this issue and interest from Congress can help to accomplish the task.

In closing, Chairman Gutknecht, I want to thank the House Agriculture Committee specifically your Subcommittee for having this field hearing. We know we can’t

explain all of our concerns here in detail but want to make you aware of them so

that when we do provide you with additional details you will better understand our

concerns. I will be happy to answer any questions, or provide any additional information that you might want.

STATEMENT OF SABINO HERRERA

Good morning Mr. Chairman and members of the committee. Thank you for holding this important hearing today and welcome to our great state of California. My

name is Sabino Herrera and I’m a veterinarian and dairy producer with the Hilmar

Cheese Company.

I did not grow up on a dairy farm. I grew up in the inner city of Los Angeles

but learned the love of dairying and dairy medicine at the large scale operation in

California’s Central Valley.

I might have a different perspective than others on the panel, maybe even than

other dairy farmers you have heard from as I am not a proponent of the so called

dairy safety net program. I’m here today to convey to this committee just how important it is for us to revisit our current two-part dairy support program and for

us to make meaningful and sensible reforms that are fair to all farmers.

As you already know, there are currently two subsidy programs in place, both

with the goal of helping producers like myself. One is not very popular in states

with large dairy operations like California, the Milk Income Loss Contract (MILC)

program. The other program is the USDA’s Dairy Price Support Program that has

existed for decades and works at cross purposes with MILC. But, together they

lower milk prices and decrease dairy productivity.

Let me explain why MILC is so unpopular in this growing part of the dairy world.

MILC is not a true safety net for all dairy farmers. Instead it encourages farmers
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to produce more milk because it keeps some farms in business that are not profitable on their own. At the same time, the price support program buys up whatever

surplus cheese, butter and non-fat dry milk produced by these same farmers as another form of support. And to make matters worse, USDA then has to find means

to get rid of the surplus by reselling these dairy products or simply giving them

away. This, in turn, significantly disrupts the marketplace, which affects all farmers. Even the USDA has said that the two programs are at odds with each other

and decrease farmer income. This situation should not be allowed to continue.

Nearly $2 billion had been spent on MILC payments prior to the recent extension.

That amount far exceeded the original estimates for the program. And truthfully,

the money has only helped a limited group of farmers. One reason milk prices were

so low for so long in 2002 and 2003 was because of MILC payments. These artificially low dairy prices were the direct result of a Federal system that failed to protect all farmers.

Committee members, I urge you to do away with the current system and start

fresh with the creation of a single, sensible dairy program that achieves the purpose

of providing dairy farmers with a safety net while protecting prices for consumers.

This change is vital for the sustainability of many dairy farmers across the country

and needs to happen sooner rather than later. I hope Congress can find the right

vehicle to implement this overhaul.

Let me be clear of one thing. By advocating for a single system and not the current dual programs, I am NOT suggesting that dairy farmers need less financial

help and funding. Rather, I believe that resources saved from the consolidation of

the two existing programs can instead be used to support farmers in many other

important areas.

Dairy farmers are constantly struggling to keep up with the changing times and

will continue to need help and resources dedicated to address new issues. In the immediate future, dairy farmers, as a group, will have to concentrate on finding innovative ideas for sound environmental management practices and conservation. We

also have to tackle the implementation of new technologies and meet the demands

of creative promotion of our products.

I did not know when I was young that I would be a vet and a dairy farmer. I

entered this business after a very positive experience at a well-run dairy farm operation. We need programs to help young people get into the business of agriculture.

Dairy farming is hard work, but it is a business and we should not have to be dependent on government programs to make our livelihood.

What dairy farmers need is help dealing with real on-farm issues. In the West,

we struggle with water conservation and environmental compliance. Federal dollars

could help us met these challenges, as well as help us become energy independent

through the use of methane digesters. As a vet, I can tell you we could use more

Federal dollars for Johnes disease research and eradication, and to guard against

foot and mouth and mad cow diseases. What we don’t need is to be tied down with

the same unfair and costly support system that we have been saddled with for years

while real on-farm needs go neglected.

I want to make sure you know I am not talking about giving us more and more

money. We just need your help to make sure that Federal dollars are targeted at

helping dairy farmers across the country. We certainly do not want money to go to

new, hastily created programs like MILC or arcane, outmoded programs like the

price support, but rather to programs that help grow our business.

Mr. Chairman and members of the committee, I am optimistic about my future

and about the health of dairy in the Central Valley, but I am deeply concerned

about the current dairy subsidy system. An overhaul of the dairy program in the

next farm bill is essential for creating effective policy that will stabilize the dairy

industry and enable us to continue to have healthy, high quality farms and produce

dairy products that the public wants and enjoys.

I thank you again for holding this hearing here in California’s Central Valley and

I look forward to your questions.
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STATEMENT OF SUE TAYLOR

Mr. Chairman and members of the Committee, thank you for the opportunity to

appear before you today. My name is Sue Taylor and I am Vice President of Dairy

Policy and Procurement at Leprino Foods. Leprino Foods is a family-owned company

that has grown from making small batches of ricotta and mozzarella cheese for local

delivery to the world’s largest producer of mozzarella cheese. We operate nine plants

in the United States, manufacturing mozzarella cheese and whey products. Six of

the nine plants receive milk pooled in the Federal Milk Marketing Orders administered by USDA. We operate three manufacturing facilities that are regulated under

the California state order.

Before discussing issues related to the next farm bill, I would like to thank members of the Committee for passing the Milk Regulatory Equity Act (’’MREA’’) earlier

this year. It was a critical piece of legislation and we appreciate your efforts.

In an effort to prepare the dairy industry for future competitiveness here and

abroad as part of the next farm bill, we suggest Congress:

1. mandate that USDA act with speed in its regulation of the Federal Milk Marketing Orders to keep up with changes in the dairy marketplace,

2. give all producers and processors risk management tools like forward contracting, and

3. resolve the conflicting nature of the two existing Federal dairy safety nets.

Make Allowance and Streamlining the Federal Milk Marketing Orders. First, I

want to thank the Chairman for his support of updating the make allowance to

allow the milk pricing formulas of the Federal Milk Marketing Order to reflect current manufacturing costs. I have just returned from the USDA hearing on the make

allowance and I hope the Department will act quickly on the hearing record and

finalize the formula update within weeks and not months.

The delay and politization of the make allowance update is of great concern to

Leprino and other dairy manufacturers across the country. The make allowances in

the current formula are based upon cost data from the late nineties. With the significant rise in energy, healthcare and other costs since the late nineties, the industry was closing in on a financial crisis by 2005. Going to the marketplace to recover

the increased costs is not an option. The make allowance hearing was requested and

granted on an ‘‘emergency’’ basis last year. A four-day hearing was held last January and yet, here we sit with no decision from USDA some nine months later. A

year of deliberation is simply not acceptable when the industry is losing millions

of dollars a month. Mr. Chairman, I hope you will continue to urge USDA to finish

what they started and not be distracted by calls to link this simple, straightforward

exercise with other proposals that are unrelated to the pricing of milk for manufacturing.

Congress should urge USDA to take a page from the playbook here in California.

The California state milk marketing order also has hard and fast deadlines for considering and making changes to its state order. Changes are implemented within

60 days after concluding its public hearing, as required by law. This system has allowed California processors and producers to be more responsive to commercial demands while the rest of the Nation lingers under the cumbersome bureaucracy of

USDA.

Reinstating the Right to Forward Contract. Price volatility has become an increasing concern to domestic and international customers alike. I believe that the ability

to forward price significant volumes of product is key to driving demand for American dairy products. Unfortunately, multiple food service customers have told me

that they are frustrated by price volatility over the years and, as a consequence, are

minimizing the use of cheese in menu items. Neither producers nor processors win

when our ultimate consumers turn away from our product because of volatile prices.

Leprino routinely uses the risk management tools available to offer forward prices

to our customers, but futures market liquidity on the Chicago Mercantile Exchange

where dairy is traded still makes accumulation of significant volumes cumbersome.

Congress can help address this need by reinstating the dairy forward contracting

program.

In addition to the demand issues that will be addressed by forward contracting,

I can tell you as a former agricultural banker with continued ties to that community, forward contracting is an important tool in the producer arsenal.

Reforming Current Federal Safety Nets. Finally, I would like to briefly comment

on the current Federal safety nets. Leprino is very concerned that the Milk Income

Loss Contract Program (MILC) impedes the industry’s transition to becoming a

more competitive long-term player. The program’s current structure with a very

high target price and limitations on eligible production shields smaller producers

from market forces, resulting in greater production and lower overall market prices.
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At the same time, mid-sized and larger producers are primarily gaining their revenue from the depressed markets, placing these more efficient producers that represent the future of our industry under financial stress. The MILC program runs

headlong against the U.S. industry’s need to become more competitive. Moreover,

the current dairy price support program is not operating as intended.

The dairy price support program has also become more disruptive to the marketplace. For example, the accumulation of over a billion pounds of nonfat in USDA’s

coffers a few years back was very disruptive. Given limitations on distributions for

international food aid, USDA started giving away surplus milk powder accumulated

through the dairy price support program for livestock feed in drought areas. The

more powder that came out of government storage, the more prices in the free enterprise whey market were undermined. Leprino’s whey and cheese business is hurt

when the government is buying product and dumping it on the marketplace when

it is not needed.

Leprino is operating under the laws of supply and demand but the current dairy

programs with these two conflicting safety nets are not. The price support program

and the MILC program work against one another and stifle innovation and growth

in the dairy industry.

Today, in dairy we have a Federal pricing scheme that is complex and unresponsive to markets. We have to deal with greater volatility and production of unwanted,

surplus products. This web of programs combines to put the U.S. dairy industry farther behind our competition.

However, with your help in modernizing these dairy policies, we will have a greater opportunity to expand domestically and earn a greater share of international

markets. We need Federal dairy policies that help pave the way, rather than impede

our progress to flourish in the long-term.

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