U.S. GOVERNMENT PRINTING OFFICE

42–397 cc WASHINGTON : 1997

S. HRG. 105–131

ALTERNATIVES TO THE NATIONAL

CHEESE EXCHANGE AS PART OF

THE DAIRY PRICING SYSTEM

HEARING

BEFORE A

SUBCOMMITTEE OF THE

COMMITTEE ON APPROPRIATIONS

UNITED STATES SENATE

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

SPECIAL HEARING

Printed for the use of the Committee on Appropriations

(

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
2

COMMITTEE ON APPROPRIATIONS

TED STEVENS, Alaska, Chairman

THAD COCHRAN, Mississippi

ARLEN SPECTER, Pennsylvania

PETE V. DOMENICI, New Mexico

CHRISTOPHER S. BOND, Missouri

SLADE GORTON, Washington

MITCH MCCONNELL, Kentucky

CONRAD BURNS, Montana

RICHARD C. SHELBY, Alabama

JUDD GREGG, New Hampshire

ROBERT F. BENNETT, Utah

BEN NIGHTHORSE CAMPBELL, Colorado

LARRY CRAIG, Idaho

LAUCH FAIRCLOTH, North Carolina

KAY BAILEY HUTCHISON, Texas

ROBERT C. BYRD, West Virginia

DANIEL K. INOUYE, Hawaii

ERNEST F. HOLLINGS, South Carolina

PATRICK J. LEAHY, Vermont

DALE BUMPERS, Arkansas

FRANK R. LAUTENBERG, New Jersey

TOM HARKIN, Iowa

BARBARA A. MIKULSKI, Maryland

HARRY REID, Nevada

HERB KOHL, Wisconsin

PATTY MURRAY, Washington

BYRON DORGAN, North Dakota

BARBARA BOXER, California

STEVEN J. CORTESE, Staff Director

LISA SUTHERLAND, Deputy Staff Director

JAMES H. ENGLISH, Minority Staff Director

SUBCOMMITTEE ON AGRICULTURE, RURAL DEVELOPMENT, AND RELATED AGENCIES

THAD COCHRAN, Mississippi, Chairman

ARLEN SPECTER, Pennsylvania

CHRISTOPHER S. BOND, Missouri

SLADE GORTON, Washington

MITCH MCCONNELL, Kentucky

CONRAD BURNS, Montana

TED STEVENS, Alaska

ex officio

DALE BUMPERS, Arkansas

TOM HARKIN, Iowa

HERB KOHL, Wisconsin

ROBERT C. BYRD, West Virginia

PATRICK J. LEAHY, Vermont

Professional Staff

REBECCA DAVIES

MARTHA SCOTT POINDEXTER

GALEN FOUNTAIN (Minority)

Administrative Support

C. RACHELLE GRAVES-BELL

(II)
(III)

CONTENTS

Page

Opening remarks of Senator Cochran .................................................................... 1

Statement of Senator Specter ................................................................................. 2

Statement of Senator Kohl ...................................................................................... 3

Statement of Senator Feingold ............................................................................... 3

Prepared statement .......................................................................................... 6

Alternative price for cheese free from manipulation ............................................ 9

Establishing a price floor ........................................................................................ 10

Statement of Hon. Dan Glickman, Secretary of Agriculture ............................... 11

Prepared statement .......................................................................................... 15

Seasonal-base plans ................................................................................................. 19

Cheddar cheese prices ............................................................................................. 35

Milk marketing orders ............................................................................................ 39

Statement of Alan T. Tracy, secretary, Wisconsin Department of Agriculture .. 41

Governor’s Task Force on Cheese Pricing ............................................................. 42

Cheese Pricing: A Study of the National Cheese Exchange ................................. 51

Task force recommendations ................................................................................... 75

Prepared statement of Alan T. Tracy ..................................................................... 78

Status of the National Cheese Exchange ............................................................... 79

Statement of Harold J. Howrigan, president, St. Albans Cooperative Creamery, Inc .................................................................................................................. 83

Prepared statement .......................................................................................... 84

National survey of cheese prices ............................................................................ 89

Statement of Arden Tewksbury, manager, Progressive Agricultural Organization ........................................................................................................................ 90

Prepared statement .......................................................................................... 93

Statement of Kenneth E. Zurin, dairy farmer ....................................................... 97

Prepared statement .......................................................................................... 98

Statement of Buckey M. Jones, board of directors, Mid-America Dairymen,

Inc .......................................................................................................................... 98

Prepared statement .......................................................................................... 101

Statement of Bill Brey, president, Wisconsin Farmers Union ............................. 103

Prepared statement .......................................................................................... 106

Price of cheese long-term solution .......................................................................... 108

Statement of E. Linwood Tipton, president and CEO, International Dairy

Foods Association ................................................................................................. 110

Prepared statement .......................................................................................... 113

Statement of Edward T. Coughlin, acting CEO, National Milk Producers

Federation ............................................................................................................. 119

Prepared statement .......................................................................................... 122

Request to establish price floor .............................................................................. 122

Submitted questions ................................................................................................ 126

(III)
(1)

ALTERNATIVES TO THE NATIONAL CHEESE

EXCHANGE AS PART OF THE DAIRY PRICING SYSTEM

THURSDAY, MARCH 13, 1997

U.S. SENATE,

SUBCOMMITTEE ON AGRICULTURE, RURAL

DEVELOPMENT, AND RELATED AGENCIES,

COMMITTEE ON APPROPRIATIONS,

Washington, DC.

The subcommittee met at 2:38 p.m., in room SD–138, Dirksen

Senate Office Building, Hon. Thad Cochran (chairman) presiding.

Present: Senators Cochran, Specter, Bumpers, Kohl, and Leahy.

Also present: Senator Santorum.

CONGRESSIONAL WITNESSES

OPENING REMARKS OF SENATOR COCHRAN

Senator COCHRAN. The subcommittee will please come to order.

We are pleased today to convene a meeting of the Agriculture

Appropriations Subcommittee for the purpose of reviewing the Department’s plans for dairy pricing.

This hearing is being held at the request of the distinguished

Senator from Pennsylvania, Senator Specter, who, during our hearing with the Secretary of Agriculture on the subject of the President’s budget request, asked if we would schedule this special hearing to discuss the alternatives to the National Cheese Exchange as

a part of the dairy pricing system.

I was happy to consent to that request, and today we are here

keeping our commitment to hold a hearing on this subject. We appreciate very much Senators’ attendance at the hearing, the Secretary of Agriculture’s attendance, and that of others who we have

asked to be here today to help us better understand the alternatives and the options available to the Government on this very

important issue.

Let me point out, too, that we have problems in Mississippi and

across the South with dairy pricing formula issues. While not specifically the subject of the hearing the milk marketing orders and

seasonal base plans are an integral mechanism to encourage milk

producers to even out their seasonal milk production over the year.

The authorization for these plans was not included in the Federal Agriculture Improvement and Reform [FAIR] Act, and we are

concerned about that. We understand there are some witnesses

who will be here to discuss this, and we hope the administration
2

will work hard to address this problem as it endeavors to make

needed changes to the dairy program.

At this point I am going to yield to my distinguished colleagues

here on the committee for any opening statements they may have,

and then we will proceed to hear from our first witness, Senator

Feingold.

Senator Specter.

STATEMENT OF SENATOR SPECTER

Senator SPECTER. I thank you very much, Mr. Chairman, and

thank you for convening this hearing as you have stated we would

when we heard earlier from the Secretary of Agriculture on our

regular appropriation hearing.

In my judgment, there is a real crisis in the milk industry today,

with prices being so very low. The formula is determined with an

input from cheese, and for every 10 cents the price of cheese goes

up, the price of milk per hundredweight goes up by $1. There are

some indications that the price of cheese which has been established is not the realistic fair market price. It is determined by the

Wisconsin Cheese Exchange, and without getting into any of the

details as to how that exchange functions, suffice it to say that it

may not be the accurate market price in the country.

Secretary of Agriculture Glickman traveled to northeastern

Pennsylvania a few weeks ago to meet with a large group of Pennsylvania farmers, about 500 gathered into a large field house that

day to express real displeasure at what was happening with milk

prices.

At that time, it was stated that the Secretary would review the

situation to make a determination as to whether he would exercise

the authority which he has unilaterally to establish a different

price of cheese after due consideration of market factors which

would, in turn, raise the price of milk.

Collaterally, the Department of Agriculture had been undertaking a rulemaking process, which takes considerable time, but the

Secretary acknowledged that he had the authority to do it unilaterally and said he would take a look to see if market forces, the market price of cheese would warrant that kind of increase.

Since that meeting, the Secretary has been surveying the price

of cheese across the country as he testified here, and the collateral

proceeding on rulemaking has been going on.

We did discuss this matter to some extent when he was here before, but time did not permit the full discussion, which is why this

meeting has been convened, so I am looking forward to hearing

from Secretary Glickman and his associates as to what else has

been done on the subject.

We also have the cheese purchasers here, very distinguished witnesses, Mr. Linwood Tipton, Mr. Ed Coughlin—I have consulted

with Mr. Tipton in some detail on this question earlier, and we

have a number of witnesses here who are dairy farmers, Arden

Tewksbury, manager of the Progressive Agricultural Organization,

and a very forceful advocate for milk farmers in his section of the

State, for the full State and the country, and Mr. Ken Zurin, dairy

farmer from Lancaster, PA. We have other farmers here as well.
3

So I think this promises to be a very worthwhile hearing, and I

again thank you, Mr. Chairman.

Senator COCHRAN. Thank you, Senator Specter. Senator Kohl.

STATEMENT OF SENATOR KOHL

Senator KOHL. Mr. Chairman, we thank you for holding this

hearing on the issue of alternatives to the National Cheese Exchange, and we thank all who have come to testify, especially those

of you who have flown in from far away.

There has been a great deal of debate over the past 2 years about

the National Cheese Exchange, about the flaws of that market and

about the inappropriate influence it has had on farmers’ milk

checks and on cheese prices nationally.

To his credit, Secretary Glickman recently announced that he

was seeking public comment on the proposal to delink the USDA

calculation of the basic formula price on the National Cheese Exchange, and I think there is wide agreement that the delinking

should take place, but the purpose of this hearing is not to rehash

the debate about the shortcomings of the National Cheese Exchange, which unfortunately has been an acrimonious debate. The

purpose of this debate is to look forward to try to reach common

ground, and to focus on where we go from here.

As we will hear in testimony today, plans are underway to create

a new market for cheese to be an alternative to the National

Cheese Exchange. One of the things I would like to explore in this

hearing is how to avoid merely repeating the flaws of the National

Cheese Exchange.

Before we start, there are a couple of points that I believe need

to be clarified. First, a more credible price discovery mechanism for

dairy is an important prerequisite for the larger dairy pricing reforms that are taking place now at the USDA, but it is not a panacea for the low milk price problems that farmers have been experiencing. That is a separate debate and an important debate, and

one that I have discussed with Secretary Glickman in the past, but

it is not the subject of this hearing.

Second, we all want to find an alternative to the cheese exchange

as quickly as possible, but I believe we need to be careful not to

insist that USDA link its pricing system to any new market until

that new market becomes viable, and has proven its credibility. We

need to act as quickly as possible, but we should not make matters

worse.

So we welcome everybody here today, and we look forward to

your testimony.

Senator COCHRAN. Thank you, Senator Kohl. Senator Feingold,

you may proceed.

STATEMENT OF HON. RUSS FEINGOLD, U.S. SENATOR FROM WISCONSIN

Senator FEINGOLD. Thank you very, very much, Mr. Chairman.

I want to thank Senator Specter for his leadership and attention

to this issue, and particularly thank Senator Kohl. He and I are

partners on this issue, and agree I think in almost every respect

on the dire need to find a different way to address this issue of

cheese and milk pricing.
4

Mr. Chairman, thank you for holding this hearing and giving me

an opportunity to testify on a very important matter to dairy farmers in Wisconsin and throughout the Nation, the National Cheese

Exchange. I will submit a longer statement for inclusion in the

hearing record if the chairman will permit.

Senator COCHRAN. Without objection, it will be included in the

record.

Senator FEINGOLD. Thank you, Mr. Chairman.

The question of whether traders on the National Cheese Exchange have actually used this market to manipulate milk and

cheese prices has been the subject of a lot of debate, but the more

important issue at hand here, as Senator Kohl has indicated, is the

resolution of problems that the exchange has created. To do that,

we have to understand what the problems are.

Many economists, dairy farmers, and market observers agree

that the exchange is a badly flawed market. It has low trading volume, few active traders, brief trading periods, infrequent trading

sessions, and tends to be highly volatile, overreacting to market

conditions. Those characteristics make it very easy for one single

trade to affect the opinion price of the exchange, but that is not the

fundamental problem.

While the flawed nature of the cheese exchange gives traders the

ability to manipulate prices, it is the role of the exchange in setting

milk prices that appears to provide them with the incentive to do

so. The combination, then, of these two factors is the crux of the

problem.

To solve the problem, we must address both the flaws of the market and its influence over milk prices. The National Cheese Exchange has a strong and indirect influence on milk prices paid to

farmers throughout the Nation. USDA sets the basic formula price

for milk, which under Federal milk marketing orders is based on

two components: First, a survey of prices paid to producers by 160

milk manufacturing plants, and second, an adjustment factor linking the National Cheese Exchange prices to the BFP.

Recent efforts to address the cheese exchange problem by breaking the direct link between the Cheese Exchange and the basic formula price, as Senator Kohl has indicated, only addresses part of

the problem. While USDA should delink the BFP from the exchange and fortunately Secretary Glickman has taken the first

steps toward doing that, doing so will not eliminate the influence

of the Cheese Exchange on farmer milk prices.

The more fundamental problem is the role the exchange plays in

setting milk prices for the first half of USDA’s BFP formula, that

plant survey component that I have mentioned. As the exchange is

the only existing source for consistent price information on cheese,

most cheese sellers surveyed by USDA link their forward contract

prices for cheese to the price of the National Cheese Exchange, so

this indirect linkage caused by the role the exchange plays as the

price benchmark for the industry is actually the more pervasive

and difficult problem to solve here. It will not be solved until new

and reliable sources of price information which cannot be manipulated by one large buyer or seller are developed, maintained, and

utilized.
5

Mr. Chairman, I caution members of this committee and the Department of Agriculture not to consider the creation of any single

National Cheese Exchange replacement or any one particular alternative source of price information as the sole solution to this problem. Relying on a single alternative to the exchange accomplishes

nothing if the alternative market is merely in effect the recreation

of the National Cheese Exchange by a different name.

I think, and I believe Senator Kohl agrees, if I may say so, the

problem is better approached from several different angles at once.

As he has said, first eliminating the formal link between the BFP

and the NCE.

Second, creating and encouraging many different sources of price

discovery, including increasing USDA cheese price reporting for offexchange transactions, increasing trading volume on cheese and

milk future markets, and creating alternative and potentially competing cash markets for cheese.

But there is then a third approach that has to be taken to make

this all work, and that is regulating and overseeing at the Federal

and State level any cash market that directly or indirectly affects

milk prices regulated under Federal Milk Marketing Orders.

To this end, I have introduced legislation, the Milk Price Discovery Improvement Act, S. 258, which would require USDA to implement many of these solutions. I am very pleased that Secretary

Glickman has agreed to implement some of these initiatives, such

as price reporting for off-exchange cheese transactions independent

of a congressional mandate.

The Secretary has also opened up a comment period to begin the

process of delinking the cheese exchange from the basic formula

price for milk. But I caution both the Secretary and members of

this committee not to prematurely substitute an alternative market

price for the cheese exchange in the BFP until that market is found

to be free from manipulation.

So these options, changing the calculation of the BFP, creating

new cash markets, improving USDA cheese price reporting, and increasing regulation and oversight, are not exclusive of one another.

They can and should be implemented simultaneously.

So to conclude, Senator Kohl and I, as well as others in the Wisconsin congressional delegation, have been working very hard on

this issue of the National Cheese Exchange for many years, and

particularly in the last year. We welcome the interest and participation of this committee and other Senators in ensuring that dairy

farmers are no longer held hostage to a market which cannot be

relied upon to return a fair and competitive price to farmers.

And again, thank you very, very much, Mr. Chairman, for permitting me to testify and for holding this hearing.

PREPARED STATEMENT

Senator COCHRAN. Thank you, Senator, for your statement and

your contribution to this hearing. Your complete statement will be

made part of the record.

[The statement follows:]
6

PREPARED STATEMENT OF SENATOR RUSS FEINGOLD

Mr. Chairman and Members of the Agriculture Appropriations Subcommittee,

thank you for holding today’s hearing and for this opportunity to testify on the problems created by the National Cheese Exchange and the lack of reliable pricing information in the dairy industry.

As many Committee members are aware, the National Cheese Exchange controversy has recently received national attention due to the recent dramatic and unprecedented plunge in milk prices which followed sharp drops in cheese prices at

the Exchange.

What some members of this Committee may not know, is that the controversy

surrounding the Cheese Exchange, located in Green Bay, Wisconsin has been raging

in my state for several years. I have been working with my colleague, the senior

Senator from Wisconsin [Mr. Kohl], for many years to resolve some of these problems.

Wisconsin farmers have alleged, and a March 1996 study by the University of

Wisconsin and the Wisconsin Department of Agriculture, Trade and Consumer Protection (DATCP) concluded, that cheese prices on the National Cheese Exchange are

vulnerable to manipulation for the benefit of traders on the Exchange and frequently to the detriment of dairy farmers. Contrary to popular belief, concern about

the National Cheese Exchange has persisted in Wisconsin regardless of the milk

price level. Senator Kohl and I were working on the National Cheese Exchange

issue on behalf of dairy farmers when milk prices were at their peak last year.

Following release of the UW/DATCP report, Senator Kohl and I asked federal

antitrust authorities to look into those allegations. The fundamental conclusion of

the Department of Justice and the Federal Trade Commission is that the type of

manipulation that is alleged to have occurred at the National Cheese Exchange is

not a violation of federal antitrust law. That is obviously a difficult answer for dairy

producers to hear. Farmers correctly conclude that just because such manipulation

may be legal, doesn’t mean the problems that might lead to manipulation shouldn’t

be corrected.

In order to determine how to solve those problems, it is important that members

understand what this whole controversy is about, and what it is not about.

Many economists, dairy farmers and market observers agree that the Exchange

is a badly flawed market. It has low trading volume, few active traders, brief trading periods, infrequent trading sessions, and tends to be highly volatile overreacting

to market conditions. Those characteristics make it very easy for one single trade

to affect the opinion price of the Exchange. But that is not the fundamental problem.

While the flawed nature of the Cheese Exchange gives traders the ability to manipulate prices, it is the role of the Exchange in setting milk prices that appears

to provide them with the incentive to do so. The combination of these two factors—

the ability and the incentive to manipulate—is the crux of the problem.

Fundamentally, the resolution of the problem of the National Cheese Exchange

lies in ensuring dairy farmers that the price they receive for milk they produce cannot be manipulated by those with the power and incentive to do so. To solve the

problem, we must address both the flaws of the market and its influence over milk

prices.

The Exchange affects milk prices because of the way the federal government sets

milk prices under Federal Milk Marketing Orders. The Basic Formula Price is calculated each month by USDA and is used to set the base price for milk for all farmers regulated by Federal Orders. The BFP has two components. The first is a survey

of actual prices paid to producers by roughly 160 manufacturing plants receiving

grade B milk—which is unregulated by the Federal government. The second component is an adjustment factor based in large part on the price at the National Cheese

Exchange.

It is this second factor, the direct linkage between the National Cheese Exchange

and the Basic Formula Price that has garnered a lot of attention. Many have suggested that if we break this link, and we should, that the influence of the Cheese

Exchange on milk prices will be eliminated. I, and many others, including the Senator from Pennsylvania [Mr. Specter], have proposed to do that and as you may

know, Secretary Glickman has taken the first steps toward breaking that link by

opening up a comment period on the issue.

However, breaking that direct link will only solve part of the problem. The more

fundamental problem is the role the Exchange plays in setting milk prices for the

first half of USDA’s BFP formula—the plant survey component.

The plants that are surveyed by USDA pay farmers milk prices based on the price

they receive for the cheese they manufacture. That price is determined by the prices
7

at the National Cheese Exchange. Since the Exchange is the only existing source

for consistent price information on cheese, most cheese sellers surveyed by USDA,

and indeed most cheese sellers and buyers nationally, link their forward contract

prices for cheese to the price at the National Cheese Exchange. This indirect linkage

caused by role of the Exchange as the only source of price discovery is the more pervasive and difficult problem to solve.

Solving this problem requires that new and reliable sources of price information

that cannot be manipulated by one large buyer or seller are developed, maintained

and utilized by the dairy industry. I caution members of this Committee and the

Department of Agriculture not to consider any single National Cheese Exchange replacement or any one particular source of price information as the sole solution to

this problem. Many options are needed and the more price information, the more

fair the marketplace will be for dairy farmers.

Since the release of the University of Wisconsin/DATCP report, I have proposed

tackling this problem from every possible angle including:

—Creation of voluntary internal reform of practices at the National Cheese Exchange to increase trading volume and reduce both price volatility and the influence of individual traders on overall price levels. Reforms could include limitations on daily price movements, movement toward electronic trading, and a

prohibition of certain trading practices.

—Increased price reporting by USDA for off-Exchange bulk cheese transactions to

reduce the role of the Exchange as the only source of price information thereby

hopefully reducing the indirect influence of the Cheese Exchange on milk prices;

—Elimination of the direct link of the National Cheese Exchange to USDA’s Basic

Formula Price;

—Creation of a new cash market or markets that do not share the flaws of the

National Cheese Exchange;

—Increased federal efforts in improving milk price discovery generally, such as

encouraging greater trading on futures market and exploring the creation electronic markets; and,

—Increased federal and state regulation and oversight of any cash market, including the National Cheese Exchange, that fundamentally influences milk prices

paid to producers.

These options are not exclusive of each other. And in fact, if they were all implemented, we might be well on our way to solving the fundamental problem of the

lack of price discovery in cheese and dairy markets. In fact, relying on one option

alone will not resolve these problems.

I have introduced legislation to implement several of these options. My bill, the

Milk Price Discovery Improvement Act (S. 258) requires USDA to begin consistent

weekly reporting of cheese prices for off-Exchange transactions, requires USDA to

eliminate the direct link between the milk prices and the National Cheese Exchange

or its replacement market, requires increased USDA oversight of any cash markets

that affect milk prices under Federal Milk Marketing Orders, and requires USDA

to explore additional ways of improving price discovery such as encouraging increased trading volume in futures market.

I am extremely pleased that Secretary Glickman has taken steps to implement

a number of the provisions in my bill without a Congressional mandate.

In fact, this week marks the first week of USDA’s weekly reporting of cheese

prices for off-Exchange transactions—something I first proposed in June 1996 as

part of Senator Daschle’s Cattle Industry Improvement Act and which I later urged

Secretary Glickman to implement using existing administrative authority.

The success of this new price series as a reliable source of price discovery depends

upon the cooperation of cheese manufacturers and processors reporting prices, as

well as upon the integrity of those reported prices. It will take the agency some time

to determine whether or not this has been achieved. However, it is an excellent

start toward improving price discovery. If the Department believes that accurate

and statistically reliable price collection can only be achieved through mandatory

data collection, I urge the Secretary to notify Congress as soon as they make that

determination.

Secretary Glickman has also taken the first step toward delinking the price of the

Exchange from the Basic Formula Price by taking public comments on whether that

link should be broken. An additional question facing the Department is whether or

not they should find an alternative price to replace the role of the Exchange in the

BFP. I urge the Department not to rush to judgment on a new indicator of cheese

price value in this formula. If necessary, the Department should consider in the

short run, not replacing the adjustment component of the BFP.

Senator Kohl and I have also been working to encourage the development of new

cash cheese markets that would have sufficient protections against intentional ma-
8

nipulation of prices and which might garner greater federal oversight. Specifically

we have talked with the Coffee, Sugar and Cocoa Exchange to understand how they

might structure a sound and efficient cash market for cheese.

I understand that the cheese processing industry has also aggressively sought

new markets by soliciting bids from major commodity exchanges for the creation of

a new cheese trading mechanism. It has been suggested that the Exchange may

cease operation in Wisconsin on May 1st due to the scrutiny it has been under and

because of potential increased regulation by the State of Wisconsin. Efforts by private industry to establish an alternative market are apparently in response to that

likely outcome.

I caution members of this Committee and the USDA to avoid the temptation to

prematurely substitute prices from a new market for the Cheese Exchange in the

BFP before it can be shown that the market is reliable and free from manipulation.

We must not attempt to solve the problem of the National Cheese Exchange’s influence on milk prices by merely creating a new problem. If the Cheese Exchange is

merely recreated under a different name, we will have accomplished nothing.

It continues to be absolutely critical that any market mechanism that can so severely impact regulated milk prices, directly or indirectly, is overseen and regulated

by those federal and state entities with the expertise to do so. My legislation gives

USDA authority to prohibit anticompetitive activities on cash markets that affect

milk prices. This authority is similar to that which the agency has over livestock

auction markets under the Packers and Stockyards Act. So long as regulated prices

are affected by private markets, USDA has a fundamental responsibility to exercise

oversight. I have also cosponsored legislation offered by the senior Senator from

Wisconsin which increases the Commodity Futures Trading Commission role in

overseeing certain cash markets.

Ultimately, we must address the fundamental problems of the lack of adequate

price discovery in the dairy industry by continuing to approach this problem from

every angle possible. USDA can and should break the direct link between the National Cheese Exchange and milk prices. Congress can and should increase regulation and oversight of markets that indirectly affect milk prices under Federal Orders to ensure that farmers’ prices are not being manipulated. But neither the Congress nor the Federal government can prohibit the dairy industry from relying on

poor pricing mechanisms. We must continue to work to create more and better price

information to provide more pricing options for the industry and to ensure dairy

farmers that their milk prices cannot be manipulated.

Senator Kohl and I, as well as others in the Wisconsin Congressional delegation

have been working very hard on these problems for some time. We welcome the interest and the participation of this Committee and other Senators in ensuring that

dairy farmers are no longer held hostage to a market which cannot be relied on to

return a fair price to farmers.

FEINGOLD TESTIFIES ON NATIONAL CHEESE EXCHANGE IN FIRST SENATE HEARING ON

ISSUE

WASHINGTON, D.C.—U.S. Senator Russ Feingold testified before the U.S. Senate Appropriations Subcommittee on Agriculture today on the need for a meaningful

solution to the problems posed by the National Cheese Exchange (NCE). This is the

first U.S. Senate hearing focused on the role of the NCE.

Senator Feingold used the opportunity to inform his colleagues about the problems the Cheese Exchange imposes on farmers in Wisconsin, and nationally, and to

caution them against the pit-fall of an easy fix that simply delinks the NCE from

USDA’s milk price formula. Feingold advocated a more comprehensive approach addressing the pervasive influence the Exchange has on milk prices.

‘‘Wisconsin farmers know the crux of the problem is that the structure of the

Cheese Exchange makes it easy for someone to manipulate prices and the role of

the Exchange in setting milk prices creates an incentive to do so. That is why I have

introduced a comprehensive bill which will not only delinks the Cheese Exchange

from the Basic Formula Price, but also creates alternative sources for price information and increases USDA oversight over markets that influence milk prices,’’ said

Feingold, referring to S. 258, which was introduced on February 4, 1997.

The hearing is the latest in a series of developments in the dairy industry. Last

Friday, the USDA released options for reform of milk marketing orders addressing

inequities suffered by mid-west producers. Comments on these recommendations

will be accepted until June 1. The final USDA proposal is due by the end of the

year.
9

ALTERNATIVE PRICE FOR CHEESE FREE FROM MANIPULATION

Senator COCHRAN. Senator Kohl, this is a great opportunity for

you to put a tough question to your colleague, if you want to take

advantage of it.

Senator KOHL. Well, as Senator Feingold indicated, he and I are

in basic agreement on the dimensions of this problem, and on some

of the things that need to be done. I am not going to ask him again

to say the extent to which he and I agree. He has said it three or

four times. But I am delighted that he is here. I have enjoyed

working with him, and he is very constructive in his suggestions,

and he is most diligent in his effort to get this matter resolved.

Because what happens to dairy in Wisconsin is of great significance. The dairy industry is our biggest industry, and it is something about which we in Wisconsin are all very sensitive, very concerned, and I appreciate the opportunity to work with Senator

Feingold, and I think we are going to get something done.

Senator COCHRAN. Thank you. Senator Specter.

Senator SPECTER. Secretary Glickman is here, so I will just ask

two very brief questions. Senator Feingold, you say an alternative

price should not be established for cheese unless we know the market is free from manipulation, but if we could establish an alternative price for cheese free from manipulation, would you see any

reason for delaying doing that?

Senator FEINGOLD. No; if we can be assured that there might be

an alternative market at the Coffee, Sugar, and Cocoa Exchange,

or perhaps the Chicago Mercantile Exchange that cannot be easily

manipulated. If we knew we had the power through the Federal

regulators to prohibit anticompetitive practices at an alternative

market, then I think that is something we want to move to. But

we need to get those kinds of assurances, and the legislation has

to be in place to empower the Federal Government to do that.

To just simply create it and merely reproduce the problems of the

National Cheese Exchange that have occurred so far, I think,

would be a mistake.

Senator SPECTER. How about a survey by the Secretary across

the country establishing what the market is, which may be different from the Green Bay Cheese Exchange?

Senator FEINGOLD. I believe the Secretary is already moving in

that direction. I asked him last fall to start gathering cheese price

information for off-exchange transactions, and he started to do it

on a monthly basis. I believe he has now moved to a weekly basis.

I hope I am not speaking out of school on that, but I believe that

is something that is beginning this week.

I feel the Secretary is very concerned and responsive to exactly

what you have just said, the need to look at all the possible information that we have so that we do not continue to have our current problems, which is a cheese exchange that really is involved

with 1 or 2 percent of the cheddar cheese in the country, and that

does not really reflect the broad scope of cheese transactions in the

country.

Senator SPECTER. Well, he has been working at that. The concern

that I have and that my Pennsylvania farmers have is the delay

which has occurred.
10

Mr. Tewksbury just commented to me that it has been 3 months

since the first meeting with the Secretary, so we want to see if we

can establish the alternative.

ESTABLISHING A PRICE FLOOR

Let me ask you one other subject matter very briefly, and that

is, a number of Senators, as I understand it, led by Senator

Breaux, wrote to Secretary Glickman asking him to establish a

price floor of $13 per hundredweight, and I have written to the

same effect on a temporary action because the farmers are in such

dire straits. What would your sense of that be?

Senator FEINGOLD. Well, I think the Secretary is in the process

of looking at a number of options with respect to milk prices. Basic

milk pricing reform, which I think is broader than the scope of this

hearing is something USDA is in the process of proposing. The Secretary just issued potentially six different alternative reform options that he is looking at with regard to the Milk Marketing Order

system. Flooring the basic formula price is one issue that has come

up.

I have indicated that I think he ought to look at all different options, including the possibility that you have just mentioned, but

I really think this should be done in the process of the comment

period, listening to dairy farmers. A lot of my farmers would tell

you that $13 is not enough. That is not adequate. The figure that

has been bandied about in Wisconsin is $14 or higher.

Senator SPECTER. Well, we can always listen to a counterproposal, but that is better than what we have now. Do your farmers have a sense of immediacy about getting something done now

because of the crunch on rising prices and falling milk prices, the

rising cost of production and falling milk prices?

Senator FEINGOLD. In the 14 years that I have been either a

State senator or a U.S. Senator working on agricultural issues I

have never seen a greater sense of immediacy, and that is why all

of us and our Governor met with the Secretary of Agriculture recently with a number of our dairy farmers.

The decline that occurred in prices in November and December

was a real jolt. Senator Kohl and I had raised issues about the

cheese exchange last July in Madison. We indicated that if we did

not do something about this, something like this might happen,

and it did happen, and the reaction in Wisconsin to the sharp decline from about $15 per hundredweight down to a little over $11

per hundredweight in just a few weeks was a very jarring experience not just for our farmers but for everyone in the State.

So there is a feeling of tremendous urgency, and that is why I

believe the Secretary should move as fast as he can to delink the

Cheese Exchange from milk prices and assist in identifying alternative markets, and in passing legislation that will guarantee that

we do not just end up with the same problems. We should have the

Federal ability to regulate that which obviously needs to be regulated.

Senator SPECTER. Thank you very much, Senator Feingold.

Senator COCHRAN. Thank you, Senator. Thank you, Senator

Feingold.

Senator FEINGOLD. Thank you, Mr. Chairman.
(11)

DEPARTMENT OF AGRICULTURE

STATEMENT OF HON. DAN GLICKMAN, SECRETARY OF AGRICULTURE

ACCOMPANIED BY:

MIKE DUNN, ASSISTANT SECRETARY, MARKETING AND REGULATORY PROGRAMS

KEITH COLLINS, CHIEF ECONOMIST

INTRODUCTION OF WITNESS

Senator COCHRAN. The Secretary of Agriculture has kindly

agreed to appear at our hearing today. We want to welcome the

Hon. Dan Glickman, Secretary of Agriculture. Just recently he was

before the committee discussing the President’s budget request for

the next fiscal year, and it was during that testimony that Senator

Specter requested that we have a special hearing of the committee

on the subject of dairy pricing.

We are very happy that the Secretary could arrange his schedule

to be with us today. Mr. Secretary, welcome to the committee.

Thank you very much for your cooperation in this effort. You may

proceed.

STATEMENT OF SECRETARY GLICKMAN

Secretary GLICKMAN. Thank you, Senator Cochran, Mr. Chairman, Senator Kohl, Senator Specter, Senator Santorum.

I bring with me today two folks who have been with me before

on occasion, or at least separately before the committee, Keith Collins, who is our chief economist, and Mike Dunn, who is the Assistant Secretary for marketing and regulatory programs, and they

have followed this subject very, very carefully over the years.

Now, first of all, I think this is an important hearing. It has obviously gotten a great deal of interest, and we have a great deal of

interest in the Department about this hearing, and you have a good

diversity of witnesses afterward.

I want to thank Senators Kohl and Leahy, Specter, Feingold,

Santorum, Jeffords, and all the others, including yourself, Mr.

Chairman, for your interest in this issue and the volatility of dairy

prices.

I have an oral statement which I would like to read, and then

there is a longer written statement which I would like to include

in the record.

I would like to begin with a brief description of recent events in

milk markets, then I would like to discuss how the Department

uses the National Cheese Exchange prices in administering its Federal milk marketing order program, and then finally review—and

I think this was the purpose Senator Specter asked originally for

the hearing—review the actions we have taken to address concerns

about National Cheese Exchange prices and what we might do in

the future.
12

First of all, the current dairy situation. A series of unusual

events combined to make 1996 a year dairy farmers will long remember and perhaps would like to forget.

Producers faced record high feed costs, high forage prices, low

forage quality, and low cull cow and calf prices.

Milk prices were record high but were also extremely volatile last

year. During late spring and summer, milk prices rose as milk production declined, and dairy product prices reached record high levels.

Suddenly, as milk production began to recover and commercial

stocks of dairy products exceeded year earlier levels, dairy product

prices plummeted, causing the basic formula price to drop by over

$4 per hundredweight in just 3 months, September to December.

On January 7, I announced a series of actions to help stabilize

farm milk prices, including (1) purchasing additional cheese for use

in the domestic food assistance programs, (2) working to increase

the flow of dairy products into our international food assistance

programs, (3) stepping up activity under the dairy export incentive

program, and (4) conducting a national survey of cheddar cheese

prices in response to concerns about the accuracy of reported

prices.

We also later on increased our purchases under the commodity

supplemental food program, which is a program for seniors and

low-income folks that we provide commodities for, and total cheese

purchases this year by the Department are up considerably, about

40 percent. So there is an effort to try to deal with the problem on

the demand side, and we believe these actions have been helpful

and the price picture is improving.

Since December, the basic formula price increased by over $1 per

hundredweight and is now very near last year’s level. Our analysts

expect the all-milk price to strengthen throughout the year and average $13.75 per hundredweight for all of 1997, despite the lower

prices at the start of the year, so we will see, I think, without being

overly Pollyannish about it, improved milk prices for the rest of the

year both in terms of the various classes, and that will be reflected

in the basic formula price. As I said, it is up about $1 since the

low.

The use of National Cheese Exchange prices in Federal orders is

obviously key to our concern and yours as well. Under Federal milk

marketing orders, which regulate the marketing of about 70 percent of the milk produced in the United States, the minimum price

a processor or handler must pay for milk varies with how the milk

is used.

Milk used in manufacturing hard products such as cheese is referred to as class III. Generally, the class II price in each order

equals the class III price plus about 30 cents a hundredweight,

while the class I price equals the class III price plus a differential

that varies by location, and this is the issue that Senator Kohl and

others have raised so often. This differential has caused some people to believe that there is an unfairness in the pricing system and

is something we are looking at right now.

Prior to May 1995, or less than 2 years ago, the Minnesota-Wisconsin price series—it is called the M–W price—was used to estab-
13

lish the minimum class III price under Federal orders. That is the

milk price used for cheese and other hard products.

The M–W price depended on two factors: (1) the average price

paid by about 170 plants for manufacturing grade or Grade B milk

in Minnesota and Wisconsin during the previous month, and (2) an

estimate of the change in the price from the previous month to the

current month.

Over time, statisticians at USDA became increasingly concerned

that not enough data was available to reliably estimate the change

in price from the previous month, the second part of that calculation.

By early 1995, just 61 manufacturing plants, or about one-third

of those that we expected to participate, were being used to estimate the price change from the previous month.

Following a national hearing and formal rulemaking, USDA replaced the M–W—Minnesota-Wisconsin price—with the BFP, or

basic formula price, which we use now.

The BFP starts with the same base month, M–W price survey,

but updates that survey using changes in wholesale dairy product

prices. In updating the M–W price to the current month, the

change in the price of cheese on the National Cheese Exchange receives about 90 percent weight, and the change in butter and nonfat dry milk prices receive about 10 percent weight, and Mr. Collins

can explain why that is the way it is, but I think there is no question that the price of cheese on the cheese exchange has a considerable amount to do with what the basic formula price actually becomes.

The National Cheese Exchange is often described as a thin market. That is, the volume traded on the exchange is very small relative to total cheese sales. Thin markets generally raise questions

about their ability to accurately reflect supply and demand conditions in a market, and the potential for manipulation.

This has led to concerns that the use of the National Cheese Exchange prices in determination of the basic formula prices could adversely and perhaps unintentionally affect producers through lower

minimum prices under the orders, and through increased price volatility.

To determine whether the basic formula price, which has the

NCE component, is accurately reflecting the volume of milk, we

have tracked the BFP and the old M–W pricing system. Averaged

over the 21-month period from May 1995 through January 1997,

the BFP and the M–W price have been almost exactly equal. However, during the last quarter of 1996, the time of the great fall, a

period of rapidly declining milk prices, the BFP, the basic formula

price, averaged 32 cents per hundredweight lower than the M–W

price, so there was some difference during that 3 months, as I said,

about 32 cents per hundredweight.

This divergence does raise the question whether the BFP is overly sensitive to changes in the National Cheese Exchange prices. At

this time, we are in the process of determining whether there exists an alternative to NCE prices for administering Federal milk

marketing orders, and we are engaged in a dialog with the dairy

industry to examine alternatives and develop additional markets

for cheese.
14

The Department is seeking public comment until about 2 weeks

from now on whether there exists an alternative to National

Cheese Exchange prices in establishing the basic formula price.

Based on the comments received and other information available,

USDA will determine whether to replace National Cheese Exchange prices in establishing the BFP.

We are also reviewing the basic formula price as part of the 1996

farm bill’s mandate to consolidate and reform orders, and as Senator Feingold said, just last week, I issued a series of options on

how we might do that in terms of the pricing mechanism, and we

anticipate releasing a report on the BFP shortly after the March

31 date.

On January 7, I announced that USDA would conduct a national

survey of cheese prices. I am happy to announce that this week our

National Agricultural Statistics Service has started a weekly survey of cheddar cheese prices, and I would tell you in all honesty

that I think your involvement has helped move that thing along

faster.

We are encouraging all cheese plants to participate in the survey,

and are working with interested parties to ensure that the data collected are accurate, timely, reliable, and of value to the dairy industry. It is too early to determine if this is the appropriate candidate for pricing cheese, in the basic formula price as an NCE replacement. We are testing it to see if it is a good candidate.

This will depend on the level of participation. Right now, this is

a voluntary-based effort, and we will see whether that volunteerism works to get the reporting that we need. If it does not, we may

have to come back and ask you for the authority to require the participation, but right now we are seeing if the voluntary effort does

work. We are encouraging all cheese plants to participate in the

survey, and are working with interested parties to assure that the

data collected are accurate.

Both the Chicago Mercantile Exchange and the Coffee, Sugar,

and Cocoa Exchange are exploring the possibility of starting a cash

market for cheddar cheese. We are committed to working with the

exchanges and the dairy industry to further develop such markets

to the benefit of producers and processors.

In conclusion, let me just say that we, along with you, have followed closely the concerns expressed originally by Senators Kohl

and Feingold and more recently during my trip up to Pennsylvania

with Senator Specter, concerns over NCE prices and their use in

pricing under Federal milk marketing orders.

As I have said, our study has indicated that there is a slight but

perceptible difference between the pricing mechanism under the

BFP, which uses the cheese exchange, and the way we would have

calculated it under the old M–W system. Basically they track each

other, except the last 3 months of the year the BFP was somewhat

lower, about 32 cents a hundredweight lower, on average.

So this concerns us. It is some evidence that this is not the process that we would want to have certainly in the future, but we

need to develop the evidence. We welcome any evidence that will

help promote reform and contribute to opportunities for growth and

stability for our Nation’s dairy producers.
15

So I would say that completes my testimony, Mr. Chairman, and

I have my two experts with me that will try to work together with

you in trying to resolve this problem.

PREPARED STATEMENT

Senator COCHRAN. Thank you very much, Mr. Secretary. We appreciate very much your cooperation with our committee. Your

complete statement will be made part of the record.

[The statement follows:]

PREPARED STATEMENT OF DAN GLICKMAN

Mr. Chairman and members of the Subcommittee, I welcome the opportunity to

discuss the current dairy situation and related policy issues.

I would like to begin with background on the current situation in milk markets

and the role of minimum pricing under Federal milk marketing orders. Then I will

discuss how the U.S. Department of Agriculture (USDA) uses National Cheese Exchange (NCE) prices in administering its Federal milk marketing order program. Finally, I will review USDA’s actions to date to address concerns about NCE prices.

THE CURRENT MARKET SITUATION FOR MILK

The all-milk price averaged a record $14.74 per cwt. in 1996, up $2 per cwt. from

the previous year and exceeded the previous annual record by about $1 per cwt (figure 1). However, this average masks the unusual volatility in milk prices during

1996. During the first 3 quarters of 1996, milk prices averaged well above previousyear levels but declined sharply during the fourth quarter.

The Basic Formula Price (BFP), which USDA uses to establish minimum prices

handlers must pay for milk according to use under Federal milk marketing orders,

dropped from a record $15.37 per cwt. in September to $11.34 in December. In addition to this sharp decline in milk prices, dairy producers had to cope with record

high feed costs, high forage prices, low forage quality and low cull cow and calf

prices this past year.

The variability in farm-level milk prices in 1996 reflected movements in wholesale

dairy product prices. During late spring and summer, wholesale dairy product prices

surged to record highs, as milk production declined 2–3 percent some months from

1995 levels. However, as milk production began to recover and commercial stocks

of dairy products greatly exceeded year-earlier levels by the fall, wholesale dairy

product prices started to plummet. From early October to mid-December, the price

of 40-pound blocks of cheddar cheese on the NCE fell 30 percent from its record

high. The price of Grade A butter on the Chicago Mercantile Exchange (CME)

dropped 56 percent from early October to mid-November.

On January 7, 1997, I announced that USDA would take a series of actions to

help strengthen farm-level milk prices. Those actions included:

—purchasing an additional $5 million of cheese for use in domestic food assistance

programs in addition to the accelerated school lunch purchases already underway;

—working with private voluntary groups to increase the flow of dairy products

into international food assistance programs;

—reactivating the Dairy Export Incentive Program (DEIP) for butterfat, which

had been idle since mid-1995, coupled with stepped-up DEIP sales for non-fat

dry milk to stimulate exports of dairy products; and

—conducting a national survey of cheddar cheese prices in response to concerns

about the accuracy of reported prices.

Since this announcement, both dairy product and farm-level milk prices have rebounded considerably. The wholesale price of butter is up 64 percent from its late

1996 low, and the wholesale price of cheddar cheese is up 12 percent from its low,

despite continued large cheese inventories. These wholesale price increases have

raised milk prices. Since December, the BFP has increased by $1.12 per cwt., reaching $12.46 in February. Compared with one year ago, the BFP for February is down

$0.13 per cwt., and the preliminary all-milk price for February of $13.30 is down

$0.50 per cwt.

In 1997, USDA expects milk production to increase less than 1 percent. Milk production per cow will increase while cow numbers will continue their long-term decline. USDA expects milk production to decline about 1 percent during the first
16

quarter but increase about 1 percent the remainder of the year, reflecting improved

pasture conditions and lower grain and forage prices.

The modest increase in milk production is expected to contribute to a steady improvement in milk prices over the course of the year, with the all-milk price averaging in the low-to-mid $13 per cwt. range during the first half of 1997 and slightly

above $14 during the second half. For all of calendar 1997, the all-milk price is projected to average $13.75 per cwt., $0.83 above the 1990–95 average.

ROLE OF FEDERAL MILK MARKETING ORDERS IN PRICING MILK

Federal milk marketing orders regulate the marketing of only Grade A milk and

in only certain areas of the country. Presently, there are 32 Federal milk marketing

orders covering about 70 percent of the milk produced in the United States. Before

an order can go into effect in a particular area, two-thirds of the dairy farmers voting in a referendum must approve it.

Under all Federal milk marketing orders, milk is classified according to its use

which determines the minimum price a processor or handler must pay for milk.

Milk used in fluid milk products is referred to as Class I and is assigned the highest

minimum price. Milk used in soft dairy products, such as ice cream and yogurt, is

classified as Class II; and milk used in hard, storable products, such as cheese, butter and nonfat dry milk, is classified as Class III and is assigned the lowest minimum price.

Minimum Class II and Class III prices are essentially uniform nationally, while

minimum Class I prices under Federal orders vary geographically. This difference

in pricing structure between Class I and the other classes of milk reflects the added

cost of moving milk in fluid form from surplus to deficit areas. Generally, the Class

II price in each order equals the Class III price plus $0.30 per cwt., while the Class

I price equals the Class III price plus a differential that varies by location. Producers in each order receive a blend price for their milk—the weighted average of the

prices and uses of all milk within the order.

THE USE OF NCE PRICES IN FEDERAL ORDERS

Prior to May 1995, the Minnesota-Wisconsin (M–W) price series was used to establish the minimum Class III price under Federal orders. The M–W price for a

given month depended on two factors: (1) the average price paid by about 170 plants

for manufacturing grade (Grade B) milk in Minnesota and Wisconsin for the previous or base month and (2) an estimate of the change in the price from the base

month to the current month. The estimated price change from the base to the current month was based on a very small sample of plants that paid dairy producers

twice a month. The prices paid producers for the first half of the month were the

primary basis for the estimated change in the M–W price from the base month. By

early 1995, USDA was using price information from just 61 manufacturing plants

to estimate the price change from the base month to the current month.

Because of concerns expressed within the dairy industry about the representativeness and applicability of the M–W price series, USDA held a national hearing to

consider a replacement for the M–W price series, and, based on the hearing record,

replaced the M–W price with the BFP. The BFP starts with the same base month

M–W survey price from Grade B manufacturing plants but updates that survey information to the current month using information on monthly changes in wholesale

prices of butter, cheese and nonfat dry milk. In updating the M–W price to the current month, the change in the price of cheese from the base to the current month

on the NCE receives about 90 percent weight and the change in butter and nonfat

dry milk prices, as reflected in the prices of Grade AA butter on the CME and West

Coast f.o.b. low/medium heat nonfat dry milk, respectively, receive about 10 percent.

Those weights reflect product yields from 100 pounds of milk and the relative

amount of milk used in the production of each product.

NCE prices are also used in 10 Federal orders with component pricing provisions.

In those orders, cheese prices determine the value of protein in milk. The purpose

of component pricing is to allocate receipts in each Federal order pool according to

the composition of each producer’s milk. Component pricing does not change total

producer receipts in an order, only the distribution of receipts among producers in

an order. The effect, for example, of lower cheese prices is to reduce protein prices

to producers. However, component pricing formulas also include a residual value

component which equals the BFP minus the value of fat and protein in producer

milk. This means that an over-estimate of the protein value would lead a corresponding decrease in the residual value component, resulting in no change in the

total value of producer milk that is pooled in the Federal order. Likewise, an underestimate of the protein value would lead to a higher residual component.
17

USDA CONCERNS REGARDING THE BFP AND NCE PRICES

Although USDA does not have any oversight authority, either under the Agricultural Marketing Agreement Act of 1937 or the Capper-Volstead Act, for trading activities on the NCE, we are very interested in NCE prices because of their use in

Federal milk marketing orders and by the dairy industry to price cheese. The cheese

industry relies on NCE prices for pricing cheese marketed in the United States. An

estimated 90–95 percent of bulk cheese is sold on a committed basis with the price

tied to NCE prices. In addition, when the USDA held formal hearings to consider

a replacement for the M–W price series, the hearing record strongly supported using

NCE prices in determining the value of bulk cheese. However, the NCE is a ‘‘thin’’

market, that is, the volume traded on the exchange is very small relative to total

cheese sales. Thin markets generally raise questions about their ability to accurately reflect supply and demand conditions in a market and the potential for manipulation. This leads to concerns that the use of NCE prices in determination of

the BFP could adversely, and unintentionally, affect producers through lower minimum prices under the orders and through increased price volatility.

To determine whether the BFP is the functional equivalent of the M–W price, we

have tracked the base month M–W price and the BFP for the same month since

May 1995 (figure 2). Over the 21-month period from May 1995 through January

1997, the BFP exceeded the base month M–W price in 11 months by an average

of $0.13 per cwt. The BFP fell below the base month M–W price in 9 months by

an average of $0.19 per cwt. The base month M–W price has averaged $12.79 and

the BFP has averaged $12.78 per cwt., or just $0.01 per cwt. lower since May 1995.

Thus, it would appear that use of NCE prices to update the base month price M–

W has not resulted in any apparent long-term distortion in minimum Federal order

prices to producers.

We are also concerned that NCE prices may be causing minimum order prices to

become more volatile. The BFP has generally exceeded the base month M–W price

during the spring and summer months but has been significantly below the base

month M–W price during the last quarter of the year. During the last quarter of

1996—a period of rapidly declining milk prices—the BFP averaged $0.32 per cwt.

below the base month M–W price. This divergence between the BFP and the base

month M–W price during this period raises the question whether the BFP is overly

sensitive to changes in NCE prices.

The use of NCE prices in the determination of the BFP emerged as a broad concern following publication of a University of Wisconsin study, which concluded that

the NCE was not an effective competitive price discovery mechanism during 1988–

93 and the NCE appears to facilitate manipulation of cheese prices. The study led

to a Congressional hearing in May 1996 and the creation of a Task Force on Cheese

Pricing by Wisconsin Governor Thompson. The Governor’s Task Force recommended

in January 1997 that USDA no longer use the NCE price in determining the BFP.

Subsequently, bills were introduced in Congress that would require the Commodity Futures Trading Commission (CFTC) to regulate the NCE or require USDA to

eliminate its use of NCE price data in setting the BFP. The Senate passed a sense

of the Senate resolution asking USDA to consider replacing the NCE price in the

BFP as soon as possible.

More recently, CFTC approved a cash settled futures contract for fluid milk that

uses the BFP as the settlement price. In so doing, the CFTC issued a report indicating that price manipulation or distortion on the NCE was not of sufficient concern

to disapprove the new contract. At this point, we believe the best approach is to

work in partnership with the dairy industry to develop a price series that the industry has confidence in and that will not disrupt the conduct of business among producers, processors and retailers.

USDA ACTIONS

At this time, we are trying to determine whether there exists an alternative to

NCE prices for administering Federal milk marketing orders, and we are engaged

in a dialogue with the dairy industry to examine alternatives and develop additional

markets for cheese. On January 29, USDA announced that it would seek public

comment on whether NCE price data should be used in the determination of the

BFP. Comments must be postmarked by March 31, 1997. Based on the comments

received and other information available, USDA will determine whether to replace

NCE prices in establishing the BFP. If USDA determines that the NCE price is no

longer functioning as intended, ‘‘price equivalency provisions’’ in Federal order regulations permit an alternative cheese price series to be substituted for the NCE price.

USDA would also like to provide additional data on cheese prices to augment

NCE price information. USDA’s National Agricultural Statistics Service (NASS) has
18

initiated a national survey of weekly cheddar cheese prices. This voluntary survey

begins this week. USDA is encouraging all cheese plants to participate in the survey

and is working with interested parties to ensure that the data collected are accurate, reliable, timely and of value to the dairy industry. As with any new survey,

a period of time will be needed to validate its accuracy and reliability before we can

begin publishing the data and expect it to be accepted by the dairy industry.

A common criticism of existing cash and futures markets for milk and dairy products is their thinness or lack of volume. Currently, the Coffee, Sugar and Cocoa Exchange (CSCE) trades futures in cheddar cheese, nonfat dry milk, fluid milk and

butter, and the CME trades futures in fluid milk and butter, all of which have limited volume. The CSCE recently announced a futures contract for fluid milk that

is cash settled using the BFP. Both the CME and CSCE are exploring the possibility

of starting a cash market for cheddar cheese. USDA is committed to working with

the Exchanges and the dairy industry to further develop such markets to the benefit

of producers and processors.

The announced action to seek public comment on the use of NCE price data in

determination of the BFP is in addition to the longer term process currently underway in USDA to consolidate and reform Federal milk marketing orders by April

1999. USDA will continue to review the BFP as part of Congress’ mandate in the

1996 Farm Bill to consolidate and reform orders. Last Friday, USDA released several reports addressing options for milk order reform, including long-term pricing

issues. We anticipate releasing an additional report on the BFP in the very near

term.

In conclusion, USDA has followed closely the concerns over NCE prices and their

use in pricing under Federal milk marketing orders. We recognize the significant

and valuable contribution of the nation’s dairy farmers to U.S. agriculture and to

the overall economy. Last year, the nation’s dairy farmers accounted for over $22

billion in farm receipts and over 10 percent of total farm sales. Changing the Federal order pricing system could have broad and substantial consequences for producers and processors. That is why USDA is now in the process of a thorough evaluation of alternatives and positive reform measures for Federal milk marketing orders.

We welcome any evidence that will help promote reform and contribute to opportunities for growth and stability for our nation’s dairy producers.

Mr. Chairman, this completes my testimony and I’ll be happy to answer any questions.
19

SEASONAL-BASE PLANS

Senator COCHRAN. In my opening statement, I mentioned that it

is very important in the South that we understand the importance

of milk marketing order seasonal-base plans as an integral part of

the mechanism to encourage milk producers to average their seasonal milk production over the year.

There is nothing in this plan, is there, that would have these as

mutually exclusive ways of establishing prices, particularly in view

of the fact that we have had experience with this program which

previously has been authorized? We understand that the plans

were not included in the FAIR Act, but there is some testimony

that we will receive today on this subject, and we hope you will

carefully consider those views and will address them in your testimony today.

Secretary GLICKMAN. We will. Perhaps Mr. Dunn may want to

comment, but we have supported efforts to make some legislative

changes on the seasonal basis issue.

Senator COCHRAN. You may proceed.

Mr. DUNN. Mr. Chairman, we are, in fact, in favor of seasonalbased pricing.

Senator BUMPERS. Would you pull the microphone closer?

Mr. DUNN. We are, in fact, in favor of the seasonal-based pricing,

Mr. Chairman, and we did push for it in the FAIR Act. Time simply ran out on us, and we will work very closely with Congress to

ensure that we get that back in.

Senator COCHRAN. Thank you very much.

Senator SPECTER. We do have other Senators who want to question witnesses, so we will start off with a 10-minute time limit, and

then we can come back to Senators who want to question witnesses

further if that is satisfactory. Is there any problem with that?

[No response.]

Senator COCHRAN. Senator Specter.
20

Senator SPECTER. Thank you very much, Mr. Chairman.

Mr. Secretary, again I thank you for going to northeastern Pennsylvania and for the special attention you are paying to this issue.

When you say that you have started the weekly survey of cheese

prices, when do you expect that you would have responses from

that survey so that you might establish a different cost of cheese

from the Green Bay Exchange price which, in turn, might raise the

price per hundredweight of milk?

Secretary GLICKMAN. I will ask Mr. Collins to respond.

Mr. COLLINS. Senator Specter, we are receiving questionnaires

this week. The first collection date will be the price for the first

week of March, the week that ended this past weekend. The questionnaires have been coming in Tuesday and Wednesday and today.

Senator SPECTER. So you have already had some come in?

Mr. COLLINS. Yes, we have.

Senator SPECTER. What are the initial results?

Mr. COLLINS. I have not looked at the questionnaires. They are

being compiled by our statisticians, so I do not know what they

show, but I can tell you what we did.

Senator SPECTER. Well, I only have 10 minutes. I want to know

what they show. When do you think you will have an idea as to

what the results are so we might expect a change in the price of

milk?

Mr. COLLINS. I do not think you can expect anything for a couple

of months. We do not start any data collection effort like that, a

national data collection effort, based on a probability sample and

then report those results immediately. We go through several

weeks of testing, so it is going to be a while before we make anything public.

Senator SPECTER. Well, several weeks will be different than several months. What I would like to know, Mr. Secretary, is when is

the earliest we might expect to know what those results are so we

can see if there will be a change in price?

Secretary GLICKMAN. I am going to give you a nonscientific rule

of thumb here. I would say in about 6 weeks we will know whether

the questionnaires are producing the volume of information necessary to determine whether we are getting the data that we need

to make that judgment, so the problem, Senator Specter, is that if

we do not get the full participation from people in the industry the

survey is not going to produce the value that we need to have it

produce to change the price, so that is why we have to do the outreach and work it and get people, some of whom are here in this

room, to come forth and give us the information.

Senator SPECTER. So if you do not receive it on a voluntary basis,

then you are going to need legislation to compel people to give you

the answer?

Secretary GLICKMAN. I would say the answer to that is yes. I do

not think we have the legal authority to compel.

Senator SPECTER. Well, then, would it be helpful to you if we initiated that legislative process as a fallback position so that we do

not have to start it—I know the answer to that is yes. We will start

the legislative process going so that we have it as a fallback.

Mr. Secretary, on the question of, I note a difference between the

BFP, basic price formula, and the M–W, the Minnesota-Wisconsin.
21

You say there already has been a noticeable difference of 32 cents

per hundredweight. Does that indicate to you that the existing pricing mechanism is, in fact, efficient?

Secretary GLICKMAN. I am trying to look at the chart here.

Senator SPECTER. I thought that is what you had suggested in

your testimony.

Secretary GLICKMAN. The interesting thing is, if you look at the

charts, 32 cents is a somewhat significant difference. If you track

it over the last 2 years the prices almost track each other identically.

There was a period in November and December 1995 and January 1996, when the M–W price exceeded the BFP, and then there

was a period in 1996 when the BFP exceeded the M–W price by

a few cents, but certainly during the fall of 1996 the reverse occurred.

I am not sure why this happened, but I bring it to your attention

that there is a 32-cents-a-hundredweight difference, and that is

why, among other reasons, we are trying to go through this comment period to see whether there is a better way to price milk than

this, whether to go back to the M–W pricing system or use our own

statistical surveys to get it done.

Senator SPECTER. Mr. Secretary, what concerns me is the time

delay. I can understand the need to establish a market on cheese

different from the Green Bay, and you have an indication that it

may be at least 32 cents per hundredweight low.

I am speculating or wondering about some action to establish a floor price at $13.50 per hundredweight now. We have a couple of

Pennsylvania milk farmers who are here today that I chatted with

just a few minutes ago. Mr. Arden Tewksbury pointed out to me

that it has been some 3 months since he met with you with a group

of some 20 farmers, and the price of milk has gone down and the

costs of production have gone up, and there is a real sense of urgency.

Senator Feingold commented about the same sense of urgency,

and I know of your reluctance to establish a floor price, but I am

wondering if that might not be an appropriate action to take on a

temporary, immediate basis.

I understand that a group of Senators wrote to you, led by Senator Breaux, last week on the subject, and I wrote you a letter

dated March 10, and how about doing something like that to stem

the floodgates at a time when we are trying to determine what is

going on?

If we really knew the answer, we might not have to take some

temporary action, but at a time when there is sort of a sensitivity

that the price may be too low now, at least as indicated by M–W,

why not establish a temporary floor at $13.50?

Secretary GLICKMAN. I have been wrestling with that. First of

all, the BFP is up $1.12 since its low, so it has come back some,

and we expect that it is going to continue to go up.

Now, whether it is going to reach the $13 level or not, I cannot

tell you for sure.

Senator SPECTER. Well, you have given an estimate that it will

be an average this year of $13.50 in your testimony.

Secretary GLICKMAN. That is correct for the BFP.
22

Senator SPECTER. So why not at least stabilize it at that price

now while these other tests are going on?

Secretary GLICKMAN. Well, I would say there are two things. No.

1, and then I will ask my colleagues to respond, and I hope they

give you enough time so you can do it all.

First of all, I would have to tell you, this is a tremendously controversial issue, and it is one that would require us to hold a hearing to make a decision and hold a referendum.

Now, I can accelerate that as much as possible, but I guarantee

you that there are people in this room and around the country who

will do their best to delay this decision long enough so it will not

have an impact, because probably the BFP will be up at that level

by the time this decision was final, which is probably 90 days, 120

days, or more.

Senator SPECTER. Well, let us hope that is fast, and let us recognize there are a lot of people with delaying tactics, but what is the

fastest you could do it to establish that base price?

Secretary GLICKMAN. If we were to go ahead and do this, I would

ask Mr. Collins.

Mr. COLLINS. Let me take a shot at this. First I will say a couple

of things. First of all, the forecast for the basic formula price for

this year is not $13.50. It is $12.80. Second of all, $13.50 by all historical——

Senator SPECTER. You say the price is not $13.50?

Mr. COLLINS. No.

Senator SPECTER. The average is $12.80?

Mr. COLLINS. Our projection is $12.80.

Senator SPECTER. I thought the Secretary said it was $13.50.

Mr. COLLINS. You said it was $13.50 and quoted his testimony.

Senator SPECTER. No; I asked him if he did not say it was

$13.50. I did not say it was $13.50. I do not testify. I ask questions.

Secretary GLICKMAN. Excuse me. The all-milk prices would average $13.75, so those are all three classes of milk. That is what my

testimony said. I am sorry if I confused that.

Mr. COLLINS. Just to get the facts straight, then, to set a floor

price at $13.50 would be to set a price that is above what we are

now forecasting and would also be above what has historically prevailed as the BFP for a long period of time.

Senator SPECTER. What is the forecast? The $13.75, as the Secretary now says, involves more than what I have asked you about?

Mr. COLLINS. Correct.

Senator SPECTER. What is the expected price for what I have

raised?

Mr. COLLINS. The forecast for 1997 for the basic formula price is

$12.80 per hundredweight, and for the all-milk price, which is the

average price of milk received by producers for all classes of milk,

is $13.75 per hundredweight.

Senator SPECTER. What is that difference, Mr. Collins?

Mr. COLLINS. The basic formula price is of course the minimum

price that we announce for class III milk. The all-milk price would

be what producers actually receive from all types of uses, including

fluid use, which has, of course, the class I differential added to it.
23

Senator SPECTER. Well, how long would it take, at the fastest,

surmounting all the delays which the Secretary predicts will be attempted, how long would it take to establish a floor price of $13.50?

Mr. COLLINS. That would require formal rulemaking, and our

lawyers have advised us that that could take at least 6 months.

Secretary GLICKMAN. If I may add, as opposed——

Senator SPECTER. How about subtracting? [Laughter.]

Secretary GLICKMAN. All right, subtracting, but if I may contribute, this would require a formal rulemaking as opposed to our action which I could take, depending upon the evidence received, on

changing the BFP to reflect an alternative for the cheese exchange,

which would not probably require a formal rulemaking. That one

can be done faster. We have talked about that.

Senator SPECTER. Well, that one definitely can be done faster,

but that is going to require that you make an assessment of a different price of cheese, which you are now undertaking to do.

Secretary GLICKMAN. Well, and plus the testimony that we are

getting right now may also reflect alternatives to that as well

which we then could use to make a decision rather quickly.

Senator SPECTER. My orange light is on, Mr. Secretary, so I am

going to ask you to give me the benefit of your imaginative thinking along with your colleagues as to what might be done to meet

this crisis. I do not have enough time, probably not enough knowledge to go through all of the range of possibilities which you experts know. What can be done, searching the full spectrum of your

knowledge, to bring some immediate relief? That is the real question. There must be something that can be done by an imaginative

lawyer from Wichita.

Secretary GLICKMAN. First of all, listening to my colleague from

a similar background as I am, that we have taken some actions

which have had some constructive help. That is, because of your interest and other people’s interest, the price of milk is up almost 10

percent, and granted it has a long way to go, but it has moved, and

we suspect it will continue to go up.

Now, we are going to continue to take those steps, including

using the dairy export incentive program [DEIP], purchases on the

demand side of the picture, to do what we can to try to increase

sales. And I just mentioned that I took one step a couple of weeks

ago on the commodity supplemental food program to add cheese to

that program, where we had not done that in recent times. That

is one thing that we are going to do.

Second of all, I recognize, as I have told you, that this NCE price

is one that I would like to find an alternative for as quickly as possible. We have been out for comment for 4 weeks, I guess, 3 to 4

weeks, and it is my hope notwithstanding the actions we are taking

to get comments and do some surveys, that we can try to come up

with an alternative as quickly as we possibly can.

Senator SPECTER. Well, can you do an alternative before you finish this 6 weeks of surveys that Mr. Collins talks about?

Secretary GLICKMAN. Let me put it to you like this. We will look

at the suggestions that are being made as part of that effort.

One of the alternatives is for us to conduct a survey ourselves,

and if we are going to use that alternative, we have got to make

sure it is statistically accurate and it reflects enough people partici-
24

pating in it. That may be the best way to go. We may need your

help in making it so that reporting is mandatory in that process

if we do not get all the voluntary response needed.

But you know, I want to move on this as fast as I can, but I want

to make sure that we do it sensibly. Fortunately, we are in a period

where the price looks more bullish over the next several months,

and that will give us perhaps not the breathing room that all the

producers need, because I know that that price is still very low for

these people, but it will at least give us a little bit of time period

where we are going to be approaching that $13 price level while we

try to find some options for the BFP, some alternatives for it.

In the meantime, if you want to consider making this reporting

mandatory, that would not be something we would oppose and it

might help get the cooperation over the next several weeks.

Senator SPECTER. Well, my time is up. Thank you very much,

Mr. Secretary, and thank you, Mr. Chairman.

Senator COCHRAN. Thank you very much.

Senator Kohl.

Senator KOHL. Thank you, Mr. Chairman.

What are the dangers of connecting up to a new market that may

not yet be credible? I anticipate you do not want to do that until

you are satisfied that the new market is credible. What are your

options in that interim period?

Secretary GLICKMAN. Why don’t we talk a little bit about what

happens. For example, what would happen if the National Cheese

Exchange would go out of business tomorrow afternoon, what

would we do to try to deal with this issue, and compute the basic

formula price? How do we handle it? I mean, that is a very important question, and I hand that to my experts, then.

Mr. COLLINS. Well, we would have two options if the National

Cheese Exchange were not to exist. One option would be to try and

find an equivalent cheese price to the one that had been on the National Cheese Exchange. And that is what we have just been talking about. One possible candidate would be a survey that we would

take, such as the one we have underway now, conducted by the National Agricultural Statistics Service. We could try and beef up or

improve the Wisconsin Assembly Point Price Survey that we now

report weekly, which most people do not like and do not think is

very accurate.

Those would probably be the major candidates that currently

exist out there for a cheese price. We certainly probably could not

use a futures price. There is a futures price for cheese, but I think

thinness concerns with that market would probably prevent us

from using that.

So we would go through a decision process of trying to identify

some equivalent alternative cheese price. Failing that, then we

would look at the basic formula price itself, and possibly go to some

alternative that did not include a cheese price, perhaps the M–W

price, adjusted only based on changes in butter and powder prices,

which might not make many people very happy. But that would be

one candidate that we would consider.

Going back to the old M–W price we used to use would also be

a candidate we would consider. And I do not think that would

make very many people happy, and it certainly does not make me
25

very happy, because there are some serious thinness concerns with

that approach as well.

Right now there is no good alternative on the table in my judgment. And that is the dilemma. That is why something has not

been done yesterday. So if the National Cheese Exchange were to

disappear, short of having a new exchange or a validated survey

to replace it, I think we would be worse off.

Senator KOHL. All right. Well, are you saying that today the National Cheese Exchange, with its flaws, is as good or better than

the alternatives that you are aware of?

Mr. COLLINS. I can answer that, in my opinion, yes.

Senator KOHL. So then are you suggesting that the National

Cheese Exchange not go out of business until we have established

something that is credible as an alternative?

Mr. COLLINS. Well, I would say that at this point I would recommend to the Secretary—and I hate to recommend to the Secretary in front of a Senate hearing without doing it first in his office—but I would recommend to him that he would use the National Cheese Exchange until we had a superior alternative. Yes;

that is what I would recommend.

Senator KOHL. Do we have a superior alternative on the table?

Mr. COLLINS. Not to my knowledge.

Secretary GLICKMAN. Well, right now, one of the superior alternatives is in the process of determination, and that is the direct

survey that we are doing on a weekly basis, which, if we get the

adequate amount of reporting, is probably superior. I would think

there would be no question, if you can get enough people reporting

to us, it is going to be a more accurate figure than the National

Cheese Exchange.

Mr. Dunn, do you have a comment?

Mr. DUNN. Senator Kohl, there are about three things that are

happening. One, the Secretary has asked for comments. We have

received to date 169 comments from various people of what to do

about the National Cheese Exchange. Now, the majority of those

have been complaints. There have not been a lot of comments stating here are some positive alternatives.

The second thing that is underway is, under our milk marketing

order reform mandate, by mid-April, we plan to put out a preliminary proposal on some way to replace—to establish—a new basic

price formula. So that will be coming out very, very shortly.

It begs the question, though, that you raise—and later on Mr.

Tipton is going to testify the Cheese Exchange may go out of operation by May 1. And if Senate bill 2 from Wisconsin passes, it may

go out even sooner, if that quickly goes into play.

So we have to look at the comments we have received, look at

what NASS is doing, and certainly any other suggestions that this

panel or any other dairy producers or people in the dairy business

might have. Those things may catch us off guard. But by May 1,

if the NCE closes, we are going to have to use whatever the Secretary has at his convenience. And we may even have to go back

to an M–W series on an interim basis.

Secretary GLICKMAN. I was going to say that the survey we are

doing, it does strike me that if the Cheese Exchange ceases to exist

right now—the M–W system has been on the books in the past—
26

so we could probably go back to that and substitute it for what we

are doing now. It certainly would be technically feasible to go back.

I am not saying it is the best option. But assuming that we would

make the determination that the Cheese Exchange—the price component on the Cheese Exchange becomes unavailable or an equivalent price is not there and we could not substitute something else,

we could theoretically move back in the direction of the old M–W.

But we replaced it in 1995 because we did not consider it to be

a very fair and feasible price.

That is why, again, I repeat, the surveys that we are doing on

a weekly basis perhaps offer us the best option as to what we

might be doing.

Mr. Collins.

Mr. COLLINS. I would like to comment on this M–W price, which

is an attraction to people who want to go back and get away from

cheese prices as a way to discover the price of milk. The M–W price

today, the one that we report, the base-month price, is based on a

survey of about 200 million pounds of milk per month from Minnesota and Wisconsin. Now, what is the total production per month

in Minnesota and Wisconsin? It is something like 3 billion pounds.

Everyone is concerned about thinness in the base from which we

draw our data. That is a thin base. But now, if we went back to

the old M–W, that 200 million pounds comes from 170 plants. To

go to the old M–W, we have to adjust the base month price using

a survey of those plants that pay biweekly. When we abandoned

this survey, there were only 61 plants doing that. That was 2 years

ago.

If we were to go back to the old M–W, we would now have to go

back and start surveying those plants that pay biweekly. What

their volume of milk is, I do not know. But I bet it is substantially

below 200 million pounds.

So we will be talking about an updater, an adjuster, to replace

the NCE that is based on a very small sample, a very thin market,

which is exactly the criticism of the National Cheese Exchange. So

I do not jump into this idea of going back to the M–W as necessarily a superior alternative at this point.

Senator KOHL. All right. I think that is very important testimony. What we are hearing you say is that we need to be careful

about encouraging the NCE to go out of business without an acceptable alternative that is going to be better. Otherwise, we solve

a problem by creating a bigger problem. Is that what you are saying, Mr. Collins?

Mr. COLLINS. That is my opinion, Senator Kohl, yes.

Senator KOHL. On the other hand, we all recognize that there is

this tremendous dissatisfaction out there with the NCE, and we

need to have a sense or urgency—which I am sure you do—about

developing an acceptable alternative. Is that correct?

Mr. COLLINS. That is my opinion, certainly.

Senator KOHL. Are we finally looking at an acceptable alternative in the foreseeable future—meaning a month, 2, 3, 4, or is

that not going to happen, Mr. Collins?

Mr. COLLINS. No; I think there is a prospect of that happening.

I think one candidate on the table is the survey we just began. And

with all due respect, you do not turn a survey like that into a reli-
27

able, accurate, valid indicator without some testing, without some

observation. It is one thing to pick a price off an organized market

of a homogeneous product, like the one that takes place in Green

Bay. It is another thing to go out to 100 plants in the United

States and ask them at what price they sold cheese. They say,

what cheese, what kind of cheese, sold over what time period?

There is a number of things that have to be straightened out,

and it will take weeks to do that, to ensure that we have a valid

series, where people are reporting a price that does not have huge

standard errors in all of the weekly data that is being reported. So

I think our survey is one candidate. But that is going to come

somewhat slowly. That may be the best survey candidate available.

However, I would also say that that survey is a concern to the

cheese industry, that we would use a price like that for regulation,

primarily because it is a voluntary-based survey. Suppose cheese

prices start to go up, then we are going to use that reported cheese

price to raise the minimum price of milk under Federal milk marketing orders. Is it in cheesemakers’ self-interest to report that the

price of cheese is going to go up if it is going to cause us to raise

the minimum price of milk? Will some of them drop out of the survey if the cheese price starts to go up? Will the survey get thin if

the cheese price starts to go up?

That is a concern we have with a voluntary-based survey for

using it in regulation. Nevertheless, that is one of the best candidates on the table at the moment.

The other primary candidate on the table at the moment is this

prospect that the Coffee, Sugar, and Cocoa Exchange or the Chicago Mercantile Exchange will develop an alternative market.

Those are institutions with some credibility and reputation. And

there is some prospect to think that they could organize a market

that could remedy some of the concerns of the National Cheese Exchange.

Senator KOHL. Do you have any intention of encouraging that to

happen?

Mr. COLLINS. Yes; we have been encouraging that to happen.

Senator KOHL. Do you expect that it will happen or do you hope

that it will happen?

Mr. COLLINS. I hope that it will happen. It is clearly not our decision. It is the decision of those who buy and sell cheese. But we

have certainly offered our support. We, in fact, attended organizational meetings of the CSCE cheese task force. And we are very interested in support of this occurring.

Senator KOHL. All right. I thank you for your testimony.

Thank you, Mr. Chairman.

Senator COCHRAN. Thank you, Senator.

Although not a member of the committee, our distinguished colleague from Pennsylvania, Senator Santorum, has asked permission to address some questions to our witnesses. For that purpose,

we recognize Senator Santorum.

Senator SANTORUM. First off, let me thank you, Mr. Chairman,

for your graciousness in inviting me and allowing me to participate

as a guest member of the panel. Thank you very much.

I have a couple of questions for the Secretary. I want to get back

to the subject at hand here. You state that the Wisconsin-Min-
28

nesota market is thin. The futures market is thin. The NCE market is thin. Somewhere out there something is thick. What is thick,

and why cannot we measure it?

Secretary GLICKMAN. There is cheese being bought and sold by

several hundred plants in the United States. So that is thick. And

the way to do that is to get full participation. And we are going

to try to do it the best we can. But we might need authority to compel it. That would provide thick participation.

Senator SANTORUM. Let me ask you, what do you anticipate the

cost of such a survey would be, and who would bear the cost?

Mr. COLLINS. We are already conducting the weekly cheese price

survey under our current appropriations. I do not think the cost is

really an issue here. Of course, the agency who is doing this might

have a different opinion. But I do not think, really, that is the

issue.

We are able to do it now. We are surveying 112 plants out of the

universe of a little over 200. If it were mandatory, that would double the number of questionnaires. I think it is something we could

handle.

Senator SANTORUM. So, in a sense, what you are surveying is the

bulk of the market—I mean what percent of the market would you

say——

Mr. COLLINS. The 112 plants represent 90 firms, and they account for 99.2 percent of cheese produced in the United States.

Senator SANTORUM. So that will give you a pretty good idea of

what is out there?

Mr. COLLINS. Yes; now, it is a voluntary survey. We will not get

99.2 percent. We might get 60 to 70 percent. We do not know yet.

That will be a thick sample.

Senator SANTORUM. Thank you. Another concern I have is the

issue of volatility. When the CCC held stocks, we did not have this

kind of volatility. As a result of deregulation, however, we now

have an industry that really does not have any mechanism to control volatility.

What changes would you suggest—either through the private

sector or through government—to help control that volatility? I

know low price hurts, but when you lose 40 percent of your price

in 3 months, that hurts even worse, because you cannot plan for

it at all.

Secretary GLICKMAN. I think that Mr. Collins ought to comment

on the reasons for this rapid price decline. Which if you look at the

charts in the back of the testimony, you have never seen anything

like this before. Certainly, in the old days, when the Government

was much more involved in the price support mechanism, you

would have had a support price that would have been a floor, that

would provide a safety net.

Quite frankly, the last several farm bills, which I voted for when

I was in the House, eliminated that. It changed the rules of the

game. We went to a free market system. And the call for a higher

basic formula price now is a direct contradiction to what Congress

has said in earlier farm bills.

Now, that does not mean that we should be inflexible on it, but

I think it is the recognition that this is in fact the case. Recently,

the Washington Post, which is not known as one of the great sup-
29

porters of farm bills, did an editorial, where they wrote that this

volatility in dairy prices should require us to rethink the issue of

farm safety net. Because, certainly, in the free market world and

open borders, there is going to be a lot more variability, particularly for a perishable commodity like milk, where you cannot really

put it under loan. What used to be the Government support program was the Government buying up the cheese under the loan

program. But now, we really do not have any of the safety net programs operating.

Now, I do think it is worthwhile examining why this extremely

rapid change took place.

Senator SANTORUM. But if you could answer—I am interested to

hear why the rapid change occurred, and that is important, but I

guess what I really want to get at is what risk management tools

can the industry use or can we help the industry with to deal with

this issue?

Mr. COLLINS. I think that is a good point. This is an industry

that has had stable prices through much of its history, as the price

has sat right on its support price and the Government always had

stocks to sell back into the market as price started to rise. What

dairy farmers are facing is the same thing that grain farmers are

facing as governments have moved out of holding stocks and have

moved out of direct intervention in the marketplace.

What we see in other markets, though, are more and more sophisticated risk management approaches taken by farmers. Look at

the volume of contracting that takes place in grains or cotton, for

example. Whether it is contracting with a local warehouse or contracting on futures and options markets, it far exceeds anything

that is happening in the dairy industry.

So the dairy industry, really, is a little bit behind in terms of,

I think, the risk management instruments that are being utilized

by those in the agricultural industry. So, certainly, one thing that

the Department can do and one thing Congress can do is to help

shape public opinion within the dairy industry about an awareness

of how the market environment has changed, about the tools that

are available, and about how to use those tools.

And those tools run the gamut. They run from managing your inputs, such as your feed costs—should you grow it on the farm,

should you buy it in the commercial marketplace—to pricing your

product. Now, many dairy producers price their product through

their co-op. And that is a little bit unlike grain markets. However,

there is nothing to prevent co-ops from running different kinds of

pools that would allow producers to lock in prices. And, in fact,

some do. But it is certainly not commonplace or very widespread.

One of the things that works against hedging is the low volume

of futures activity in milk or cheese or butter contracts. As those

markets develop—hopefully, they will be used. The farm price volatility will hopefully cause greater volume in those markets. The

more volume in those markets will encourage more people to want

to use those markets. And hopefully that will start to emerge in future years.

At USDA, we do have a risk management education obligation

under the 1996 farm bill. We have to be sure that that program

is directed to dairy producers, not just to those who produce insur-
30

able crops, for example. We also have other authorities to run various kinds of pilot programs. And so maybe there are some things

there that we can do.

Senator SANTORUM. Can you describe the activity that the USDA

has undertaken with respect to programs on risk management?

Secretary GLICKMAN. It is just starting up. Because it was in the

bill that passed in April, we have begun some activities.

Senator SANTORUM. We are looking for some short-term help. Is

this something that could be helpful in the short term, to try to get

more education for dairy producers?

Secretary GLICKMAN. Go ahead.

Mr. COLLINS. Well, I do not really see it as a short-term solution,

no. This is an educational effort, and it will take some time. And

all of the instruments, the tools, the mechanisms for risk management really are not there for dairy producers the way they are for,

say, grain producers at this moment.

Secretary GLICKMAN. I would say, in the grains area, we are

moving to a system of revenue insurance, as opposed to disaster insurance. We are moving to a system where farmers can buy insurance based upon their income. And if they have volatility in the

amount of dollars received, they can ensure a minimum level of

revenue. We have a pilot program in the Midwest called the Crop

Revenue Coverage. It has been for soybeans and corn, and we are

expanding it to more areas and more crops.

Senator SANTORUM. Does it have applicability to dairy or not?

Secretary GLICKMAN. It could. I do not know whether it does

now. Producers are insuring their feed and that kind of thing—protecting their input side. But in terms of their dairy production, I

am not sure.

Mr. DUNN. Senator Santorum, one of the witnesses who will testify later on is saying the price ought to be tied to what the input

costs are—the feed costs, et cetera. On the other side of that coin,

though, there is the opportunity, through the educational program,

to assist producers to lock in protein costs, et cetera, which is very,

very important to a dairy producer, so that they keep the prices

need to break even lower, on an even pace throughout the year. By

doing that, they can get a better return on their investment.

But we are really in the infancy on putting together those types

of programs on a mass scale to assist producers. It is an area that

we certainly have to do a lot of work in.

Senator SANTORUM. My understanding is there was an options

pilot program in the farm bill. Can you discuss how that works?

Mr. COLLINS. We had an options pilot program under the 1990

farm bill, which we operated for the last 3 years of the 1990 farm

bill. We did not operate it for 1996 because of the lateness with

which the 1996 farm bill was passed. We continue to have the authority to run that program. However, the authority has been

changed slightly.

We were spending about $3 million a year to run that program

for corn, soybeans, and wheat in the last 3 years of the 1990 farm

bill. The 1996 farm bill requires that if we run that program, we

do it in a, quote, budget-neutral way. As a result of that, we have

not gotten much interest from the industry to pursue the options
31

pilot program, with one exception—the one I am sure you are leading up to.

We did get a proposal from the Coffee, Sugar, and Cocoa Exchange for a dairy options pilot program. It was a very costly proposal. And we have that now. Our risk management agency has

that proposal. They are evaluating that proposal. I assume they are

under discussion with CSCE. I do not know that for sure. But that

proposal is now being evaluated at the Department.

Senator SANTORUM. I would appreciate it if you could at least get

us some answers on how that is going and whether or not the opportunity for a pilot program exists.

My time is up. I thank you very much.

Thank you, Mr. Chairman.

Senator COCHRAN. Thank you, Senator.

Senator Specter, do you have any further questions of the witnesses?

Senator SPECTER. I do, Mr. Chairman, but I will be relatively

brief because we have many more witnesses this afternoon.

Mr. Collins, a question which comes to my mind is, you have 112

plants out there with 99.2 percent of cheese production. Why not

simply call them all up and ask them what the sales price was

today, yesterday.

Mr. COLLINS. That is what we are doing, except we are sending

them a piece of paper, so that they can write it down.

Senator SPECTER. That is a lot different. A lot different. A piece

of paper comes in. It has to be read. It has to be written on. It has

to be mailed. Call them up. Just call them up. People answer the

telephone. Tell them you are calling from the Department of Agriculture; you would like to know what the price is.

Mr. COLLINS. Right. Well, you have to get to the right person,

who has the books. And we also get other information from them.

We get quite a bit.

Senator SPECTER. I understand that. I frequently make calls and

have to ask for somebody else.

Mr. COLLINS. Right.

Secretary GLICKMAN. I think that the idea is something we

should explore. That is, there may be a way to do this using modern technology. For example, electronic communication, e-mail,

Internet, getting a more instantaneous access to information rather

than sending out formal questionnaires. I think the idea is worth

exploring. I think it is a good idea.

Senator SPECTER. Well, Mr. Secretary, I would like to explore

that idea on February 11. I have a sense of urgency about this

which is that after we went out there on February 10, and told

those 500 farmers that the Secretary had the authority, unilaterally, to change the price of milk if the cheese price was changed,

to find a way to find out what the price is. I want information. You

want information. We pick up the phone.

Somehow it comes into the bureaucracy—Mr. Collins, with all

due respect—it takes a month to do it, and then we send out letters. And people get letters, they do not like to respond to letters.

I hate letters. Every piece of paper that crosses my desk is an

anathema. But if I get a message on the telephone sheet that

comes in from my secretary and they want an answer, can I see
32

a group next week, I say yes or no. And I would just pick up the

phone.

Will you give me a list of those 112 plants? I will call them. I

will have my staff call them. I have not seen the forms you sent

out, but how simple are they? If they are simple, it is the first one

that is ever come out of the Federal Government.

Mr. COLLINS. It is a simple form. And if we were to do it on the

telephone, it might allow us to announce the price a day or two

earlier. I mean that is what you are talking about. We are talking

about last week’s cheese price being announced the following week

with the method we have now. I do not see where your method is

going to actually accelerate that very much.

Senator SPECTER. Well, let me explain it to you. If you call up

the 112 people, you put five people on it, they can make 20 calls

or 25 calls, they can get the answers in a day

Mr. COLLINS. Right.

Senator SPECTER. And then you write them down and you see

what it is.

Mr. COLLINS. Right.

Senator SPECTER. And maybe it is vastly different from the

Green Bay price.

Mr. COLLINS. Right.

Senator SPECTER. So you would say to yourself, I may want to

do this survey over 2 or 3 days. I do not know why you have to

do the survey over 6 weeks to have an evidentiary base to establish

a different price of cheese.

Mr. COLLINS. I guess I did not understand your point. The 6-

week period is not an administrative lag in data collection, which

is accelerated by a phone call. The 6-week period is 6 consecutive

weeks of getting people to report data, and then working with

those people to report the right data, to report the cheese that has

the right moisture content, cheese that has the right container, the

cheese that is aged the right number of days, the cheese that is

contracted during the right period.

Maybe it can be done sooner than 6 weeks; 6 to 8 weeks actually

is more of a traditional time period that our statisticians have required before they have reached a comfort level to be able to report

publicly. And I think it is important that the statisticians be the

ones that tell us when they are comfortable.

Senator SPECTER. With all due respect, I do not think so. I think

that is the Secretary’s job or maybe the job of the Congress. I

would have to explore what the issue is on the statisticians’ comfort level. You have raised two questions. And if I may pursue this,

Mr. Chairman, for just a moment or two.

You went through a sequence of what you had to find out—the

right containers, the right consistency of cheese. Tell me about the

complexities in pricing cheese. What are the complexities in pricing

cheese? Is it different from going to the supermarket and buying

cheese?

Mr. COLLINS. Yes; I think it probably is.

Senator SPECTER. Well, tell me about it. I do not know about

that.
33

Mr. COLLINS. Well, I do not know that much about it myself either. I am not the statistician collecting the prices. I only know

what they have been telling me. They have been——

Senator SPECTER. Well, then, I will ask the Secretary. What is

the issue on pricing cheese?

Secretary GLICKMAN. Arlen, I do not know the answer, but I will

commit to you this. However we can get the information, it needs

to be collected the fastest way possible.

Senator SPECTER. Well, Mr. Collins is telling me about the consistency of cheese and the container of cheese, and he went through

a whole list of things. Then I ask him what is up, and he says he

does not know.

Secretary GLICKMAN. Well, I certainly do not know the answer

to that question. But all I can tell you is, based upon this hearing,

we will go back and we will try to determine the methodology of

collecting the information, and make sure it is as rapid and complete as possible. But as we said to Senator Kohl beforehand, we

have got to make sure that we are dealing with apples and apples

before we can come out with a decent number that makes some

sense.

Senator SPECTER. Secretary Glickman, all I know is that I have

got a bunch of irate farmers. And they are madder than hell because their costs of production have gone up and the price of cheese

has gone down. And I know, because you and Mr. Collins and I

were there, and we all concluded and we said in that public meeting that you had the authority to change the price of milk if you

establish the price of cheese.

Secretary GLICKMAN. That is correct.

Senator SPECTER. And that was more than 4 weeks ago.

Secretary GLICKMAN. And we are pursuing that. And I have been

on top of this issue. And before I came to Pennsylvania, we had already done a statement to indicate that the public comment would

occur through March 31. And we have to honor that time period.

In the meantime, we are examining the comments. We have started our own weekly collection process. We will try to make sure that

that is as accelerated as possible.

But if I may make one point, Senator, truthfully, the issue here

is, and I agree with you, that this cheese price is a problem. But

it is not the main problem that your dairy farmers are having trouble with. The problems go to a much bigger picture. And they,

frankly, go to the fact that for years and years and years, the Government supported dairy products at high support levels. And that

was ended. And now we are going through this free market gyration, with high volatility and highly variable prices. And the folks

are hurting. A lot of folks are hurting because of this situation.

I want to move this cheese issue as fast as I possibly can. I think

it can make some difference. However, I do not think it is going

to make a material difference. I think the big difference that is

going to be made is in terms of how we reform the milk marketing

order system, quite honestly. So I do not want to mislead farmers

to believe that the change in the cheese price is going to make a

demonstrable difference in their income levels. It will not. I wish

it would.
34

I wish I could snap my fingers and make this all well. But we

have an old, antiquated, archaic system of how we price milk in

this country. You have ordered us to change that. And it is going

to be very controversial. We have to do our best to make sure it

is done fairly.

In the meantime, we have presented the evidence to you that

there is a problem in this NCE, the way it is priced. We are going

to do our best to resolve it as quickly as possible.

Senator SPECTER. Well, if you are saying that the milk marketing orders have to be—that procedure has to be changed, you are

talking there about a 6-month process?

Secretary GLICKMAN. Well, that is a long-time process. In fact,

under the farm bill, we are required to have it complete in April

1999. I am not saying that is the short-term answer to the problem. I am just saying that in order to get some sensibility in the

pricing and milk system, to deal fundamentally with the problems

the dairy farmers are having, you have to deal with that side of

the picture.

Senator SPECTER. Well, when will you come to a conclusion as to

the milk marketing orders, which is the long-range solution? That

is what you just said.

Secretary GLICKMAN. Yes.

Senator SPECTER. What is the timeframe on that?

Secretary GLICKMAN. Well, we are under the gun to get it done

by April 1999. That is what the farm bill requires us to do. We

plan a proposed rule in December 1997. We have to have that out

about 11 months from now. But we have to have reform all finally

done, finished, by April 1999.

Senator SPECTER. Well, then what is a short-term answer, besides the cheese price?

Secretary GLICKMAN. Well the short-term answer is, in my judgment, working to modify the NCE price, which we are working on

right now; and continue to expand and augment our demand-increasing authorities, which means buying more cheese and selling

more dairy products overseas, where we can; and working our best

to make sure that there are alternative markets out there, including the futures markets. And I think with a combination of that,

we can get some relief. And through your efforts and prodding, we

will try to accelerate this process.

Senator SPECTER. Well, what is a reasonable date when that

would happen?

Secretary GLICKMAN. You mean the NCE option?

Senator SPECTER. Anything.

Secretary GLICKMAN. We have a deadline of March 31, to get the

NCE input. I wish it was sooner, but, meanwhile we have had

about a $1.15 increase in the basic formula price in the last 2

months.

Senator SPECTER. Those are normal market forces?

Secretary GLICKMAN. Yes; they may be normal market forces, but

we would like to think we are helping to contribute to those.

Senator SPECTER. OK.

Secretary GLICKMAN. We expect that to continue. Now, I hope it

continues through the entire rest of the year. And we are going to

do our best, without too unfairly interfering in the marketplace, to
35

try to keep supply and demand in relative equilibrium, if we can.

At the same time, I would like to find an alternative to this NCE.

I think that using it is not an acceptable way to price milk. And

I am going to work as hard as I can to get this done. Or else you

are going to call me up here and keep my feet to the fire, which

are feeling kind of warm right now. [Laughter.]

Senator SPECTER. Mr. Secretary, you have got asbestos shoes.

[Laughter.]

Will you give me the 112 people, because I would like to call

them up tomorrow and find out what the price of cheese is?

Secretary GLICKMAN. We will give you all—we will not only give

you the 112, we will give you everybody we have.

Senator SPECTER. Fine. I would like to get that from you. Can

I get it this afternoon?

Secretary GLICKMAN. We will get it to you by tomorrow. I do not

know if I can get it to you by this afternoon, because I am leaving.

My colleagues are staying up here, because they need to hear the

testimony. But I will get the names moving.

Senator SPECTER. OK, by tomorrow is fine.

Secretary GLICKMAN. Yes.

[The information follows:]

Each week NASS collects price information on sales of natural, unaged, Cheddar

cheese at the first (wholesale) point of sale. Data are recorded for sales transactions

completed during the survey week. A transaction is considered complete when

cheese is shipped out or title transfers. The 65 plants reporting account for an estimated 85 percent of natural Cheddar cheese sales. Sample copies of two reports are

provided for the Record. Pursuant to the provisions of 7 U.S.C. 2276, the Department is prohibited from releasing the names of plants surveyed.

CHEDDAR CHEESE PRICES

[Released Aug. 1, 1997, by the National Agricultural Statistics Service]

40 LB. BLOCK PRICES RISE 3.6 CENTS

Prices received for 40 lb. block Cheddar cheese rose 3.6 cents per lb. for the week

ending July 25, 1997. Prices in the MN/WI region rose over 5.5 cents per lb. Prices

for 500 lb. barrels increased 0.4 cents per lb. and 640 lb. blocks increased 5.3 cents

per lb.

Revision Policy: This week’s ‘‘Cheddar Cheese Prices’’ contains ten weeks of data.

The extra information is published to ensure data users have the most accurate, upto-date information. June data are no longer open to revision. Next month at this

time, only July and August data will be published.

Data Reliability: The survey collects price information on sales of natural, unaged,

Cheddar cheese at the first (wholesale) point of sale. Data are recorded for sales

transactions completed during the survey week. A transaction is considered complete when cheese is shipped out or title transfers. The 65 plants reporting account
36

for an estimated 85 percent of natural Cheddar cheese sales. Estimates for only the

current month are subject to revision.

Notice: This report will include ten weeks of data on the following release dates:

September 5, October 3, October 31, and December 5.

CHEDDAR CHEESE PRICES BY STYLE AND REGION

Style and region

Week ending—

Jul 25, 1997 Jul 18, 1997 1 Jul 11, 1997 Jul 4, 1997 Jun 27, 1997

40 lb. blocks: Dol./lb.

Avg. price: 2

MN/WI ................ 1.2636 1.2078 1.1906 1.1868 1.1889

West 3 ................ 1.1950 1.1617 1.1479 1.1445 1.1466

U.S.4 .................. 1.2150 1.1787 1.1603 1.1549 1.1603

Sales volume: 5 Pounds

MN/WI ................ 1,095,379 1,697,923 1,090,694 1,066,271 1,368,780

West 3 ................ 3,269,397 3,923,510 3,400,241 3,606,842 3,570,405

U.S.4 .................. 4,498,249 5,857,381 4,697,274 4,869,764 5,259,571

640 lb. blocks: Dol./lb.

Avg. price 2 U.S .......... 1.2390 1.1863 1.1701 1.1644 1.1654

Pounds

Sales volume 5 U.S ..... 1,055,345 863,666 1,098,164 1,121,786 1,186,785

500 lb. barrels: Dol./lb.

Avg. price: 2

MN/WI ................ 1.2177 1.2158 1.2131 1.2017 1.2147

Other ................. 1.1952 1.1920 1.1900 1.1886 1.1913

U.S ..................... 1.2046 1.2006 1.1996 1.1941 1.2010

Adj. price to 39 percent moisture:

MN/WI ................ 1.1384 1.1370 1.1295 1.1263 1.1290

Other ................. 1.1088 1.1058 1.1036 1.0980 1.1036

U.S ..................... 1.1211 1.1170 1.1144 1.1098 1.1141

Sales volume: 5 Pounds

MN/WI ................ 3,707,010 3,465,431 3,318,522 3,417,633 4,662,975

Other ................. 5,161,707 6,121,424 4,637,298 4,717,162 6,658,133

U.S ..................... 8,868,717 9,586,855 7,955,820 8,134,795 11,321,108

Moisture content: Percent

MN/WI ................ 34.75 34.77 34.48 34.92 34.37

Other ................. 34.25 34.25 34.22 33.96 34.15

U.S ..................... 34.46 34.44 34.33 34.36 34.24

1 Revised.

2 Prices weighted by volumes reported.

3 CA, ID, OR, and WA.

4 ‘‘Other Regions’’ included in U.S. total.

5 Sales as reported by cooperating manufacturers.

CHEDDAR CHEESE PRICES BY STYLE AND REGION

Style and region

Week ending—

Jun 20, 1997 Jun 13, 1997 1 Jun 6, 1997 May 30, 1997 May 23, 1997

40 lb. blocks: Dol./lb.

Avg. price: 2

MN/WI ................ 1.1906 1.1984 1.1928 1.1882 1.1912

West 3 ................ 1.1438 1.1453 1.1410 1.1407 1.1423
37

CHEDDAR CHEESE PRICES BY STYLE AND REGION—Continued

Style and region

Week ending—

Jun 20, 1997 Jun 13, 1997 1 Jun 6, 1997 May 30, 1997 May 23, 1997

U.S.4 .................. 1.1575 1.1608 1.1595 1.1561 1.1613

Sales volume: 5 Pounds

MN/WI ................ 1,733,258 1,327,932 1,839,944 1,563,877 2,045,475

West 3 ................ 4,005,425 3,359,164 3,820,455 3,908,574 3,842,841

U.S.4 .................. 6,049,131 4,854,962 5,838,913 5,654,293 6,139,062

640 lb. blocks: Dol./lb.

Avg. price 2 U.S .......... 1.1684 1.1723 1.1857 1.1751 1.1717

Pounds

Sales volume 5 U.S ..... 997,738 1,013,328 525,685 1,045,625 1,758,467

500 lb. barrels: Dol./lb.

Avg. price: 2

MN/WI ................ 1.1989 1.2100 1.2184 1.2146 1.2240

Other ................. 1.1877 1.1987 1.2013 1.1971 1.2068

U.S ..................... 1.1920 1.2033 1.2089 1.2051 1.2165

Adj. price to 39 percent moisture:

MN/WI ................ 1.1219 1.1273 1.1331 1.1370 1.1421

Other ................. 1.1038 1.1177 1.1191 1.1161 1.1259

U.S ..................... 1.1107 1.1216 1.1253 1.1256 1.1350

Sales volume: 5 Pounds

MN/WI ................ 3,908,680 3,912,327 3,665,436 3,359,592 4,230,711

Other ................. 6,313,356 5,759,175 4,587,078 4,040,825 3,281,805

U.S ..................... 10,222,036 9,671,502 8,252,514 7,400,417 7,512,516

Moisture content: Percent

MN/WI ................ 34.81 34.53 34.40 34.83 34.63

Other ................. 34.36 34.58 34.52 34.57 33.62

U.S ..................... 34.53 34.56 34.47 34.69 34.62

1 Revised.

2 Prices weighted by volumes reported.

3 CA, ID, OR, and WA.

4 ‘‘Other Regions’’ included in U.S. total.

5 Sales as reported by cooperating manufacturers.

CHEDDAR CHEESE PRICES

[Released Aug. 8, 1997, by the National Agricultural Statistics Service]

40 LB. BLOCK PRICES RISE 1.7 CENTS

Prices received for 40 lb. block Cheddar cheese rose 1.7 cents per lb. for the week

ending August 1, 1997. Prices in the MN/WI region rose over 1.2 cents per lb. Prices

for 500 lb. barrels also increased 4.4 cents per lb. and 640 lb. blocks increased 2.7

cents per lb.
38

Data Reliability: The survey collects price information on sales of natural, unaged,

Cheddar cheese at the first (wholesale) point of sale. Data are recorded for sales

transactions completed during the survey week. A transaction is considered complete when cheese is shipped out or title transfers. The 65 plants reporting account

for an estimated 85 percent of natural Cheddar cheese sales. Estimates for only the

current month are subject to revision.

The next Cheddar Cheese Prices report will be released at 8:30 a.m. ET on August

15, 1997.

CHEDDAR CHEESE PRICES BY STYLE AND REGION

Style and region

Week ending—

Aug 1, 1997 Jul 25, 1997 1 Jul 18, 1997 Jul 11, 1997 Jul 4, 1997

40 lb. blocks: Dol./lb.

Avg. price: 2

MN/WI ................ 1.2753 1.2636 1.2078 1.1906 1.1868

West 3 ................ 1.2160 1.1950 1.1617 1.1479 1.1445

U.S.4 .................. 1.2320 1.2150 1.1787 1.1603 1.1549

Sales volume: 5 Pounds

MN/WI ................ 1,072,017 1,095,379 1,697,923 1,090,694 1,066,271

West 3 ................ 3,164,620 3,269,397 3,923,510 3,400,241 3,606,842

U.S.4 .................. 4,483,640 4,498,972 5,857,381 4,697,274 4,869,764

640 lb. blocks: Dol./lb.

Avg. price 2 U.S .......... 1.2664 1.2390 1.1863 1.1701 1.1644

Pounds

Sales volume 5 U.S ..... 478,905 1,055,345 863,666 1,098,164 1,121,786

500 lb. barrels: Dol./lb.

Avg. price: 2

MN/WI ................ 1.2443 1.2177 1.2158 1.2131 1.2017

Other ................. 1.2437 1.1948 1.1920 1.1900 1.1886

U.S ..................... 1.2440 1.2044 1.2006 1.1996 1.1941

Adj. price to 39 percent moisture:

MN/WI ................ 1.1768 1.1384 1.1370 1.1295 1.1263

Other ................. 1.1555 1.1089 1.1058 1.1036 1.0980

U.S ..................... 1.1649 1.1212 1.1170 1.1144 1.1098

Sales volume: 5 Pounds

MN/WI ................ 4,006,256 3,707,010 3,465,431 3,318,522 3,417,633

Other ................. 5,017,545 5,186,678 6,121,424 4,637,298 4,717,162
39

CHEDDAR CHEESE PRICES BY STYLE AND REGION—Continued

Style and region

Week ending—

Aug 1, 1997 Jul 25, 1997 1 Jul 18, 1997 Jul 11, 1997 Jul 4, 1997

U.S ..................... 9,023,801 8,893,688 9,586,855 7,955,820 8,134,795

Moisture content: Percent

MN/WI ................ 35.50 34.75 34.77 34.48 34.92

Other ................. 34.34 34.27 34.25 34.22 33.96

U.S ..................... 34.86 34.47 34.44 34.33 34.36

1 Revised.

2 Prices weighted by volumes reported.

3 CA, ID, OR, and WA.

4 ‘‘Other Regions’’ included in U.S. total.

5 Sales as reported by cooperating manufacturers.

MILK MARKETING ORDERS

Senator SPECTER. And beyond the cheese issue, which I understand is limited, I do not see any short-term fix in all that has been

testified to. I understand you are buying more cheese and you are

putting more demand in the market, which would raise the price.

But the milk marketing orders, we are talking about a long time,

until April 1999. Talking about establishing a different milk price,

you are talking about 6 months. I do not see anything that is very

fast.

Perhaps some of the other witnesses will have some more light

to shed on that subject.

Thank you, Mr. Chairman.

Senator COCHRAN. Thank you.

Senator Kohl.

Senator KOHL. I just want to round out the discussion. You are

saying that reforming the NCE and that whole process, just as a

matter of fact, is not going to have a big impact on the price of

milk. You are saying it is the formula price, the milk marketing

order, that has to——

Secretary GLICKMAN. A major impact.

Senator KOHL. The big impact will come from that?

Secretary GLICKMAN. The Cheese Exchange can have some impact.

Senator KOHL. Some impact, right.

Secretary GLICKMAN. Yes; that is right.

Senator KOHL. But you do not want to mislead——

Secretary GLICKMAN. That is correct.

Senator KOHL [continuing]. Farmers, whether they be from

Pennsylvania or Wisconsin or wherever into thinking that there is

a huge impact that the reform of the NCE is going to have. You

are stating it as a matter of fact, not as a matter of opinion.

Secretary GLICKMAN. I think you have characterized it correctly.

Senator KOHL. Now, on the other hand, in answer to those of us

who want some short-term improvements, you are bullish about

the price of milk over the short term?

Secretary GLICKMAN. Based upon the experts that work for the

Department of Agriculture, the answer is yes. And you know as

well as I do, the markets are variable. But, basically, we think

things look pretty good over the next few months.
40

Mr. COLLINS. I would agree with that, but I would have to be the

economist. On the other hand, you know, anything can happen.

Right now, our projections are based on a very small increase in

milk production in 1997. If we were to get a sudden increase in

milk production, with productivity coming back—which we have

not seen in 2 years—and cheese inventories are fairly high right

now—we could see some weaker milk prices. But, overall, the

trend, we think, is for stronger prices for the year.

Senator KOHL. I thank you.

Thank you, Mr. Chairman.

Senator COCHRAN. Thank you, Mr. Secretary, for your attendance

and your contribution to this hearing. We appreciate it very much.

Secretary GLICKMAN. We will get Senator Specter his names, and

hopefully phone numbers.

Senator COCHRAN. Your Rolodex, that is what he wants.

Senator SPECTER. Thank you very much.
(41)

NONDEPARTMENTAL WITNESSES

STATEMENT OF ALAN T. TRACY, SECRETARY, WISCONSIN DEPARTMENT OF AGRICULTURE, TRADE AND CONSUMER PROTECTION

INTRODUCTION OF WITNESS

Senator COCHRAN. Alan Tracy, the Secretary of the Department

of Agriculture, Trade and Consumer Protection, from the State of

Wisconsin, will be our next witness.

Mr. Tracy, thank you for being here. And, Senator Kohl, I yield

to you for any introductory comments you would like to make.

Senator KOHL. Well, I want to welcome, Mr. Tracy and Mr. Brey,

from Wisconsin, who are here to testify. I will not be able to stay

through the entire hearing. But we have two outstanding gentlemen from Wisconsin, who are going to shed a great deal of light

and information on this whole topic. And I think we are fortunate

to have you here today.

Senator COCHRAN. Mr. Tracy, you may proceed.

STATEMENT OF ALAN TRACY

Mr. TRACY. Thank you very much, Mr. Chairman and Senator

Kohl. I very much appreciate your arranging for me to be here

today.

I do want to apologize on behalf of Governor Thompson, who had

hoped to be here today. And I would hope to pass that word directly to Senator Specter in particular, because Governor Thompson had planned to come out earlier, when another hearing had

been tentatively scheduled, responding to Senator Specter. And unfortunately he was not able to accommodate that schedule for

today, but did send me in his stead.

I appreciate the opportunity to address you regarding alternatives to the National Cheese Exchange in determining milk

prices. Farm milk prices and the mechanisms for determining them

are of utmost importance to Wisconsin farmers and the Wisconsin

economy. Wisconsin leads the Nation in the number of dairy farmers, in the number of dairy cows and in the production of cheese.

The dairy industry contributes over $17 billion to Wisconsin’s economy—nearly 10 percent of our State’s overall economic output.

Just about 1 year ago, our Department released a report, detailing the findings of a comprehensive study on cheese pricing and

trading activities on the National Cheese Exchange. That study

was conducted by researchers at the University of Wisconsin, at

our request and under the authority of our department to investigate business practices in Wisconsin. The report stimulated widespread interest and debate about the National Cheese Exchange.

Its findings were of particular concern because of the link between the National Cheese Exchange prices and the milk prices

paid to farmers. While less than 2 percent of all bulk cheddar
42

cheese is traded on the National Cheese Exchange—and in some

years, less than one-tenth of 1 percent of all cheese—the National

Cheese Exchange price largely determines the basic formula price,

which is the price of manufacturing milk under the entire Federal

milk pricing system. It is vitally important that the underlying

market or markets be competitive and that farmers can have confidence that prices accurately reflect the supply/demand situation

for milk.

Following that report, Governor Thompson convened a task force

on cheese pricing to make recommendations to improve the current

system of pricing for the benefit of the dairy industry and consumers. I am submitting a copy of the Governor’s task force January

1 report for the record.

[The information follows:]

GOVERNOR’S TASK FORCE ON CHEESE PRICING

INTRODUCTION

The Governor’s Task Force on Cheese Pricing was named in May, 1996, amid ongoing concern about the cheese pricing system, and the influence of cheese prices

on the price for manufacturing milk. The Task Force’s charge was to ‘‘make recommendations to improve the current cheese pricing system for the benefit of the

dairy industry and consumers.’’

The Task Force held five meetings between July and December 1996. Membership

included dairy producers, cheese makers, dairy marketers, and industry and state

leaders. A complete list of members is included in Appendix 1. The meetings were

well attended by dairy producers, farm and local media, and representatives from

state and federal dairy related groups and agencies.

The Task Force recommendations address the link between National Cheese Exchange prices and milk prices, alternative pricing mechanisms for cheese and milk,

cheese market information, and oversight and operating rules of the National

Cheese Exchange.

BACKGROUND

Changes in U.S. dairy policy have resulted in market forces playing a larger role

in pricing milk and dairy products. For most of the period from the early 1960’s to

the late 1980’s, federal dairy price supports were instrumental in dairy pricing. Except for brief periods, cheese, butter, and nonfat dry milk prices were at or close

to government purchase prices. Consequently, milk prices were driven by support

prices, and price changes were small and predictable.

Large milk surpluses and resulting large price support purchases and high treasury costs led to pressures to reduce the role of government in pricing milk. The support price for milk was reduced from $13.10 per hundredweight in the early 1980’s

to $10.10 in the early 1990’s. The support program became more of a safety net than

a driver of milk prices. Manufacturing milk prices since the late 1980’s have been

consistently above the federal support level. More important, prices have been considerably more volatile.

With market forces replacing the government as the driver of milk and dairy

product prices, attention in the dairy industry focused on how market prices were

determined. The Basic Formula Price (BFP) is used in the Federal Milk Marketing

Order system to establish minimum prices for milk throughout the U.S. Cheese

dominates the use of milk in Minnesota and Wisconsin, where the BFP is derived.

Cheese prices are determined in large part by weekly price ‘‘opinions’’ for block and

barrel cheddar cheese. These opinions are arrived at by observers of transactions

on the National Cheese Exchange (NCE), a wholesale cash market located in Green

Bay, Wisconsin.

Members of the National Cheese Exchange trade cheese by open outcry in weekly

trading sessions that last about one-half hour. On an average annual basis, consummated sales on the NCE represent from less than 0.5 percent to 2 percent of

annual cheddar cheese production. But the price opinions based on NCE transactions are extensively used as reference prices in purchase contracts and in spot

market transactions for all types of cheese.
43

1 A copy of the summary report, ‘‘Cheese Pricing: A Study of the National Cheese Exchange;

Summary, Conclusions, and Policy Initiatives,’’ is included as Appendix 3. 2 A listing of ail materials provided to Task Force members during their deliberations is provided in Appendix 2. Copies of individual documents listed are available by contacting the Bureau of Trade Practices, Wisconsin Department of Agriculture, Trade and Consumer Protection,

P.O. Box 8911, Madison, Wisconsin, 53704–8911, telephone 608–224–4918.

In other words, trading activity on the NCE has an enormous influence on cheese

prices, and, because of the prominence of cheese in establishing the BFP, on milk

prices throughout the U.S.

The impact of the NCE on regulated milk prices underlies public policy concerns

regarding NCE trading activities. A recent investigation of the NCE involved a comprehensive economic study conducted by researchers affiliated with the University

of Wisconsin-Madison Food Systems Research Group at the request of and in cooperation with the Wisconsin Department of Agriculture, Trade and Consumer Protection, under its authority to investigate business practices in the state.

A report released March 19, 1996, detailed the findings of the study.1 The report

concluded that, ‘‘As currently organized, the Exchange appears to facilitate market

manipulation.’’ The report also concluded that ‘‘* * * the National Cheese Exchange

was not an effectively competitive price discovery mechanism during 1988–93.’’ Several specific problems with the NCE were identified along with related suggestions

for alleviating competitive concerns.

The report stimulated widespread interest and debate about the NCE and cheese

pricing, including a Congressional hearing in May, 1996. NCE traders vehemently

denied allegations of misconduct. Along with some other industry participants, traders claimed that the Exchange accurately reflected supply and demand conditions

for cheese.

In response to waning public confidence in the NCE, especially in its role as a

driver of regulated milk prices, Wisconsin Governor Tommy G. Thompson convened

a Task Force on Cheese Pricing. Members were chosen to reflect the various perspectives of the dairy industry. The Task Force was charged with making recommendations to improve the current pricing system for the benefit of the dairy industry and consumers, and to remove the link between the National Cheese Exchange price for cheese and the basic formula price for milk.

The Task Force sought a general overview of various aspects of the cheese and

dairy pricing system before making recommendations for improvement. At their first

meeting in July, Task Force members reviewed the background and conclusions of

the UW/DATCP report. At the September meeting, members heard information

about the operations and structure of the National Cheese Exchange, the cash market for cheese; and the Coffee, Sugar, and Cocoa Exchange, which trades futures

contracts for cheese, butter, nonfat dry milk and milk. A representative of the U.S.

Department of Agriculture’s Dairy Market News Service explained the USDA cheese

price reporting series. Task Force members also heard information detailing California’s mandatory price reporting system for nonfat dry milk and other dairy products.

During the October, November and December meetings, the Task Force accomplished its charge. It agreed on criteria useful for evaluating proposed recommendations, then discussed the various proposals that had been submitted for consideration by Task Force members. The proposals addressed the structure and organization of the National Cheese Exchange, participation in and access to trading on the

National Cheese Exchange, improvements to cheese market information services,

and alternative reference prices for milk and cheese. A subcommittee of five Task

Force members was formed to finalize the report, which was then sent to all Task

Force members for final approval.2

REPORT RECOMMENDATIONS

Evaluation Criteria

The Task Force agreed on several criteria for evaluating proposals to improve the

cheese pricing system. These criteria are based on the characteristics of a perfect

market, which, while never observed in real life, provide guidance as to aspects of

market structure that lead to desirable market performance. A perfectly competitive

market consists of many buyers and sellers who buy and sell a homogeneous product. All participants have full information about the product and prices. Price is

driven by supply and demand, thus no individual or firm can influence the price.

Market participants are freely able to enter and exit the market.

Posed as questions, the criteria used to evaluate the proposed recommendations

were:
44

—Does the proposal encourage more buyers and sellers to participate in trading

on the National Cheese Exchange?

—Does the proposal make it easier for current and potential traders to use the

National Cheese Exchange?

—Does the proposal mitigate the potential influence of large traders vis-a-vis

small traders?

—Does the proposal expand the amount of market information and equalize its

accessibility to traders?

—Does the proposal improve public confidence in the National Cheese Exchange?

—Does the proposal help the market to better reflect supply and demand?

Recommendations

After careful consideration, the Task Force advances these recommendations to

improve the current cheese pricing system and to remove the link between NCE

prices and milk prices paid to farmers.

In addition to these specific recommendations, the Task Force recommends that

the Governor lend encouragement and support to dairy farmers and marketers for

efforts to expand demand for dairy products and to increase the value added by producers and manufacturers.

ADDRESSING THE LINK BETWEEN THE NATIONAL CHEESE EXCHANGE AND MILK PRICES

1. Recommend that the U.S. Department of Agriculture should no longer use the

National Cheese Exchange price in the price adjustor used to determine the basic

formula price (BFP) for manufacturing milk. The price of manufacturing milk under

Federal Milk Marketing Orders should be based on supply of and demand for milk

used in the manufacture of dairy products.

The USDA could accomplish this by:

—First, substituting the National Agricultural Statistics Service’s (NASS) reported national average cheese price for the NCE price in the BFP as soon as

the NASS price is available and reliable (mandatory reporting, if necessary for

statistical reliability);

—and revising the weighting in the basic formula price adjustment factor to reflect national production of cheddar cheese, nonfat dry milk and butter.

And then:

—Begin substituting prices from the Coffee, Sugar and Cocoa Exchange’s ‘‘BFP

Milk Futures Contract,’’ or similar contract prices, for the BFP. A schedule

could be developed that increases the weight assigned to the milk futures price

as the volume of milk futures contracts traded increases;

Or:

—Replacing the BFP with a national survey of manufacturing milk prices, less

performance premiums and over-order values.

And simultaneously:

—Moving toward the deregulation of pricing within the Federal Milk Marketing

Order System, including elimination of the basic formula price.

Discussion Points:

—The NCE price was never intended to be an indicator of national supply of and

demand for milk. Any of these alternative measures have the potential to be

more reliable indicators of market supply of and demand for milk.

—The current BFP is highly influenced by the NCE price in two ways: (1) The

base month Minnesota-Wisconsin price series (M-W price) used in the BFP is

highly correlated with the NCE price because most of the survey plants make

cheese that is priced in reference to the NCE opinion; and (2), Over ninety percent of the weight in the price adjustment favor used in the BFP is based on

the NCE price.

—The NCE price results from trading that represents less than two percent of all

bulk cheddar cheese transacted nationally. In the short term, the U.S. Department of Agriculture should include a cheese price in the BFP that more broadly

represents cheese market transactions, and should weight manufactured milk

product prices by the proportion of national production of these products, rather

than on Upper Midwest production. In the long term, any federal order price

for milk used in manufacturing should reflect markets for all manufacturing

uses, not solely cheese.

—The NCE Board fully agrees with removing the NCE price from the calculation

of the BFP.

—The USDA recently announced that the National Agricultural Statistics Service

(NASS) will begin reporting a probability-based national average cheddar

cheese price.
45

—The newly-reported NASS price would be more broadly based than the NCE

price and is expected to include spot and contracted sales prices for bulk cheese.

However, the NASS price will continue to move in close concert with the NCE

price as long as prices for contracted and spot sales are pegged to NCE opinions.

—The CSCE and the CME recently initiated futures contracts for Grade A milk.

These contracts represent possible alternative indicators for manufactured milk

value, but Grade A futures prices are characterized by an unpredictable basis

relative to the BFP.

—The CSCE is seeking authorization to trade a cash settlement BFP contract.

That contract, or a BFP contract on another futures contract market, could potentially encourage broad participation of milk producers, producer cooperatives,

users and manufacturers of milk-based products, as well as market speculators,

in determining the value of manufacturing milk.

—The futures price could be phased in as a replacement for the BFP as the market achieves sufficient volume to be viewed as a reliable indicator of the market

value for manufacturing milk.

—The alternative of replacing the BFP with a national milk price based on a survey of manufacturing plants, less over-order values and performance premiums,

is consistent with the Upper Midwest Dairy Coalition’s proposal for federal

order reform.

—A national price survey would base milk prices on the prices that dairy plants

actually pay nationally, not just in the midwest, for manufacturing milk (both

grade A and grade B.)

—Deregulation of milk pricing, which would eliminate the need for setting a basic

formula price, could allow milk prices to be competitively determined between

buyer and seller, according to supply of and demand for milk.

ALTERNATIVE PRICE DISCOVERY MECHANISMS FOR CHEESE

2. Recommend that the Coffee, Sugar and Cocoa Exchange and/or the Chicago

Mercantile Exchange establish a cash market for cheese.

Discussion Points:

—Both these exchanges would provide more frequent (daily) trading sessions than

the NCE provides currently.

—These exchanges are currently regulated by the Commodity Futures Trading

Commission.

—These exchanges can provide anonymous trading and offer clearinghouse capabilities and other support to members.

—Provides an opportunity for more direct linkage between the cash and futures

markets; may improve liquidity in the futures markets and may improve participation in the futures markets.

IMPROVING MARKET INFORMATION

3. Recommend that USDA expand the weekly Wisconsin Assembly Point Price series to a statistically reliable and regional series that would include major manufacturing areas. (Mandatory reporting, if needed for statistical reliability.)

Discussion Points:

—Improved market information would help buyers and sellers identify trading opportunities and track regional market conditions.

—This series would represent an alternative reference price for contracted cheese

sales.

—Weekly and regional cheese market information would be more useful than

monthly, national information for cheese buyers and sellers.

REGULATORY OVERSIGHT OF THE NATIONAL CHEESE EXCHANGE

4. Recommend that the Commodity Futures Trading Commission and the Federal

Trade Commission re-evaluate their regulatory authorities regarding the National

Cheese Exchange.

Discussion Points:

—The NCE is a national market and regulation of this market is more appropriate at the federal level.

—State regulation would be ineffective if it merely resulted in the Exchange moving out of Wisconsin.

—The NCE Board has previously requested oversight by the Commodity Futures

Trading Commission.
46

OPERATING RULES FOR THE NATIONAL CHEESE EXCHANGE

5. Recommend to the NCE Board that they consider imposing a limit on the daily

price movement of NCE prices.

Discussion Points:

—There is a strong public interest in the NCE and limits may improve public confidence.

—Daily limits would allow the industry time to re-evaluate supply and demand

factors when market conditions are changing rapidly.

—However, limits on price movements may limit participation and volume of trading on the NCE.

—Limits on price movements may cause prices in the short term to be temporarily

above or below prices reflecting supply and demand conditions.

6. Recommend to the NCE Board that they include one or more public (non-NCE

member) members on their board.

Discussion Points:

—Addition of public members recognizes the public interest in the Exchange as

a driver of milk prices throughout the U.S.

—Public members would offer a broader perspective to the exchange board and

could offer expertise that would be useful in establishing policy and trading

rules.

—May improve public confidence in the National Cheese Exchange.

7. Recommend to the NCE Board that the identities of buyers and sellers be anonymous during trading.

Discussion Points:

—Not knowing the identity of the buyers and sellers would mitigate the potential

influence of large traders vis-a-vis small traders. Large traders may be perceived as having better information, which could inhibit other traders from taking an opposite position in the market.

—Anonymous trading is common in futures contract markets, which, like the

NCE, are national in scope and have broad public scrutiny.

—Anonymous trading may encourage participation in trading on the Exchange.

8. Recommend to the NCE Board that they consider implementing more frequent

trading sessions for bulk cheese transactions once remote electronic access is in

place.

Discussion Points:

—The Exchange will be implementing remote electronic access to their current

weekly trading sessions in 1997. This is a positive first step towards improving

participation and access to trading on the Exchange.

—Increasing the frequency of trading on the Exchange to more than once weekly

may encourage broader participation in trading on the Exchange (assuming cost

effectiveness.)

More frequent trading may result in less volatile price movements.

Remote electronic trading facilitates maintaining the anonymity of traders.

APPENDIX 1

GOVERNOR’S TASK FORCE ON CHEESE PRICING MEMBER LIST

Chair, Mr. Robert H. Burns, President, ConAgra Refrigerated Foods, 2000 S. Batavia Avenue, Geneva, IL 60134

Deborah Van Dyk, Schreiber Foods, Inc., 425 Pine Street, PO Box 19010, Green

Bay, WI 54307–9010

Mr. Bernard Golbach, President, Master’s Gallery Foods, Inc., 328 County Hwy.

PP, PO Box 170 Plymouth, WI 53073–0170

Mr. Larry Lemmenes, President and General Manager, Alto Dairy Cooperative,

N3545 County EE, PO Box 550, Waupun, WI 53963

Ms. Marsha Glenn, Vice President, Kraft Foods, Inc., 1 Kraft Court, Glenview, IL

60025

Mr. Bill McCoshen, Secretary, Wisconsin Department of Development, 123 W.

Washington Ave., PO Box 7970, Madison, WI 53707–7970

Mr. Wilfrid Turba, Retired Dairy Farmer, N 9617 Turba Court, Elkhart Lake, WI

53020

Mr. Will Hughes, Wisconsin Federation of Cooperatives, 30 W. Mifflin, Madison,

WI 53703

Dr. Ed Jesse, Associate Dean, Agriculture Hall, Room 146, University of Wisconsin-Madison, Madison, WI 53706

Mr. Jack Sturm, President, A. Sturm and Sons, 215 Center Street, PO Box 287,

Manawa, WI 54949
47

Mr. Bob Wagner, President, Weyauwega Milk Products, 105 E. Third Ave., PO

Box 410, Weyauwega, WI 54983

Mr. Alan Tracy, Secretary, Wisconsin Department of Agriculture, Trade and

Consumer Protection, 2811 Agriculture Dr., PO Box 8911, Madison, WI 53708

Mr. Bob Thelen, Dairy Farmer, Route 2, Box 39, La Farge, WI 54639

Mr. Gary Anderson, Dairy Farmer, Route 1, Box 184, Cecil, WI 54111

Mr. Richard Gould, President, National Cheese Exchange, 130 E. Walnut St., PO

Box 1844, Green Bay, WI 54301–1844

Mr. W. O’Neill McDonald, President, SuperValu-Great Lakes Division, 7400 95th

Street, PO Box 330, Pleasant Prairie, WI 53158–0330

Mr. Gerald Jaeger, Dairy Farmer, N1387 Rolling Drive, Campbellsport, WI

53010–2250

Mr. Jon Peterson, Dairy Farmer, Route 2, Box 170, Cashton, WI 54619

Darin Von Ruden, Dairy Farmer, Rt I Box 23A, Westby, WI 54667

Jim Holte, Dairy Farmer, N2478 CTY H, Elk Mound, WI 54739

APPENDIX 2

Information and materials associated with and leading to the July 25, 1996 Task

Force meeting

Letter sent to members of the Governor’s Task Force on Cheese Pricing, dated

May 14, 1996, from Governor Tommy G. Thompson.

Draft of Press release ‘‘Governor Appoints Cheese Pricing Task Force,’’ dated May

14, 1996.

Letter sent to Alan T. Tracy, Secretary of the Department of Agriculture, Trade

and Consumer Protection, from Governor Tommy G. Thompson regarding Mr. Tracy’s agreement to serve as a member of the Task Force on Cheese Pricing.

Introductory letter containing information about the goals of the Task Force,

dated July 10, 1996 and sent to the members of the Cheese Task Force from Alan

T. Tracy, Secretary of the Department of Agriculture, Trade and Consumer Protection.

‘‘Cheese Pricing, A Study of the National Cheese Exchange.’’ Mueller, Willard F.,

Bruce W. Marion, Maqbool H. Sial, and F.E. Geithman. The Department of Agriculture, Trade and Consumer Protection and the Department of Agricultural Economics, University of Wisconsin-Madison. March 1996.

‘‘Cheese Pricing: A Study of the National Cheese Exchange. Summary, Conclusions, and Policy Initiatives.’’ Mueller Willard F., Bruce W. Marion, Maqbool H. Sial,

and F.E. Geithman. The Department of Agriculture, Trade and Consumer Protection

and the Department of Agricultural Economics, University of Wisconsin-Madison.

March 1996. (Included in this report.)

National Cheese Exchange Investigation, Summary Remarks. March 19, 1996.

National Cheese Exchange Member list.

Agenda for Thursday, July 25, 1996 Governor’s Task Force on Cheese Pricing

meeting.

Map to Prairie Oak Office Building.

Preliminary Draft of ‘‘Proposed Order of the State of Wisconsin Department of Agriculture, Trade and Consumer Protection Adopting Rules,’’ dated March 15, 1996.

National Cheese Exchange Investigation, Questions and Answers, March 19,

1996.

National Cheese Exchange Investigation, Federal and State Regulatory Authority.

Statement of Alan T. Tracy, Secretary of the Department of Agriculture, Trade

and Consumer Protection, on bulk cheese market pricing issues, before the U.S.

House Subcommittees on Livestock, Dairy and Poultry; and Risk Management and

Specialty Crops, May 15, 1996.

Submission by National Cheese Exchange, Inc., to the House Subcommittees on

Livestock, Dairy and Poultry, and the House Subcommittee on Risk Management

and Specialty Crops, May 15, 1996.

Statement of Willard F. Mueller, William Vilas Research Professor, Emeritus Department of Agriculture and Applied Economics, University of Wisconsin-Madison,

before Joint Hearings of the House Subcommittee on Livestock, Dairy and Poultry,

and the House Subcommittee on Risk Management and Specialty Crops, May 15,

1996.

Statement of Bruce W. Marion, Professor of Agricultural Economics and Director,

Food Systems Research Group, University of Wisconsin-Madison, before Joint Hearings of the House Subcommittee on Livestock, Dairy and Poultry, and the House

Subcommittee on Risk Management and Specialty Crops, May 15, 1996.

Written testimony of Betsy Holden, Executive Vice President of Kraft Foods, Inc.

and General Manager of the Kraft Cheese Division, before Joint Hearings of the
48

House Subcommittee on Livestock, Dairy and Poultry, and the House Subcommittee

on Risk Management and Specialty Crops May 15, 1996.

Tape recording, consisting of two cassettes, of the complete July 25, 1996 Task

Force meeting.

Information and materials associated with and leading to the September 19, 1996

Task Force meeting.

Summary of Action from the July 25, 1996 Task Force meeting.

Minutes from the July 25, 1996 Task Force meeting.

Letter, dated September 6, 1996, sent to Task Force members from Bob Burns,

Vice Chair, Governor’s Task Force on Cheese Pricing.

Agenda for the September 19, 1996 Task Force Meeting.

Amended Agenda for September 19, 1996 Governor’s Task Force on Cheese Pricing meeting.

Letter, dated September 19, 1996, from the National Cheese Exchange, Inc., to

the Governor’s Task Force on Cheese Pricing, concerning the operations and structure of the National Cheese Exchange, Inc.

Letter, dated June 6, 1996 to Alan T. Tracy, Secretary of the Department of Agriculture, Trade and Consumer Protection, from Blake Imel, Acting Director of U.S.

Commodity Futures Trading Commission, Division of Economic Analysis, regarding

the report ‘‘Cheese Pricing: A Study of the National Cheese Exchange.’’

Letter, dated July 26, 1996, to Alan T. Tracy, Secretary of the Department of Agriculture, Trade and Consumer Protection, from Donald S. Clark, Secretary of the

Federal Trade Commission, regarding the report ‘‘Cheese Pricing: A Study of the

National Cheese Exchange.’’

Letter from Richard E. Rominger, Deputy Secretary of the Department of Agriculture, to Alan T. Tracy, Secretary of the Department of Agriculture, Trade and

Consumer Protection, regarding the report ‘‘Cheese Pricing: A Study of the National

Cheese Exchange.’’

‘‘Responses to Hearing Testimony and Subcommittee Members’ Questions.’’

Mueller Willard F., Bruce W. Marion. The University of Wisconsin-Madison. June

18, 1996.

‘‘Dairy Market News,’’ Week of September 2–6, 1996, Volume 63, Report 36.

‘‘Dairy Market News,’’ Week of September 9–13, 1996, Volume 63, Report 37.

‘‘Review of Econometric Findings in the University of Wisconsin Study of Prices

on the National Cheese Exchange.’’ Gardner Bruce L. University of Maryland. July

1996.

‘‘Comments on Bruce Gardner’s Review of the University of Wisconsin Study of

Cheese Pricing on the National Cheese Exchange.’’ Marion, Bruce W., Willard F.

Mueller. University of Wisconsin-Madison. September 19, 1996.

News Release, ‘‘Economist Calls Report on National Cheese Exchange ‘Seriously

Flawed’,’’ July 25, 1996.

Testimony of James J. Bowe, President of Coffee, Sugar and Cocoa Exchange, Inc.,

before the Joint Hearings of the House Subcommittee on Livestock, Dairy and Poultry, and the House Subcommittee on Risk Management and Specialty Crops, May

19, 1996.

The National Cheese Exchange, Inc. Rules Regulating Trading, July 1996.

Tape recording, consisting of two cassettes, of the complete September 19, 1996

Task Force meeting.

Video from David Ikari, California Department of Food and Agriculture, shown

at September 19, 1996 Task Force meeting.

Information and materials associated with and leading to the October 17, 1996 Task

Force meeting.

Letter Dated October 9, 1996 sent to Task Force members concerning the October

17, 1996 meeting from Robert Burns, Vice Chair, Governor’s Task Force on Cheese

Pricing.

Map to Ramada Inn, site of Task Force meeting.

Agenda for the October 17, 1996 meeting of the Governor’s Task Force on Cheese

Pricing.

Summary of Action from the September 19, 1996 Task Force Meeting.

Letters from the State of California Department of Food and Agriculture concerning changes to the current Stabilization and Marketing Plans for Market Milk, received from David Ikari, along with video tape (shown at September 19, 1996 meeting).

Graphs showing various price relationships between National Cheese Exchange

Prices, Federal Milk Order prices, Wisconsin Assembly Point Spot prices and CSCE

futures prices.
49

Recommendation worksheets for members of the Governor’s Task Force on Cheese

Pricing from October 17, 1996 meeting.

October 17, 1996 meeting topic outline.

Examples of Alternative BFP for the month of April ’96, for the month of June

’96, and Proposed Phasing-in of Alternative BFP.

October 17, 1996 DATCP Rule Proposal.

A March 28, 1996 memo from Alan T. Tracy, Secretary of the Department of Agriculture, Trade and Consumer Protection, to the Board of Agriculture, Trade and

Consumer Protection concerning the National Cheese Exchange; Hearing Draft

Rule.

An October 9, 1996 memo from Alan T. Tracy, Secretary of the Department of Agriculture, Trade and Consumer Protection, to the Task Force members regarding

proposals for the Task Force discussion.

Letter from Jon R. Peterson, Task Force Member, sent to John Norton, Director

of the Bureau of Trade Practices, regarding Mr. Peterson’s proposals for cheese pricing.

Letter, dated October 7, 1996, from Phillip F. Gudgeon, Dairy Producer and Commodity Futures Broker, sent to Jon R. Peterson, Task Force Member, concerning

dairy’s price discovery system.

Letter, dated October 7, 1996, from Bernard V. Golbach, Chairman of Masters

Gallery Foods, sent to John C. Norton, Director of the Bureau of Trade Practices,

regarding the October 17, 1996 Task Force meeting.

FAX, dated October 3, 1996, from Ed Jesse, Task Force Member, to John C. Norton, Director of the Bureau of Trade Practices, containing recommendations and criteria for evaluating proposals for change in cheese pricing.

Letter, dated October 1, 1996, sent to John C. Norton, Director of the Bureau of

Trade Practices, from John A. Sturm, President of A. Sturm & Sons Inc., concerning

proposals on how to improve the cheese pricing system.

Submitted recommendations to the Governor’s Task Force on the Cheese Exchange by Gary L. Anderson, Task Force Member.

CSCE Nearby Cheddar Contract and NCE.

Memo, dated March 28, 1996, from Alan T. Tracy, Secretary Department of Agriculture, Trade and Consumer Protection, to the Board of Agriculture, Trade and

Consumer Protection, regarding the National Cheese Exchange; Hearing Draft Rule.

Tape recording, contained on two cassettes, of the complete October 17, 1996 Task

Force Meeting.

Information and materials associated with and leading to the November 14, 1996

Task Force meeting.

Letter, dated November 7, 1996 and sent to Task Force members concerning the

November 14, 1996 Task Force Meeting, from Robert Burns, Vice Chair, Governors

Task Force on Cheese Pricing.

Letter, dated November 1, 1996, distributed to the members of the Task Force on

Cheese Pricing from John C. Norton, Director of the Bureau of Trade Practices, regarding an additional meeting in December.

Letter, dated November 1, 1996 from Governor Thompson to the members of the

Task Force on Cheese Pricing concerning recommendations to improve the current

cheese pricing system.

Letter, dated November 13, 1996, from Governor Thompson and addressed to

Alan T. Tracy, Secretary of Agriculture, Trade and Consumer Protection, and Robert

Burns, Vice Chair of the Task Force on Cheese Pricing, concerning the Governor’s

recommendations.

FAX, dated November 13, 1996, from Ed Jesse, sent to John C. Norton, Director

of the Bureau of Trade Practices, concerning supplemental Cheese Task Force recommendations.

FAX article from the Coffee, Sugar & Cocoa Exchange titled ‘‘CSCE Files with

CFTC to Trade BFP Milk Contact.’’

Memo, dated November 18, 1996, from Ann Roth, Task Force Staff Support, to

the members of the Governor’s Task Force on Cheese Pricing, regarding establishing

a cash contact for the cheese on the CSCE.

Letter from Dan Glickman to Senator Feingold, dated October 29, 1996.

A letter, dated October 29, 1996, from R.J. Gould of the National Cheese Exchange, Inc. to John C. Norton, Director, Bureau of Trade Practices, Wisconsin Department of Agriculture, Trade and Consumer Protection, concerning the Governor’s

Task Force on Cheese Pricing.

Press release ‘‘Governor Expands Cheese Exchange Task Force’’, dated November

7, 1996.
50

Agenda of the November 14, 1996 Governor’s Task Force on Cheese Pricing meeting.

Summary of Action for Task Force meeting held on October 17, 1996.

Minutes of the October 17, 1996 Governor’s Task Force on Cheese Pricing meeting.

Statement from Upper Midwest Milk Producers Association, included with the

minutes of the October 17, 1996 meeting and distributed to the Task Force members

at the November 14, 1996 Task Force meeting.

Summary of Preliminary Proposals Still on the Table as of November 14, 1996.

‘‘Why do Corporations Have More Rights than You?’’ Democracy Unlimited of Wisconsin Cooperative. Madison, WI. Handed out by this group at Nov. 14 meeting.

‘‘The National Cheese Exchange: Impacts on Dairy Industry Pricing.’’ Hamm,

Larry G., Robert March. Dairy Markets and Policy-Issues and Options. Cornell University. February 1995.

Tape recording, contained on two cassettes, of the complete November 14, 1996

Task Force Meeting.

Information and materials associated with and leading to the December 5, 1996 Task

Force meeting.

A letter dated November 26, 1996 sent to the members of the Governor’s Task

Force on Cheese Pricing from Bob Burns, Vice Chair Governor’s Task Force on

Cheese Pricing, concerning the December 5, 1996 Task Force meeting.

Agenda for the December 5, 1996 Governor’s Task Force on Cheese Pricing meeting.

Map to the Dane County EXPO Center, where Dec. 5, 1996 meeting was held.

Summary of Action from the November 14, 1996 Task Force meeting.

Proposal to Replace the BFP submitted by Darin Von Ruden.

List of Proposals Adopted at the November 14, 1996 meeting.

FAX letter, dated November 25, 1996, from Commissioner, Gene Hugoson of the

Minnesota Department of Agriculture, to Secretary Glickman concerning the NCE

and pricing of cheese.

Information sheet dated November 18, 1996 and titled: ‘‘What is New With the

Governor’s Task Force on Cheese Pricing?’’

News release, December 5, 1996, from Farm Bureau News entitled ‘‘Farmers need

to take milk pricing to USDA, according to farmers on Task Force on Cheese Pricing.’’

Letter from Dory Kidder to the Task Force on Cheese Pricing concerning the pricing of cheese.

Letter, dated November 11, 1996, from Rod and Pam Olson, Dairy Producers, sent

to Robert Burns, Vice Chair of the Governor’s Task Force on Cheese Pricing, concerning their proposal for changes in the cheese pricing system.

Letter, dated November 26, 1996, from Marvin Zorn concerning the Green Bay

Cheese Exchange.

The Base Month Minnesota-Wisconsin Price and Basic Formula Price released

noon, C.S.T., December 5, 1996, from the Wisconsin Agricultural Statistics Service.

News release, dated December 3, 1996, from the United States Department of Agriculture titled ‘‘USDA Announces Suggested Milk Order Consolidations.’’

Family Farmers vs. Kraft FoodsTM. UW Greens. Madison, WI. Handed out by UW

Greens at this meeting.

Letter from Kevin Kirker to Governor Thompson, dated November 27, 1996, and

FAX to John C. Norton, Director of the Bureau of Trade Practices, for distribution

to the Task Force members.

Letter from John Peterson, received via FAX on December 4, 1996, to the Task

Force members regarding his recommendations for improving the system of cheese

pricing.

Tape recording, contained on two cassettes, of the complete December 5, 1996

Task Force Meeting.

Information received after final Task Force meeting

Letter from Richard J. Gould, President of the National Cheese Exchange, dated

December 26, 1996, objecting to the proposed Task Force on Cheese Pricing report.

This letter is addressed to Carol Svenson, of the Department of Agriculture, Trade

and Consumer Protection and Task Force Member.

Minutes of the December 5, 1996 Task Force meeting.
51
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53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
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TASK FORCE RECOMMENDATIONS

Mr. TRACY. I would like to just quickly summarize the recommendations in it. The first and lead recommendation is very

much to the point of these hearings. The recommendation is that

the U.S. Department of Agriculture should no longer use the National Cheese Exchange price in the price adjuster used to determine the basic formula price for manufacturing milk. The price of

manufacturing milk under a Federal milk marketing order should

be based on supply of and demand for milk used in the manufacture of dairy products. I will return to that one.

The next recommendation was that the Coffee, Sugar, and Cocoa

Exchange and/or the Chicago Mercantile Exchange establish a cash

market for cheese. That has not happened yet, but we have seen

some hope that that could occur.

The next recommendation was to recommend that USDA expand

the weekly Wisconsin Assembly Point Price series to a statistically

reliable and regional series that would include major manufacturing areas. And also mentioning the possibility of mandatory reporting, if necessary, for statistical reliability. And I am pleased that

USDA is proceeding on that recommendation.

The fourth recommendation was that the Commodity Futures

Trading Commission and the Federal Trade Commission reevaluate

their regulatory authorities regarding the National Cheese Exchange. And that is the very subject of a bill that Senator Kohl has

introduced.
76

Then there were four more recommendations that were directed

to the National Cheese Exchange board, dealing with such things

as daily price limits, anonymous trading, electronic trading, and so

on.

I would like to caution the subcommittee that these suggestions

are not magic solutions that will miraculously provide high, stable

milk prices for our Nation’s dairy farmers. With the end of the Federal dairy price support program in sight, we have left the era of

Government-supported, stable milk prices and entered the era of

market-driven national and even international pricing.

However, the task force suggestions would, if implemented, move

milk pricing to markets that are more competitive and that will

more accurately represent the supply and demand in milk for all

of its manufacturing purposes.

Returning to that first recommendation. The recommendation includes both an interim replacement for the National Cheese Exchange price in the current basic formula price, as well as longerterm replacements for the basic formula price itself. In the short

term, the NCE price can be replaced by a national average cheese

price, collected and reported by USDA’s National Ag Statistic Service. And you have heard a report on how that series is being developed.

In the longer term, we suggested a couple of alternatives. One

would be substituting an average monthly milk futures price for

the basic formula price or, two, replacing the basic formula price

with a competitively determined milk-pay price collected through a

national survey of prices that dairy plants actually pay for milk.

The task force has also recommended that USDA and the Federal dairy policy should be moving toward the deregulation of milk

pricing, including the eventual elimination of setting a basic formula price for milk.

It is easy to get lost in the complex details of the milk marketing

system, but for the purposes of illustration, let us compare the current pricing mechanism with milk to the pricing mechanism for

corn. Imagine for a moment that Cargill, Continental Grain and

Mitsubishi sat down once a week with Ralston Purina, Nabisco,

and Tyson’s Foods, just for examples, to buy and sell a few trainloads of corn. And that regardless of whether any corn actually

changed hands, the prices at which corn was traded or was at least

offered or bid became the price of corn for virtually every corn

transaction in the coming month. Corn farmers would be up in

arms.

Yet this is just about what happens for milk, based on trading

on the Cheese Exchange, where a handful of large companies set

the price for more than 100,000 dairy farmers in the United States.

Dairy farmers, however, unlike corn farmers, do not have the option of storing their product to wait for a better price. And currently, they do not even know what they will be paid until the

month after they ship their milk.

Now, compare that scenario that I gave for what actually does

occur in the corn market. Every day, thousands of farmers and

hundreds of grain elevators sell and buy corn or agree to buy and

sell corn at a future time using prices from the futures contract

markets. In addition, Wall Street investors and market speculators
77

bring their knowledge and their expertise to the futures market,

and actively participate.

The expectations of thousands of individuals on the future supply

and demand for corn are measured by the minute. Compared to the

level of information about, participation in, and sophistication of

the market mechanism for corn, our dairy market mechanisms are

still in their infancy.

If we have a clear vision of where we would like to go, we can

better determine what direction to take the next step. For the best

future dairy pricing mechanisms, why not use as a model the systems used in corn, wheat, soybeans, and other agricultural commodities, and adapt it to the peculiarities of milk? Why could not

dairy farmers, at least on a monthly or quarterly basis, evaluate

offers from various dairy plants for their upcoming production?

Such offers could cover a range of time periods from which the milk

producer could choose.

Dairy farmers could also price their product in advance on the

futures market. The plants, at the time they contract for future

production, could sell milk futures that they would buy back as the

milk is delivered.

Further, processors could also hedge their purchases. Investors

and speculators, seeing the makings of a real market, would bring

their money, their expertise, and their analysis to that market. The

dairy futures market would work to provide a clear measure of future price expectations, updated by the minute.

I am optimistic that dairy futures markets will grow, that they

will eventually provide a competitive, dynamic market, reflecting

an accurate value of the demand for and supply of milk and dairy

products. I would like to specifically suggest that dairy futures

prices could be phased in to the basic formula price calculation as

participation in those contract markets grows.

USDA and Federal dairy policy need to evolve, reducing Government involvement and relying more on the marketplace. We need

action now to improve the milk pricing mechanism, but we also

need to take a longer term view of the milk pricing reform effort

currently underway.

One of the farmers who came to Washington with Governor

Thompson in February, and met with Senator Kohl and others of

our delegation and Secretary Glickman, made a statement to Secretary Glickman that I would like to repeat for you today. This was

Pete Knigge of Omro, WI, and he said: ‘‘I am not here to complain

about the price of milk. I am here to fix the way milk is priced.’’

No; he was not happy about pay prices this past winter. But he

does not want you or the USDA or any other Government entity

to set dairy prices. Now, that is not the only view of Federal pricing

in Wisconsin, but I do believe it is the majority view.

Mr. Knigge wants those prices set in the marketplace. But I

think he and all of the farmers in Wisconsin, virtually, agree that

they want a mechanism that they can trust to accurately tell them

what the market price is for their product. I think Pete’s statement

concisely describes the mission before us today.
78

PREPARED STATEMENT

I thank the committee and the chairman for your interest in this

topic, and especially Senator Kohl for arranging for me to be here,

and for your continued constructive work on national dairy policy

reform. I look forward to questions.

Senator COCHRAN. Thank you, Mr. Tracy.

[The statement follows:]

PREPARED STATEMENT OF ALAN T. TRACY

Good morning, Chairman Cochran and Subcommittee members. Thank you for inviting me to share with you my perspective on current dairy pricing issues, and in

particular, alternatives to the National Cheese Exchange in determining milk

prices.

Farm milk prices, and the mechanism for determining them, are of utmost importance to Wisconsin farmers and Wisconsin’s economy. Wisconsin leads the nation in

the number of dairy farmers and dairy cows and in the production of cheese. The

dairy industry contributes over $17 billion to Wisconsin’s economy, nearly 10 percent of our state’s overall economic output.

Just about a year ago today, our department released a report detailing the findings of a comprehensive study on cheese pricing and trading activities on the National Cheese Exchange (NCE). The study was conducted by researchers at the University of Wisconsin at our request and under our authority to investigate business

practices in Wisconsin. The report concluded that ‘‘As currently organized, the Exchange appears to facilitate market manipulation.’’ The report stimulated widespread interest and debate about the NCE, including a Congressional hearing before

the House Committee on Agriculture’s Subcommittees on Livestock, Dairy and Poultry, and Risk Management and Specialty Crops.

The report’s findings were of particular concern because of the link between NCE

prices and milk prices paid to farmers. While less that two percent of all bulk cheddar cheese is traded on the National Cheese Exchange, the NCE price largely determines the ‘‘Basic Formula Price,’’ the price of manufacturing milk under the entire

Federal milk pricing system. It is vitally important that the underlying market or

markets be competitive and that farmers have confidence that prices accurately reflect the supply of and demand for milk.

Wisconsin Governor Thompson convened a Task Force on Cheese Pricing to ‘‘make

recommendations to improve the current system of pricing for the benefit of the

dairy industry and consumers.’’ A copy of the Task Force’s report to the Governor

is attached for the record. Governor Thompson, along with Task Force members,

representatives of our farm organizations and members of our Congressional delegation met with USDA Secretary Glickman in early February to present the Task

Force’s recommendations.

At the outset, I would like to caution this Subcommittee that these suggestions

are not magic solutions that will miraculously provide high, stable milk prices for

our nation’s dairy farmers. With the end of the federal dairy price support program

in sight, we have left the era of government supported, stable milk prices and entered the era of market-driven, national, and increasingly, international pricing.

However, the Task Force suggestions, if implemented, will move milk pricing to

markets that are more competitive and that will more accurately represent the supply of and demand for milk for all its manufacturing uses.

The Task Force recommendations include both an interim replacement for the

NCE price in the current Basic Formula Price (BFP), as well as longer term replacements for the BFP. We have suggested that in the short term, the NCE price be

replaced by a national average cheese price, collected and reported by USDA’s National Agricultural Statistics Service (NASS). NASS has recently begun collecting

this price series. For the longer term, we have suggested two alternatives: (1) Substituting an average monthly milk futures price for the BFP; or (2) Replacing the

BFP with a competitively determined ‘‘milk pay price,’’ collected through a national

survey of prices that dairy plants actually pay for milk, less performance premiums,

Class I pool disbursements and over-order values. The Task Force has also recommended that USDA and federal dairy policy should be moving toward the deregulation of milk pricing, including the eventual elimination of setting a Basic Formula

Price for milk.

Compare the current pricing mechanism for milk with the pricing mechanism for

corn. Imagine for a moment, that Cargill, Continental Grain and Mitsubishi sat

down once a week with Ralston-Purina, Nabisco and Tyson Foods, for example, to
79

buy and sell corn, and that regardless of whether any corn actually changed hands,

the prices at which corn was traded (or was offered or bid) became the price of corn

for virtually every corn transaction in the coming month. This is what happens for

milk, based on trading on the NCE. Compare this scenario with what actually occurs in the corn market: Every day, thousands of farmers and hundreds of grain

elevators sell and buy corn or agree to sell and buy corn at a future time, using

prices from the futures contract markets. In addition, Wall Street investors and

market speculators bring their knowledge and their expertise to the futures market

and actively participate. The expectations of thousands of individuals on the future

supply of and demand for corn are measured by the minute. Compared to the level

of information about, participation in and sophistication of the market mechanism

for corn, our dairy market mechanisms are still in their infancy.

If we have a clear vision of where we would like to go, we can better determine

in what direction to take the next step. For the best future dairy pricing mechanisms, let’s use the systems used for corn, wheat, soybeans and other agricultural

commodities, adapted to the peculiarities of milk. Why couldn’t dairy farmers, on

a monthly or quarterly basis, evaluate offers from various dairy plants for their upcoming production? Such offers could cover a range of time periods from which the

milk producer could choose. Dairy farmers could also price their product in advance

on the futures market. The plants, at the time they contract for future production,

could sell milk futures that they would buy back as the milk is delivered. Further

processors could also hedge their purchases. Investors and speculators, seeing the

making of a real market, would bring their money, expertise and analysis to the

market. The dairy futures market would work to provide a clear measure of future

price expectations, up to the minute.

I am optimistic that the contract markets for dairy futures will continue to grow,

and that they will eventually provide a competitive, dynamic market reflecting an

accurate value of the demand for and supply of milk and dairy products.

USDA and federal dairy policy need to continue to evolve, reducing government

involvement and relying more on the marketplace. We need action now to improve

the milk pricing mechanism, but we also need to take a longer term view of the milk

pricing reform effort currently underway.

One of the dairy farmers who came to Washington with Governor Thompson in

February, Pete Knigge of Omro, Wisconsin, made a statement to Secretary Glickman that I’d like to repeat for you today. He said, ‘‘I’m not here to complain about

the price of milk, I’m here to complain about the way milk is priced.’’ No, he wasn’t

happy about his pay prices this past winter. But he doesn’t want you, or USDA, or

any other government entity to set dairy prices. He wants them set in the marketplace, but he wants a mechanism he can trust to accurately tell him the market

price for his product. I think Pete’s statement concisely describes the mission before

us today.

I want to thank the committee for your interest in this subject and I especially

want to thank you, Senator Kohl, for arranging for me to be here today and for your

constructive work to reform national dairy policy. I would be pleased to answer any

questions committee members may have.

[CLERK’S NOTE.—The task force report appears with Mr. Tracy’s

testimony previous to this prepared statement.]

STATUS OF THE NATIONAL CHEESE EXCHANGE

Senator COCHRAN. Senator Kohl.

Senator KOHL. Thank you very much, Mr. Chairman.

Mr. Tracy, can you bring any information to us with respect to

the National Cheese Exchange? Are they closing? Are they closing

soon? How quickly do we have to develop an alternative? What can

you tell us, Mr. Tracy?

Mr. TRACY. Well, I think you will have some other people who

will be testifying later, who are closer to that than I am, who are,

for instance, members of the board of the exchange. I believe that

there are some here who are members or at least have those members as memberships of their associations. And I think that is better directed to them.

I am pleased that the USDA is proceeding to put together the

price series that they are working on. I agree with Assistant Sec-
80

retary Collins that they do need to do some proofing or some

truthing of that mechanism before they substitute it for the NCE

right now. I do think that the M–W does provide an alternative—

not precisely the old M–W, because there are some things that are

wrong with it. But you could modify the M–W and go back to that

mechanism. It did not use the Cheese Exchange price directly in

the calculation, as the basic formula price does.

One of the problems with the M–W is that it was based purely

on grade B pricing, grade B milk shippers, and the number of those

is continuing to decline in the upper Midwest, and yet much of the

grade A milk that is shipped in Wisconsin is also used for manufacturing purposes—over 80 percent of it. So you could substitute

grade A milk in for a percentage of the grade B, modify that M–

W, and come up with something, if you had to, and I think USDA

could do that if they had to.

But I am hopeful that they will rather quickly be able to acquire

some assurance that their milk survey work is a suitable substitute.

Again, keep in mind that that is still going to reflect an awful

lot of what the Cheese Exchange dictates. Right now, most of the

trades that occur between plants who buy and sell cheese are done

with the basis of the Cheese Exchange. So, even if we are surveying cheese prices, we are going to be getting—and we are surveying

maybe 30 percent of all the sales, for instance—we are still going

to be reflecting what goes on in that very narrow market in the

Cheese Exchange price.

That is why I would like to see us develop a price discovery

mechanism for milk. You know, there is not a price discovery mechanism for milk now. This is the No. 1 agricultural commodity in

the United States and there is no price discovery mechanism for it.

It is purely a calculated price, calculated by USDA for the base

price, and then additional calculations made by the plants who pay

the farmers, in turn, calculated off the cheese price. There is a

price discovery mechanism for cheese, but it does not involve the

participation and the broad number of players with broad amounts

of information that would make it as good a market as it can be.

Senator KOHL. All right. I am done. I just want to ask a question, if I might, quickly. Could you give us an opinion on what

could happen in the dairy industry, and in dairy States as important as Wisconsin, if we continue to have a segmentation regionally?

Mr. TRACY. Well, that is a good question.

Senator KOHL. Can you give us an opinion? I would like your

opinion of it for the record. How concerned are you that we might

have a segmentation of the dairy industry in this country that

would really wreak havoc?

Mr. TRACY. Well, there are two kinds of segmentation that take

place. One is political segmentation. The dairy industry, being a

powerful force in every State in the Nation virtually, is very powerful in its regional groups. As you know, it is easier to stop something from happening here in Washington than it is to make something go.

Unfortunately, when the dairy industry has not been in agreement with each other, it has been easy to keep things from happen-
81

ing. That is why, I think, that the progress that was made in the

1996 farm bill of requiring some changes in the milk marketing

order system, in requiring some changes in the way that prices are

developed, are really important, because now something has to

happen. Of course, you kind of dumped it in poor Secretary Glickman’s lap. But something definitely has to happen in terms of

changing these pricing mechanisms.

If the dairy industry is together, they are unstoppable, because

they are so powerful. But any one broad regional group has heretofore been able to stop pricing. The other that you have talked

about, in segmentation, I think what we mean is a balkanization

of prices or the continued lack of a national pricing system.

Oddly enough, we do have a national pricing system for cheese.

The pricing for it tends to come out of our part of the country,

where we have roughly one-fourth of the dairy farmers. But there

is a national pricing system for cheese. There is not a national pricing system for fluid milk.

Fluid milk is priced order by order. I know the chairman has

done a lot of work in trying to overcome European export subsidies

and European import barriers. Yet what you have, between individual marketing orders for fluid milk is very similar to what Europe

has, with its variable levy for imports of agricultural commodities

that bring that price back up.

If, for instance, you ship a load of fluid milk from Wisconsin

down to, let us say, the south Florida order—I cannot remember

exactly what that differential is in the south Florida order, but it

is darn near 100 percent fluid utilization and it is something over

$4 a hundredweight—so those farmers in that area are guaranteed

a minimum price of something like $4 over the BFP. That is a pretty powerful price.

Well, you would think, with free trade, that would work itself

out. We have interstate highways now. We can ship a truckload of

milk from Wisconsin to south Florida without even turning on the

refrigerator and not lose more than 1 °C of temperature in it, with

modern equipment. But what happens is that the bottler who receives that milk in south Florida has to pay that differential into

that local pool in south Florida where it gets distributed to Florida

milk producers, even though that milk might have come from Wisconsin. And the Wisconsin milk producers get none of the benefit

of the higher fluid milk price for that load. They essentially get the

manufacturing price.

That is the regionalization of pricing that we have through the

order system. So getting at the 10 orders is going to help. You are

still going to have big differences in utilization. You still have barriers to trade. I think that those compensatory payments are a terrible thing that are a restraint of trade within the United States.

Senator KOHL. Thank you, Mr. Tracy.

And thank you, Mr. Chairman.

Senator COCHRAN. Senator Leahy, have you any questions for the

witness?

Senator LEAHY. Thank you.

Are you suggesting that a better way is to do something like the

Cheese Exchange, or did I misunderstand you?
82

Mr. TRACY. No; not at all. We proposed a number of specific alternatives to the Cheese Exchange for pricing.

Senator LEAHY. Because I was going to say, having somebody

meet for a couple of hours a week and manipulate it, I would hope

you would not want that.

Mr. TRACY. Right.

Senator LEAHY. I am sure the dairy farmers would be delighted

to hear how powerful they are. I think in my region in New England, I think they make up about one-tenth of 1 percent of the population. I think they are going to be impressed to hear from you

just this enormous power they have. I can think of some of the

States that have joined for what they think is best for both consumers and producers, and that includes States that have about a

dozen dairy farmers in their whole State.

Maybe if you spent time in some of these States, it looks a little

different. It may be the case in Wisconsin. Maybe this is a major

part. I think in my part of the world, they have neither the electoral or financial muscle that they might have in Wisconsin. And

if they get gains with our State legislators or with members of Congress, it is because they have made a darn good case for what they

want, not because they have any muscle at the ballot box. And,

frankly, I think they have made some darn good cases.

I just thought I would throw that in, for whatever it is worth.

Mr. TRACY. Thank you very much.

Senator LEAHY. If we are going to be speaking in these kind of

euphemisms, Mr. Chairman, I just thought I would throw in a few

facts.

Senator COCHRAN. We are trying to find out what everything is

worth today.

Mr. TRACY. If I could respond very briefly, Senator. I agree with

you. I did not intend to imply that they had the power to overcome

the wishes of consumers. Only that, in terms of things like details

of dairy policy, that if the entire dairy industry is together, because

they are constituents of all 100 Senators of the U.S. Senate, for instance——

Senator LEAHY. If they are all together, it is a lot better.

Mr. TRACY [continuing]. They can accomplish a lot. But it is also

possible, when they have regional differences, that they stymie

each other.

Senator LEAHY. I have been here for 22 years, and I have always

wished fervently for the dairy industry, nationwide, to be together

on some of these issues. And being an optimistic sort, and this

close to St. Patrick’s Day, I will keep on wishing. [Laughter.]

Mr. TRACY. Thank you, Senator.

Senator COCHRAN. Thank you, Mr. Tracy, for being here and for

your testimony at this hearing.

Next, I am going to call on a panel of dairy farmers and producers we have with us today: Mr. Harold Howrigan, president of St.

Albans Cooperative Creamery, Inc., in Vermont; Buckey Jones,

board of directors of Mid-America Dairymen, from Mississippi;

Arden Tewksbury, manager of the Progressive Agricultural Organization; Bill Brey, president of the Wisconsin Farmers Union; and

Ken Zurin, a dairy farmer from Pennsylvania.
83

We appreciate very much the attendance of this panel of witnesses. And you can be assured that it is your interest that has

provoked the questions that we have raised to the Secretary and

the policymakers here in Washington about dairy pricing and

whether reforms are indicated and, if so, what reforms ought to be

considered.

Let us start with Mr. Howrigan. We have copies of statements.

They will all be placed in the record in their entirety. We encourage you to summarize your comments so we will have a chance for

questions.

Senator LEAHY. Mr. Chairman.

Senator COCHRAN. Senator Leahy.

Senator LEAHY. Mr. Chairman, I appreciate your courtesy. Because, as you know, Mr. Howrigan has an airplane back to Vermont and we do have a big storm coming in the morning. So he

needs to get this one. So I appreciate that.

Senator COCHRAN. We appreciate that, and we hope this does not

cause anybody any inconvenience.

Mr. Howrigan, you may proceed.

STATEMENT OF HAROLD J. HOWRIGAN, PRESIDENT, ST. ALBANS COOPERATIVE CREAMERY, INC., VERMONT

Mr. HOWRIGAN. Thank you, Mr. Chairman, members of this committee. I am very honored, of course, to be here. And I intend to

do just that, summarize briefly and touch on a few points. I am a

dairy farmer from Fairfield, VT, the president of St. Albans Cooperative Creamery, and I speak on behalf of our 600 members and

the other farmers of the Northeast who share our concerns that we

are addressing here today.

Vermont has just under 2,000 dairy farmers in production. The

average size is 85 to 90 cows. And they produce 1 to 1.5 million

pounds of milk annually. In Vermont, we produce over 400 million

dollars’ worth of milk, 94 to 95 percent of which is sold outside of

Vermont. Which means that nearly $400 million of outside money

comes into the State each year. This is generator income. It has a

multiple factor of 4 to 5 times its initial value.

Vermont dairy farmers employ about 40,000 people directly and

with the related businesses. In our county, Franklin County, in the

northwest section of Vermont, we exported over 700 million dollars’

worth of agricultural products in 1995. The dairy industry is of utmost importance to the State of Vermont. In Vermont, dairy farming accounts for 80 percent of our agricultural income—a higher

percentage than any other State in this country.

We are well located to supply one-third of our consuming public,

which live within a 500-mile radius of our source of supply. Which

guarantees them a direct and immediate source of fresh product.

I think this is very important.

We need our farms in Vermont and New England. And our farmers are dependent on this basic formula price, which is, of course,

very directly correlated to the National Cheese Exchange and the

cost of production in the United States. Dairy farmers throughout

the Nation need a base price that is understandable and creates a

fair price.
84

The information used to formulate this basic price needs to come

from broad, reliable sources. This information must have a track

record which could be used to calculate past prices for comparison

as well as to provide a prediction for the future market changes.

The futures market for cheese has been suggested as an alternative. The most intriguing portion of this futures market is the

minimum price fluctuation requirement used in the commodity

markets. This will provide a cap or a damper on excessive movement, as we have witnessed in this last fall of our milk prices.

The basic formula price is important to all our dairy farmers nationwide. And this basic price should be connected to a pricing

mechanism that is more reflective of market condition. The trading

of less than one-half of 1 percent of a product should not establish

a basic price for the other 99.5 percent. I think this creates a problem.

A more stable activity here could restore the dairy farmer confidence in the formulation of the prices that they are paid for their

milk. Now, it may take time to implement a variable alternative

to the price data from the National Cheese Exchange. And within

this timeframe, again, we need to look at some of the existing pricing mechanism and not rely solely on a new source, but be aware

of the excessive fluctuation that might occur.

I would like to quote my brother Francis. He was in our local

State legislature. He is quoted as saying that farmers must live

like they are going to die tomorrow, but you farm like you are

going to live forever, because of our long-term investments.

PREPARED STATEMENT

I thank you again for the opportunity to address you on these issues, and I appreciate your interest in taking some proper, corrective action. And it was touched on a little bit previously on the

basic price of fall, over spring, milk. And it is interesting to note

in our co-op at St. Albans, we have kept a fall incentive. And we

pay our members $1 a hundredweight over their basic price in the

fall. Just an extra, additional premium for fall production over the

spring 4 months. The months of March, April, and May as a base,

then the months of September, October, and November is the payback. This has worked very well to level our production in our

small co-op.

We thank you very much.

Senator SPECTER [presiding]. Thank you very much, Mr.

Howrigan.

[The statement follows:]

PREPARED STATEMENT OF HAROLD J. HOWRIGAN

I would like to thank this committee for the opportunity to speak to you today

regarding the National Cheese Exchange.

My name is Harold Howrigan and I am a dairy farmer from Fairfield, Vermont.

At the current time, I farm three farms with my family. The three farms comprise

a total of 1,800 acres and 500 head of Holstein cattle. In 1996, my family shipped

over 7 million pounds of milk to the St. Albans Cooperative Creamery, Inc. I am

the President of the St. Albans Cooperative Creamery, Inc., and I speak today on

behalf of 600 dairy farmer members in Vermont and upstate New York.

In 1996, Vermont dairy farmers produced over $400 million worth of milk. Most

(94–95 percent) of this was sold outside of Vermont, which means that nearly $400

million of out side money comes into Vermont because of the investment and hard
85

work of our dairy farmers. This is generator income and has a real impact of 4 to

5 times greater than its initial value to our local economy.

Vermont agriculture and its related businesses employ 40,000 people in Vermont. Franklin County, Vermont alone exported over $700 million in agricultural products

in 1995. The dairy industry is of the utmost importance to the state of Vermont.

The livelihood of our dairy farmers and of our State’s economy is dependent of

the Basic Formula Price. The BFP is used to formulate the prices for Class I, II

and III milk. These Class prices, along with Class III–A, are used to calculate the

blend prices paid to dairy farmers based on percent utilization of each Class of milk

in Federal Order 1. The average blend price paid to dairy farmers in Federal Order

1, Zone 21 for 1994 was $13.10, for 1995, $12.66 and for 1996, $14.63. The cost of

production of milk in the Northeast as reported by the USDA was $17.68 in 1994

and $17.77 in 1995. Grain prices were elevated in 1996 so the cost of production

of milk was higher still in 1996. As you can see, farmers in the Northeast are not

being paid at a level that meets the USDA’s calculation of the cost of production.

I have attached a graph summarizing this information for 1995 and 1996.

There has also been volatility in the average blend price between 1994 and 1996.

From 1994 to 1995 the price decreased by 3.48 percent. Between 1995 to 1996 the

price increased by 7.90 percent. Dairy farmers have been riding a roller coaster of

milk prices within the year as well. The lowest blend price for 1996 occurred in

April at $13.53. The highest blend price occurred in October at $16.04. This is a

18.6 percent increase in price in 6 months. The January 1997 blend price for Zone

21 was $12.96. This represents a 23.8 percent drop in the blend price in 3 months.

This volatility is linked to the Basic Formula Price and to the National Cheese Exchange prices for 40 pound blocks of cheddar cheese. Attached is a chart for 1996

showing the direct correlation between the Basic Formula Price and the National

Cheese Exchange 40 lb. Block price.

The National Cheese Exchange is a part of the Basic Formula Price calculation,

although it was not established for this purpose. The weekly market was established

over 50 years ago to allow cheese makers and buyers to sell excess cheese or buy

cheese when short. Its purpose was not intended for use in the calculation of the

national base milk price. There are many concerns about the National Cheese Exchange including price volatility, representativeness of trades, ‘‘thin market’’, and

market dominance.

We have witnessed the price volatility this year, with record highs and rapid declines in prices. The National Cheese Exchange is considered a ‘‘thin market’’ because of little trading volume and the possibility that individual firms can exert

undue influence on prices and other terms of trade. The volume of cheese traded

is small compared to the entire United States market for cheese. The less than 1

percent of cheese traded at the Exchange sets prices for all the cheese produced.

This ‘‘thin market’’ concern and that of market dominance has been made evident

by a recent report published by Mueller, Marion, Sial and Geithman which accuses

Kraft of manipulating the market to depress cheese prices.

The Cheese Exchange does not represent a large amount of cheese or a diversity

of cheese products. The 40 members of the Exchange trade cheese for 30 minutes

each Friday morning. Trading on the Cheese Exchange represents only .2 to .5 percent of annual cheese production. Prices have been volatile on the cheese exchange

and in the last part of 1996 were dramatic. The high for 40 pound blocks occurred

in August of 1996 at $1.6942 per pound and the low occurred in December at

$1.2373 per pound. Alternatives to the National Cheese Exchange must or should

be more reliable indicators of market supply and demand for products and provide

more stability in milk prices. Cash markets such as the National Cheese Exchange

are indicators of supply and demand conditions for particular companies that trade

on the Exchange, but may not indicate what is being paid in the marketplace.

Cheese is an important part of the national dairy industry. Approximately 36 percent of the United States milk supply is made into cheese. In years past, University

of Wisconsin Economists determined that 92 percent of the change in the Minnesota

Wisconsin prices series could be explained by changes in the cheese price. Prices

paid for cheese will need to play a role in the formulation of a base price for manufacturing milk.

A replacement is needed for the National Cheese Exchange price data in the formulation of the Basic Formula Price. Accurate price discovery is very important to

any milk pricing system. The market value of manufactured products can be obtained by price surveys, trading on cash markets, trading on futures markets or specific data on sales transactions. I am pleased that the USDA has begun a survey

of cheese prices nationwide. This survey could be a useful alternative to the National Cheese Exchange data but, I also have concerns about the information contained in this survey. The comparisons must be real. Cheese prices must be reported
86

for identical product composition (more/less moisture or fat) and insure pricing reflects same terms of sale.

It is important to obtain weighted average prices received that is reported by

manufacturers for actual commodity sales. This should be done for all commodities

and not just cheese. It should provide the most accurate value of manufactured

products and the value of milk going into these products.

The replacement for the National Cheese Exchange price data must also have historical information available. Historical information could be used to calculate past

prices for comparison as well as provide a prediction for future market changes. The

futures market for cheese has been suggested as an alternative. The most intriguing

portion of the futures markets is the Minimum Price Fluctuation requirement used

in the commodities markets. This provides a cap to price movement on the market.

This cap would provide more stability to dairy farmer prices through a more incremental and known change in cheese prices. Futures markets can be very beneficial

to processors and producers in time. However, based on the current minimal activity, I am not sure that the futures price should be used to base current milk prices.

If a new cash market is used in the calculation of the basic formula price and there

is no historical information, it would be important to have some kind of price snubber for a period of time to ensure that this new cash market reflects true market

conditions.

Obtaining the price data required for the calculation of the Basic Formula Price

should be one step in the overall reform of this pricing system as part of the federal

order consolidation. Several options have been proposed for an alternative to the

Basic Formula Price. I would ask you to appraise each proposal using the following

criteria: Long life, will the proposed alternative to the BFP be useful for at least

10 years; Understandable, this pricing mechanism must be clear and evident to the

dairy farmers that must survive its outcome. They must have confidence in the process; Geographic uniformity, manufactured dairy products compete in a national

market which suggests a uniform national price for milk used in manufacturing;

and this pricing system must reflect the manufacture milk market, be it prices for

butter, nonfat dry milk and cheese.

The Basic Formula Price is important to all dairy farmers nationwide. The basis

for the calculation for the BFP should be connected to a pricing mechanism that is

more reflective of market conditions. A pricing mechanism that has broader trading

activity and oversight of this trading could restore dairy farmer confidence in the

formulation of their milk price to calculate their milk checks.

Farmers must live like they are going to die tomorrow, but must farm as if they

are going to live forever.

I thank you again for the opportunity to address you on this issue.
87
88
89

NATIONAL SURVEY OF CHEESE PRICES

Senator SPECTER. Senator Leahy has questions.

Senator LEAHY. I wonder if I might, Mr. Chairman. I appreciate

this, because I think that Mr. Howrigan is going to have to leave

right after for an airplane. I would note—and his whole statement

is in the record—he makes a point that we should all think about.

In here, he says farmers must live like they are going to die tomorrow, but must farm as if they are going to live forever. And in your

State, my State and all others, that is the case.

And to the extent that governmental policies can give some sort

of predictability, I think we should. This chart next to me, Harold,

shows that not once between 1974 through 1993 did any trading

on the Exchange account for more than 1 percent of total cheese

production. But the Department of Agriculture accords prices found

on the Cheese Exchange a significant amount of weight. These tiny

amounts of trading carry a huge, disproportionate amount in triggering the prices.

Now, Secretary Glickman has said that he will work with us to

devise a better option for replacing it. Senator Jeffords and I made

a proposal to him. We suggested that they do some kind of an online random thing, like the New York Times Best-Seller List does.

They do not go to the same bookstore every time to check which

books are selling, because it would be very easy just to manipulate

that by the publishers just going in and buying those books. They

go random.

Do you think something like that, a national survey of cheese

prices, random, electronic, weekly, mandatory, could give a price

that represents the market, rather than something that could be

really open to manipulation because of the tiny amounts?

Mr. HOWRIGAN. I think, Senator, it is very obvious we need a

broader and more responsible mechanism and pricing reporting

that would truly reflect its actual value of the milk that goes into

it.

Senator LEAHY. Would you say that, in your membership, that is

a pretty universal feeling?

Mr. HOWRIGAN. It appears to be. It certainly is in our area. The

farmers are very concerned and frustrated when they lose 25 percent of their income in a couple of months’ time.

Senator LEAHY. Well, you had milk prices shot up in September,

fell through the floor in December, got to rise a little bit again now.

Obviously, that kind of a yo-yo situation does not help anybody. It

does not help the consumers and it does not help the producers. Do

you think that there is a connection between that and the Cheese

Exchange?

Mr. HOWRIGAN. There is certainly a strong suspicion of that. And

our bankers get very concerned when our prices go to heck. I will

tell you.

Senator LEAHY. I bet they do.

Thank you, Mr. Chairman. I appreciate the courtesy of letting

Mr. Howrigan go first.

Senator SPECTER. Well, thank you, Senator Leahy. We are glad

to accommodate him on his plane schedule.
90

Mr. Howrigan, do you have any suggestion as to what might be

done in the short run, immediately, to help farmers on this terrible

problem they are facing?

Mr. HOWRIGAN. Well, there was a lot of discussion earlier with

the Secretary and Mr. Collins and Mr. Dunn, and you had some

very good questions, Senator. And I would hope that they would act

forthwith, and provide some of that immediately. I think flooring

that basic price would go quite a long ways.

Senator SPECTER. Well, we are going to call up all those sales tomorrow and see what that shows. I do not think it is up to the statisticians. I think it is up to the policymakers. That is my idea in

public policy.

Mr. Howrigan, we thank you. And if you have to catch a plane,

we will understand your departure.

Mr. HOWRIGAN. We thank you very much, Senator.

Senator SPECTER. And, Senator Leahy, if you have to catch a

plane, we will understand your departure.

Senator LEAHY. No; I am just going to make sure I get Harold

to the place where he has to go.

Senator SPECTER. If you do not have to catch a plane, Senator

Leahy, we will still understand your departure. [Laughter.]

Senator LEAHY. Mr. Chairman, I know that I am in my mother’s

arms as long as you are here.

Senator SPECTER. Thank you very much.

Senator Cochran has asked me to chair the meeting. I am not

only the next ranking in seniority on the subcommittee, I am the

only person left.

So let me turn now, in order of listing on the panel, to Mr. Arden

Tewksbury, manager, Progressive Agriculture Organization, a man

I have known for many, many years, and a very strong advocate

of the dairy farmer.

Mr. Tewksbury, the floor is yours.

STATEMENT OF ARDEN TEWKSBURY, MANAGER, PROGRESSIVE AGRICULTURAL ORGANIZATION, PENNSYLVANIA

Mr. TEWKSBURY. Thank you, Senator Specter.

I do have a prepared statement that has been circulated, and I

understand will become a part of the record.

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

record, without objection, as will all the full statements.

Mr. TEWKSBURY. Thank you.

I guess I will then center my remarks around observations I had

both in my remarks and what I have heard today. I have to tell

you that I am very disappointed on many things I have heard

today so far. You and I both were at the meeting at the college,

where our records show 750 people were there. We did hear remarks that attempts would be made in the very near future to

raise prices to the dairy farmers.

Evidently many have long-term and short-term memories. We

know now the basic formula price fell by $4.03 in a short period

of time, and people are talking as if this never happened before.

Yet, as I check my records, in 1989 through 1990, I find the same

prices fell $4.25 per hundredweight in 1 year’s time to our dairy

farmers all across the United States. We did not have the basic for-
91

mula price at the time. We had what was called the M–W series

price, which tied all of our milk prices together, and they fell that

time also.

So history now has repeated itself as to what happened just 7

years ago.

The M–W, as a replacement for the basic formula price, in my

opinion, would be no real improvement, because this happened

back then. And I surveyed the M–W pricing back about that time

and found out, as we have heard today, it was a very small portion

of the milk, grade B milk, produced in the upper Midwest. And of

the milk that was produced, it was probably less than one-half of

that milk that was surveyed to see what the prices were being paid

to the dairy farmers by those processors.

And I think we are completely on the wrong track of trying to

produce milk in the United States. Now, I know we are probably

trying to step a couple steps above and beyond the scope of this

hearing. But if we are going to deal with the problems we have facing dairy farmers, we must elicit all viewpoints as to what is the

problem and what needs to be done.

We have a very, very serious short-term problem here in the

United States for our dairy farmers. Of course, I have got to admit

that I really have not heard any reputable solution to it today. And

then we have a long-term problem.

Now, I have been told over and over again lately that if enough

Senators, including yourself and others—30-some—and some 30-

some secretaries of agriculture—would petition the Department of

Agriculture, we could expect to have the basic formula price raised

to a level of $13.50. Evidently, all the people across this country

that circulated that remark were not hearing what really was going

to happen. But we certainly heard today there is no movement

afoot, on a short-term basis, to raise the basic formula price 1 cent

per hundredweight, let alone to the level of $13.50.

I have not heard anybody say today, as they have been talking

about milk prices, that the cheese prices on the Green Bay Cheese

Exchange have stayed stagnant for 3 straight weeks. And the barrel prices went down 1 cent last week, which would indicate probably the block prices will not go up tomorrow. So that means we

have 4 weeks of cheese prices not going up in this country, and will

not affect the prices paid to dairy farmers any more than where we

are today.

It is strange that this has been omitted.

Now, if we are going to give dairy farmers some income, we have

to raise prices. We have got to raise prices to them. It has got to

be done one of three ways. We thought the Secretary did have the

authority to do it without going through the hearing procedure.

And what he said today is exactly what he said on December 19,

that it would take 6 months to do it. Well, that is 6 months from

December 19. Now it is 6 months from today, which is now 9

months from December 19.

At the same time, in Pennsylvania, the producers that we are

representing, we know the average dairy farmer is going to lose—

and our testimony proves that—is going to lose about $26,000 in

gross income. The dairy farmers in Pennsylvania are going to lose

$280 million of gross income in 1 year’s time. The economy in
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Pennsylvania, in our estimation, will be adversely affected by $1.9

billion, just in Pennsylvania alone, with this decline in milk prices.

If the Secretary—and I hear nothing today—is not going to be

able to raise prices, raise the basic formula price, I would have to

enlist the support of the U.S. Congress to step in and either raise

the basic formula price to the level we have advocated the Secretary to do. Our suggestion, of course, as it has been and will continue to be, is $15 per hundredweight. We would buy into a $13.50

on an interim basis until we got this situation resolved.

And I am sorry the Senator from Vermont had to leave, because

our second alternative then would be to do what was done in the

U.S. Senate in the spring of 1991. And that was to raise the class

I differentials on all milk, fluid milk across the United States, by

$3 per hundredweight.

And I would urge the Congress to consider stepping in and doing

that method. Because my concern is just as keen for the farmers

in California and Wisconsin as they are in Pennsylvania. And we

would have to pool that $3 nationally to all dairy farmers. And I

have talked to the Dairy Division of the USDA, and they said, yes,

it can be done—some problems, but it could be done.

Now, in Pennsylvania, the gallon price of milk in our area has now gone from $2.29 to $2.35. We have recaptured 6 cents of the

46-cent drop that hit us in the last 3 or 4 months. Consumers—

I have talked one-on-one with 4,000 consumers in the last 2

months—and outside of two of them, every one of them supports

what we are trying to do. I am also concerned that if milk per gallon is selling for $2.35

in northeastern Pennsylvania, why is that same milk selling for

$3.55, $3.56, and $3.59 per gallon in Orange County, CA? Maybe

it is time, if we are going to keep this manufacturing price as the

mechanism to price milk, that we should not only include the

wholesale price of our dairy products, but include the retail price

of products into a formula that would more adequately give a price

to our dairy farmers.

Because our survey also finds that in northeastern Pennsylvania,

I can buy top-quality butter for $1.55 a pound. My son did a survey

in California yesterday for me, and we found a national brand butter selling in Orange County, CA, for $2.99 a pound. Now, it would

be awful nice if we capture some of those retail dollars back into

the hands of our dairy farmers.

I also went across the Delaware River in Port Jervis, NJ, and I

found that same butter selling down there for $2.99. So it does not

matter if it is on the east coast or the west coast, this national

brand butter is commanding $3 a pound.

Now, if this is a way that the predecessors to this panel are saying the free market works, it sure as the Devil does not work to

the benefit of our dairy farmers. If it did, then why did we see, in

1996, the price of butter on the Chicago Mercantile Exchange go

from 80 cents a pound on January 5, 1996, up to $1.50 in June

1996, at the same time the raw milk product price went up only

$1.05 per hundredweight, which was a tremendous windfall for

somebody in the butter business? I do not know who made the

money, but the consumers got raped and the dairy farmers got

gouged on a pricing mechanism like this.
93

So, in essence, what we are saying, Senator, is in the short-term

situation, one option has been declined today because the Secretary

has very clearly announced to us that he cannot raise the milk

prices on the basic formula price without a hearing. And if we went

through all that, it may take 6 months. That is not what farmers

are waiting to hear.

The second alternative is, can the U.S. Congress step in and do

that? And third, if they can do that, will they step in and do what

you did in 1991, when 60 Senators voted to raise the class I differential, including you and the late Senator John Heinz, by $3 per

hundredweight, and pool that milk across the United States to get

some money into the hands of our dairy farmers?

PREPARED STATEMENT

Senator SPECTER. We thank you very much, Mr. Tewksbury.

When you say you are disappointed, so am I. I think that at least

we could get an answer on the cheese issue, should have gotten an

answer on the cheese issue a long time ago.

I will have some more questions for you, but we are going to go

through the rest of the panel at this time.

[The statement follows:]

PREPARED STATEMENT OF ARDEN TEWKSBURY

My name is Arden Tewksbury, I own and operate a dairy farm in Meshoppen

Township, Wyoming County, state of Pennsylvania.

I have been operating my present farm since October 1957.

In addition to operating my dairy farm, I am the consulting manager of the Progressive Agricultural Organization. (Pro-AG).

Pro-AG was formed in February 1991, following the severe pricing crisis that

faced dairy farmers in 1990–91. Pro-AG has membership in Pennsylvania, New

York and New Jersey. We work very close with the National Family Farm Coalition

located in Washington, DC. The Coalition has membership in approximately 35

states.

My appearance today is being made on behalf of the Progressive Agricultural Organization, and the thousands of dairy farmers that we have met with during the

last few months.

I want to recognize the quick response that Senator Cochran, Senator Specter and

other Senators on this Committee have illustrated by calling this special emergency

hearing.

Mr. Chairman, in late October 1996, it became obvious to Pro-AG that dairy farmers, once again were going to be seriously victimized by an inadequate milk pricing

formula.

I have been, and will continue to be very critical of the farm organizations across

the United States for not working closer together in an attempt to ward off the serious decline in milk prices paid to all dairy farmers.

On December 19, 1996 I attended a special meeting along with other organizational leaders, that was called by the U.S. Secretary of Agriculture, Mr. Dan Glickman. At that meeting, I urged the Secretary to establish a floor under the basic formula price of $15.00 per cwt. (on all milk). I was astonished at suggestions that

were made by leaders of our milk cooperatives to floor the basic formula price at

$13.00 per cwt., on Class I and Class II milk only. At the meeting with the secretary, I urged him to come into Northern Pennsylvania and observe the mood of

our dairy farmers.

Since December of 1996, Pro-AG has held nearly 20 meetings with farmers and

business people to explain the decline in milk prices, and attempt to find out from

dairy farmers how they feel regarding short term, and long term solutions to the

milk pricing dilemma the dairy farmers are facing. Over 2,000 dairy farmers and

business people attended these meetings. In addition, nearly 300 people attended a

Dairy Farmers Rally with Senator Rick Santorum. At all of these rallies, the dairy

farmers voted overwhelmingly to support a new milk pricing formula that would relate to the average cost of producing milk. In other words—establish the value of

milk at the farm level.
94

On February 10, 1997 a dairy farmer rally was held in Keystone College, La

Plume, Pennsylvania, 10 miles north of Scranton, PA. This meeting was called by

our distinguished Senator from Pennsylvania Arlen Specter. Everyone in North

Eastern Pennsylvania was pleased that Senator Specter brought with him U.S. Secretary of Agriculture Dan Glickman. Never before had our area had the presence

of a U.S. Senator and U.S. Secretary of Agriculture on the same podium.

A crowd of at least 750 people turned out for the rally at 8:30 AM. Many at the

rally were consumers. These consumers came to support the dairy farmers. Both

Senator Specter and Senator Glickman announced they were there to hear from the

farmers, and, they certainly did hear from the farmers.

Some of the key points made at the rally were:

1. Dairy farmers are in a serious milk pricing dilemma.

2. Dairy farmers want the basic formula price floored at $15.00 per cwt.

3. Dairy farmers need a blend price paid to them of $16.00 per cwt.

4. Consumers were supporting the dairy farmers 100 percent.

5. Consumers announced they would pay more for milk and milk products, providing the additional funds went to the dairy farmers.

6. On a long term basis—once again, the dairy farmers wanted their milk priced

on the average cost of production.

Mr. Chairman, it is now nearly three months since the first meeting with Secretary of Agriculture, Dan Glickman. Something now has to be done to improve

prices to dairy farmers.

While this hearing is being held mainly regarding the continued inclusion of the

National Cheese Exchange as a component of the Basic Farmer Price; we have sever

reservations regarding any other cheese pricing points that will influence the basic

formula price enough to have a positive effect on the prices paid to dairy farmers.

For instance—The most recent National Exchange price announced was $1.321⁄2

cwt. per lb. The Wisconsin Assembly price was between $1.32–$1.351⁄2. Obviously

these types of prices will not raise prices to dairy farmers.

In addition to the National Cheese Exchange, the M–W price series is still a main

component of the basic formula price. The M–W Series only represents a very small

portion of the milk produced in the United States. The M–W is the price paid by

processors to Grade B producers in the upper Midwest. Five years ago, I did a survey of the M–W Series. I found out that there was less than 5 billion lbs of Grade

B milk in the M–W area and approximately 21⁄2 billion lbs of milk was surveyed

for the determination of the prices paid to dairy farmers. Certainly, dairy farmers

will never receive a fair price for their milk, unless there are enough changes in

the components of the Basic formula price.

We are estimating the average dairy farmer in Pennsylvania will loose $25,970

between October 1996 through September 1997. The comparison price we used was

September 1996.

Mr. Chairman, attached to our testimony are three charts: Chart No. 1 illustrates

the decline in milk prices; Chart No. 2 illustrates the predicted losses to dairy farmers shipping milk under the provisions of federal milk marketing Order No. 2 (NYNJ); and Chart No. 3 illustrates Class prices in Order No. 2 for different periods

of time in 1996.

The chart also illustrates the blend price that would be achieved by Pro-AG’s proposal, the Commissioner of Agriculture’s proposal and the proposal made by National Milk Producers on December 19, 1996.

All quoted prices are generated from various stated basic formula prices. Final

prices reflect prices that would be paid to Order No. 2 producers.

The gross dollar loss to the dairy farmers in Pennsylvania will be approximately

280 million dollars for one year. However, the economic loss to the rural areas in

Pennsylvania will be 1.9 billion dollars. Imagine what these figures come to on a

National level.

SHORT TERM SOLUTIONS

1. The Secretary of Agriculture should, if he has the authority, place a floor under

the basic formula price of $15.00 per cwt. for an indefinite period of time.

2. If the Secretary can not establish the floor price, then Congress should take

the appropriate steps to establish the same floor.

3. If suggestion numbers one and two are not followed, then Congress must take

action and raise the Class I differentials in all federal milk marketing orders by

$3.00 per cwt. for an indefinite period of time.

4. If cheese prices are continued to be used then the formula must represent the

retail value of cheese as well as the wholesale value of cheese. The same would be

true of butter prices.
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LONG TERM

Mr. Chairman, the time has now arrived when we must review other ways of pricing milk to our dairy farmers across the United States.

We strongly feel the value of the dairy farmers milk must be established on the

actual cost of producing milk.

The USDA currently surveys the cost of production by several regions across the

United States.

Three main components make up the cost of production: 1. Cash Cost; 2. Return

on investment; and 3. Unpaid labor.

The manufactured value of milk could be established by using the cash cost-plus

an adequate return on investment.

The value of fluid milk could be established by using the cash cost plus the return

on investment plus a fair figure for unpaid labor.

In our estimation, this formula would return a pay price to our dairy farmers of

nearly $16.00 per cwt. Different organizations will be submitting a detailed copy of

this formula to the USDA during the next two weeks.

GENERAL OBSERVATIONS

1. I can buy top grade butter in Meshoppen for $1.55 per lb. Yet, I go to a ShopRite store in Port Jervis, New Jersey and find a National Brand butter selling for

$2.99 per lb. What’s going on?

2. I can go into Meshoppen and purchase American cheese for $2.00 per lb. Yet,

I can go to other stores and find National brands of cheese selling for $4.00 per lb.

This is very confusing.

3. During February 1 gallon of milk was selling for $2.29 per gallon in Northeast

Pennsylvania yet, in many stores in Elmira, Horseheads, Corning and Binghamton,

New York stores, milk was still selling as high as $2.75 per gallon in some super

markets.

4. In Orange County California, milk is selling for nearly $4.00 per gallon.

5. On January 5, 1996 the Chicago wholesale price of butter was $0.80 per lb.

By late June of 1996, the price went to $1.50 per lb. At the same time the raw milk

price used for butter went up $1.05 per cwt. Something is wrong.

These observations are only a few of the many inequities facing dairy farmers and

consumers.

Mr. Chairman, the time has come to take the speculation and manipulation out

of milk prices.

Dairy farmers and consumers are highly recommending the time has arrived to

price milk on the cost of producing milk at the dairy farm.

Thank you.

CHART 1.—Prices received by dairy farmers under Federal Order No. 2 at the 200–

210-mile zone

Basic formula price:

September 1996 .............................................................................................. $15.37

October 1996 ................................................................................................... 14.13

November 1996 ............................................................................................... 11.61

December 1996 ................................................................................................ 11.34

Decline ......................................................................................................... ¥4.03

Class III price:

September 1996 .............................................................................................. 15.43

October 1996 ................................................................................................... 14.19

November 1996 ............................................................................................... 11.67

December 1996 ................................................................................................ 11.40

Decline ......................................................................................................... ¥4.03

Class I price:

November 1996 ............................................................................................... 17.79

December 1996 ................................................................................................ 16.55

January 1997 .................................................................................................. 14.03
96

February 1997 ................................................................................................. 13.76

Decline ......................................................................................................... ¥4.03

Blend price:

September 1996 .............................................................................................. 15.81

October 1996 ................................................................................................... 15.62

November 1996 ............................................................................................... 14.87

December 1996 ................................................................................................ 13.79

January 1997 .................................................................................................. 1 12.56

February 1997 ................................................................................................. 1 12.65

Decline .........................................................................................................1¥3.16

1 Estimate.

CHART 2.—GROSS DOLLARS LOSS PER FARM

[Compared to September’s 1996 price of $15.61 per cwt.]

Month Blend price Loss per hundred weight

100,000 lb. producer per month50,000 lb. producer per month

October ................................................... $15.62 $0.19 $190 $95

November ............................................... 14.87 .94 940 470

December ............................................... 13.79 2.02 2,020 1,010

January ................................................... 1 12.60 3.21 3,210 1,605

February ................................................. 1 12.61 3.00 3,000 1,500

March ..................................................... 1 12.81 3.00 3,000 1,500

April ....................................................... 1 13.20 2.60 2,600 1,300

May ........................................................ 1 13.31 2.50 2,500 1,250

June ........................................................ 1 13.31 2.50 2,500 1,250

July ......................................................... 1 13.52 2.29 2,290 1,145

August .................................................... 1 13.60 2.21 2,210 1,105

September .............................................. 113.70 2.11 2,110 1,055

12-month loss .......................... ........................ ........................ 25,970 12,985

1 Estimated blend price.

CHART 3.—FEDERAL MILK MARKETING ORDER NO. 2

The highest blend price that Order No. 2 producers received was for September’s

1996 milk, $15.81 per cwt.

Below are the class prices of milk that achieved the $15.81 September 1996:

Class 1 .................................................................................................................... $16.91

Class 2 .................................................................................................................... 14.79

Class 3 .................................................................................................................... 15.43

Class 3–A ................................................................................................................ 15.91

Blend ....................................................................................................................... 15.81

The highest class prices in 1996 were:

November:

Class 1 ............................................................................................................. $17.79

Class 2 ............................................................................................................. 15.67

September: Class 3 ................................................................................................ 15.43

July: Class 3–A ...................................................................................................... 16.04

Pro-Ag’s proposal—floor the basic formula price at $15.00 per hundred weight:

Class 1 price ........................................................................................................... $17.42

Class 2 price ........................................................................................................... 15.30

Class 3 price ........................................................................................................... 15.06

Class 3–A price ...................................................................................................... 12.00

Blend ....................................................................................................................... 15.72

State commissioners of agriculture’s proposal—basic formula price $13.50:

Class 1 .................................................................................................................... $15.92
97

Class 2 .................................................................................................................... 13.80

Class 3 .................................................................................................................... 13.56

Class 3–A ................................................................................................................ 12.00

Blend ....................................................................................................................... 14.30

Co-ops proposal—basic formula price $13.00 (on class 1 and 2 milk only):

Class 1 .................................................................................................................... $15.42

Class 2 .................................................................................................................... 13.30

Class 3 .................................................................................................................... 12.10

Class 3–A ................................................................................................................ 12.00

Blend ....................................................................................................................... 13.45

STATEMENT OF KENNETH E. ZURIN, DAIRY FARMER, MOUNT JOY, PA

Senator SPECTER. I would like to call now on our distinguished

Pennsylvania farmer, Mr. Ken Zurin, from Lancaster. Mr. Zurin,

the floor is yours. Thank you for coming.

Mr. ZURIN. Thank you, Senator, for inviting me. I agree with Mr.

Tewksbury, and pretty much everything that he says here, but I

am just a farmer. I only found out Monday night that I was invited

down here, and I did not have a lot of time to get a lot of the numbers together. But my wife and I, she is in the audience back here,

we own a herd of 300 dairy cows which gives a total of right

around 6 million pounds a year. And also, by the way, we milked

cows this morning at 3:30 before we came down here.

The dairy industry is in a difficult situation. The BFP does not work. The price of milk, like they said, dropped from the $16 range

down to the $12 range in a little less than 4 months’ time with

record high feed prices, and I do buy some feed. This drop in milk

price alone costs me just a shade over $20,000 a month for 4

months. So that is not too hard to figure. That is $80,000 I was

out. And that is not even figuring the higher cost of feed. This gives

us a financial crisis in the dairy industry. We need a more stable

market, like everybody was saying here, like most other businesses.

Prices in 1996 compared to 1995 were 13 percent higher for milk.

Now, that sounds well and good. But the feed prices were 26 percent higher in 1996 compared to 1995, which my feed prices make

up over one-half of my production costs, and I came up with this.

If I were to pass this on to my two sons, this farm, I do not think

I would be doing them a favor.

Now, you want a quick fix? I do not know what to tell you about

a quick fix other than like Mr. Tewksbury said, you know, have the

Congress put a $2 or $3 increase on us. That would be very nice.

But I talked to a couple of neighbors around my place there, my

dairy farm, and we were talking here the other evening and I said

how about it if we would have just a class I and a class II price?

All Class I price is all human consumption product. I do not care

if it is fluid milk, ice cream, cheese, or whatever. And then butter,

also in that.

Then class II would be dry powder milk or anything else, anything used for animal feed, dogfood, catfood, you know, anything

like that. And then let supply and demand set the price. Now, that

is going to take time to do that. It is not going to be a quick fix,

but I think over time, I think that would work.

Now, we are going to have to set the country off in about 8 or

10 orders or regions, whatever you want to call them. I, myself,

think that would work, because every region in the country has

separate or different costs to produce milk. Where I am at I have
98

land right around me selling for $7,000 and $8,000 and $9,000 an

acre. But you go out to Wisconsin, why, that sells a good bit cheaper. So their production costs are not quite as high as what ours are

in here, and we have the population here where we can sell our

product.

That is about all I have.

PREPARED STATEMENT

Senator SPECTER. OK, Mr. Zurin. We appreciate your coming

down. When you got up at 3 o’clock in the morning to milk the

cows and came down here, we understand that is not easy. Thank

you for being here.

Mr. ZURIN. And that is every morning.

Senator SPECTER. What time do you go to sleep?

Mr. ZURIN. Well, it was 11:30 last night.

Senator SPECTER. You are a good man, Mr. Zurin.

[The statement follows:]

PREPARED STATEMENT OF KEN ZURIN

I am Ken Zurin from Lancaster County, PA. We own a herd of 300 dairy cows

which give us a total of about 6,000,000 lbs. of sellable milk per year.

The dairy industry is in a difficult situation. The B.F.P. does not work. The price

of milk dropped from the $16.00 range down to the $12.00 range in four months

time with record high feed prices. This drop in milk prices alone cost me $20,000

per month not even figuring in the higher cost of feed. This gives a financial crisis

in the dairy industry. We need a more stable market like most other businesses.

Prices in 1996 compared to 1995 were 13 percent higher for milk in 1996 than

1995, but feed prices were 26 percent higher in 1996 and feed costs made up over

half of the cost to produce milk.

If I were to pass the farm over to my two sons, I do not think I would be doing

them a favor at numbers like these.

Alternatives:

The B.F.P. will not work with the N.C.E. (National Cheese Exchange) setting the

price because very little cheese is sold on the exchange. I think we should have 8

Federal orders in the United States—Have Class I and Class II. Class I would be

all dairy products for human consumption (except dry powder milk). Dry powder

milk and anything else would be Class II. Then let supply and demand set the

prices.

STATEMENT OF BUCKEY M. JONES, BOARD OF DIRECTORS, MIDAMERICA DAIRYMEN, INC., MISSISSIPPI

Senator SPECTER. Now we will turn to Mr. Buckey Jones, board

of directors of the American Dairymen. Thank you for joining us,

Mr. Jones. The floor is yours.

Mr. JONES. Thank you, sir. I am Buckey Jones, dairy farmer

from Mississippi, on the Corporate Board of Mid-America Dairymen. I understand I have got 5 minutes. I sincerely believe you

should handicap us guys from down South that talk so slow and

give us 6 minutes. I would have brought two of my assistants——

Senator SPECTER. Mr. Jones, you have 6 minutes.

Mr. JONES. Thank you. [Laughter.]

I would have brought two of my assistants to help me, but I was

afraid you may get on them like you did the Secretary’s assistants.

And so I left them milking the cows and feeding the calves.

Senator SPECTER. You thought I got on them, did you?

Mr. JONES. Yes, sir.

Senator SPECTER. You ain’t seen nothin’ yet. [Laughter.]
99

You ought to see if we were in a courtroom. [Laughter.]

Mr. JONES. I am glad to hear that milk is $4 a gallon in California. It gives us hope to get it up to about what it is worth, which

is about $6 a gallon.

The National Cheese Exchange, I guess, is the topic that we are

here to discuss today, and I sincerely believe, as we look at the entire structure of the National Cheese Exchange, that it is one small

portion of the problem, and maybe it is not the problem at all. As

we look at the structure of the dairy industry since 1990, we have

certainly seen dramatic changes. I think the authors of the 1990

farm bill told us to expect extreme gyrations in the market, and as

far as that is concerned, we certainly have not been disappointed,

because we have seen some extreme fluctuations in the market.

But on the National Cheese Exchange, the charges are that very

little cheese as a percentage of the whole is traded there. But I

would like to suggest to you if you look at the players on the National Cheese Exchange, those players—Kraft, Simplox, Land of

Lakes, AMPI, Mid-America Dairymen, Beatrice, whoever—they do

in fact buy and sell and produce and market most of the cheese in

the country.

So it is a reflection of what the market is, the cheese market,

and as we in the South look toward the cheese market, we do not

see that there is a bugger under every rock, and that there are people in the cheese exchange that have some strong desire to destroy

the industry or anything of that nature. As a whole, I think the

National Cheese Exchange has the support of the industry.

But I would like to raise a question today, if I may, that somewhere in the process decoupling class I milk from the cheese price

and having cheese control the fluid milk price in this country,

which amounts to about 42 percent of the production in the country, is somewhat out of sorts as we look to the future of a changing

industry.

People in Florida, for instance, have a very hard time trying to

understand why their milk would drop in price by 25 percent because the cheese supply in Idaho, which is almost 3,000 miles

away, is in abundant supply. Some people note that to be sort of

like showing up at kindergarten when you are 6 years old and having to stand in a corner for 3 days with your nose to the board because your sister broke a window pain 6 years before. It is just two

things that do not correlate.

Can it be done? I sincerely believe with the wisdom of the dairy

industry in this country and the wisdom of the Congress, we can

have a system whereby fluid milk can be separated from the cheese

price, and therefore to some extent cushioning the industry from

the volatility and the frustration of fluctuations that we have had

in the last 4 months. There is really no good reason to base fluid

milk prices on the cheese price. There is just no good reason to do

it.

We have had, in the fall of 1996, the highest milk prices for the

consumer in my area of the world that we have ever had, and yet

sales continue to grow. Are the consumers bucking or rejecting the

milk prices, or milk because the milk price is too high? The truth

is that sales have continued to grow. So therefore, I say to you in

all sincerity, if we dairy farmers want more money out of the mar-
100

ket, and we want more money in our check, we need to go to that

market and claim it for ourselves.

I say sincerely that there is just really no good reason to price

fluid milk because Idaho, California, Minnesota, and Wisconsin

happen to produce most of the cheese and let Idaho, Wisconsin,

California, and Minnesota set the price for the entire dairy industry. Can we convince the other 46 States that the cheese prices set

the fluid milk prices? I doubt it. Because of this, I think that the

30-percent value that we lost last year because of cheese prices was

something that farmers had in their hand and lost, and they

should not have lost it.

This was a time when we were scrounging all over the country

in my part of the world just to get enough milk for the fluid market. In my area of the world, the production is approximately 12

billion pounds of milk. The market for milk and dairy products in

that part of the world is over 15 billion pounds. We gave up years

ago all the hard product market, but our consumers deserve a

wholesome, fresh source from fluid milk, and they deserve it locally.

If you look at the record, and I am a history major so I believe

in what goes on in history, the highest priced milk anyone in Mississippi ever drank was not that high-priced class I differential

milk that was produced in Mississippi, but that milk we brought

from outside in the fall to fill the market that we did not have milk

for. So if milk is such a rare commodity in the Southeast and if you

think the price is too high, I invite you down to start a dairy. There

are a lot of them for sale because of this cheese price.

Somewhere in this arena I think that we all have to step up and

say, as the Secretary said, this is an antiquated system that we

have, and now is the time to change it. And we have a golden opportunity, I think, at this point in time to do that very thing as

we look to the future as dairy farmers.

Class I price separated from the cheese price is not an impossible

task. It can be done, and I think we can do it. Somewhere, we all

must realize, every one of us dairy farmers must realize, that parity was a wonderful thing, but parity today would be about 27

bucks a hundredweight, and someone should calculate for me really

quickly how much milk we would have in this country at $27 a

hundredweight without some kind of production control.

So with the lack of production control and the lack of parity, we

must all realize that the cost of production plus whatever dairy

farmers are willing to settle for as profit, plus the hauling and the

freight, will eventually set the market for the system. The Federal

order system, in my opinion, has worked well. It is not perfect, but

we do not need to scrap it.

Senator SPECTER. Mr. Jones, could you summarize? I have just

been advised that the majority leader wants to close the floor by

6 o’clock, and I have to be back on the floor for another matter.

Mr. JONES. I have two more points.

Senator SPECTER. OK.

Mr. JONES. I think if we look at what Rich McKee put out this

week for class I pricing options, I think that here again we see an

example of continuing to base everything on a cheese price. Some

of those options have some validity, but we still believe that sepa-
101

rating class I from cheese is the way to go, and we will support

that, and our co-op supports it wholly and it has a considerable

amount of support throughout the other cooperative systems.

Let me say that our cooperative supports exports and the export

programs, and we believe sincerely that 10 years from now the

American dairy market will dominate the world market because of

our abilities and what we can do on an annual basis. Even though

we cannot compete with the coffers of the European Common Market, we can compete once those subsidies are reduced.

Senator Cochran mentioned the seasonal base plan that is so important to the Southern producers, and I sincerely hope that we

can reinstate or at least get some messages back to the Congress

that the seasonal base plan is, in fact, a good thing for the Southeast. It is good for the consumers because they are the ones that

ultimately pay the price that we all receive.

Let me say that I sincerely appreciate the opportunity to visit

with the committee, and I sincerely hope that somewhere in this

arena that we dairy farmers, only less than 100,000 Grade A dairy

farmers in the entire country, we could all get into the University

of Tennessee football stadium and have room left over, and yet we

go around shouting at one another going in 1,000 directions. Sometime we have to come to the conclusion that the dairy industry can

work together and get at it.

Thank you.

PREPARED STATEMENT

Senator SPECTER. Thank you very much, Mr. Jones. We appreciate your testimony. Your statement will be made part of the

record.

[The statement follows:]

PREPARED STATEMENT OF BUCKEY M. JONES

I am Buckey Jones, a dairy farmer from Smithdale, Mississippi. I appreciate this

opportunity to appear before this subcommittee today and discuss some of the issues

that face our nation’s dairy farm families. I am a member of Mid-America Dairymen, Inc., a milk marketing cooperative with approximately 18,000 members in 30-

plus states. I am a member of the Mid-Am Corporate Board of Directors.

Much has been said and written about the National Cheese Exchange in the last

few weeks. The NCE alone is not the problem. It merely reflects the market conditions of the cheese market. Over time it is a barometer of the market conditions

that exist. While a major percentage of the total cheese actually sold in the U.S.

is not traded on the Exchange, the Exchange itself is made up of members who DO

produce and market a very large percentage of the total cheese marketed. The Exchange is the major place in the country where buyers and sellers come together

weekly to buy and sell cheese based on their estimates of the supply and demand

in the market.

As the dairy industry has begun to deregulate, we have seen increased volatility

in prices for all dairy products. (See attached graph) It is for this reason that we

need to take a new look at the basis on which the different Classes of milk are

priced. The price of Class III (milk used to make cheese) should be based on a product formula based on the cheese values. This should continue to be the data generated from National Cheese Exchange activity. If there is increased regulatory

oversight of the Exchange, it should be by the Commodity Futures Trading Commission (CFTC). The price of cheese will ultimately set the price of milk used to make

cheese. However, it is at this point that prices set for other Classes of milk should

be disassociated from the cheese market.

Given the volatility and wild fluctuations in the dairy commodity markets the last

two years, and given the inelasticity, consumption, and production of fluid milk,

there is no good reason to continue basing fluid milk (Class I) and soft products
102

(Class II) on the price of cheese. These need to be decoupled from the commodity

markets. Four states—Idaho, Wisconsin, Minnesota, and California—produce most

of the American style cheese in the United States. Yet, these four states, by setting

the cheese price and thus, the Basic Formula Price, set the price of milk for the

rest of the country—even in areas of deficit production. (See attached graph of

cheese prices versus BFP) For example, during the last 4 months of 1996, we experienced a decline of nearly 30 percent ($4.03 per hundredweight) in fluid milk prices.

It was during this same period the region of the country that I live in was spending

millions of dollars to purchase and transport milk into a deficit market. All of these

dollars were not recouped from the market place, therefore dairy farmers paid part

of the costs.

The concern about the general economic conditions our nation’s dairy farms is so

great that 31 Senators recently signed a letter to Secretary of Agriculture Dan

Glickman and to President Clinton asking for a temporary $13.50 price floor as a

basis of calculating Class I prices in the Federal and state orders. The letter had

bipartisan support and I commend those Senators who signed the letter. This is a

perfect opportunity, given the concern about the NCE, the general dairy situation,

and the desire to reform the system, to actually decouple Class I from the cheese

market.

As a basis for establishing Class I prices, we suggest a Supply/Demand adjuster

using a 12 month rolling average compared to the previous 12 months rolling average and adjust prices $0.12 for each 2 percent change in Class I utilization. The

Federal Milk Market Administrators should also be given the authority, under the

informal rulemaking process, to make short term adjustments in Class I prices

based on industry comments.

Butter and nonfat dry milk powder prices, such as the current Class IIIa should

be used as the basis for a new class, Class IV.

We need the ability to export dairy products in a competitive world dairy market

environment, therefore, we would like to see an export class developed. I realize

that many of these issues are to be taken up by the Secretary in the Federal order

reform process, and are not the basis of any currently proposed legislation, but our

position is one that we believe to be realistic and equitable.

I have also been asked to comment on the Seasonal Base Plan issue. Seasonal

base plans are an appropriate tool for market orders to use in trying to achieve a

more seasonally balanced milk supply. Base plans are not price enhancements but

are a means of redistribution of proceeds to those who perform for the market by

reducing spring production and increasing fall production, when milk supplies are

traditionally tighter. We support reauthorization of Seasonal Base Plans.

Federal orders have performed a vital function for farmers, processors, and consumers. We support the Federal order system and will work to aid in the reform

process currently underway.

I thank the Chairman and Committee for this time and opportunity and will be

happy to answer any questions that you might have.
103

STATEMENT OF BILL BREY, PRESIDENT, WISCONSIN FARMERS UNION

Senator SPECTER. I would like to turn now to Mr. Bill Brey,

president of the Wisconsin Farmers Union. Mr. Brey.
104

Mr. BREY. The comments that we have here today, and I thank

you very much for this time constraint we are under, and I am

from Wisconsin, I will have to talk twice as fast. So if you cannot

understand it, I did apply it so it is in the record. I hope you accept

it.

Senator SPECTER. It will all be in the record, Mr. Brey. We understand you fine.

Mr. BREY. What we are advocating is that the delinking of the

National Cheese Exchange and the response of what Mr. Jones has

talked about a little bit is that the regionalism that that causes,

even though there was a shortage of fluid milk, the National

Cheese Exchange priced all milk, so we recognize that, as he does,

as farmers and dairy producers, that that is not a place because

of the thinly traded to hang our hat on as far as receiving our production costs.

What we are talking about in the interim that you are urgently

trying to find is that as dairymen and the 20 States belong to National Farmers Union, and as we get together as farmers we have

a much different conception of how we want our milk priced to

farmers as the industry uses the National Cheese Exchange as

their place to price the milk. So the industry is not really—there

is a difference there, and we are farmers, so we are here from one

end or part of that that makes that industry. Without our sustenance the industry will no longer survive.

So from that side, one of the things that we would like to implement in this short-term price relationship is the production costs.

And we can either use U.S. Department of Agriculture figures over

the last 4 years, calculate them, average them, increase the inflation that is in there, or we can look at a price-to-feed ratio and put

that as one component of a pricing system.

For example, it was talked about today that the basic formula

price is moving up. But price-to-feed ratio also is, if you look at the

chart, in October 1996 when we had the highest milk price, we also

had the highest milk-to-feed ratios that gives us the profit that we

need as dairymen to stay in business. But now, even though the

basic farmer price is creeping up, our costs our outpacing it. So the

cost of milk-to-feed ratio is 2.30, which is quite a bit different than

the 2.89 back in October when we could take that feed and make

a little money on it.

One of the other things that we think should be included in this

mix is that wholesale price. It is based on a wholesale price from

cheese manufacturers throughout the United States, and that is

what the Secretary alluded to. But we need mandatory reporting

so that it shores up, so that it becomes meaningful, and not based

on what continues to happen on the National Cheese Exchange as

basing that price from what the reporting is.

The other place that we are looking for is a retail price, and that

was also alluded to by the farmers, the share in what happens out

there. This, again, is current information that could be put together

with a lot of phone calls quickly. That could come from the Bureau

of Labor.

So here we have three different entities that would make this

price of milk more reliable to the farmer. It brings the confidence

back into the market by looking at 90 percent of the milk or better,
105

and costs that are exchanged to get that milk or the profits derived

from that milk, versus just looking at the National Cheese Exchange and trading 1 percent and saying that should be the same

price for the milk fluid or whatever. It is not quite right.

Senator SPECTER. Mr. Brey, I do not understand your point. Are

you saying there are some other prices we could look at besides the

cheese price which could raise the price of milk?

Mr. BREY. Yes; to the farmer.

Senator SPECTER. Such as what? I do not understand.

Mr. BREY. One would be to look at the wholesale price and take

that into a barometer, take the retail price, take that into—however it fits. I am not sure how it would fit. I do not have the answer.

Senator SPECTER. OK, you could do that, but there would have

to be a total change by the Department of Agriculture on how they

price milk.

Mr. BREY. Well, this is what can be implemented as we move

into order reform as a new BFP, but it also gives us relevance to

the urgency that you are asking and talking about.

Senator SPECTER. I think it is. I think it is. Proceed.

Mr. BREY. I mean, if one of the—if there is an idea that says that

these—looking at where we get the information from the cheese is

not accurate enough or it is not sure enough, I think if you put all

these other ones and lay them together, whatever percentages that

we want to put on them will give us a more timely benefit of them.

The other thing that was mentioned today is exchange trading.

Again, it is too early. The announcement and the implementation

of that is not even there yet. How can that be a barometer so urgently needed at this time. I think it has to see the participation

and whatever that is going to be on that. So that is too speculative

at that point, and with the influence of the National Cheese Exchange still being there, that is why it is thinly traded also at this

time, because they always use the crutch that will get them to

where they want to be at the most rapid rate.

The other thing is looking at economic formulas, I know USDA

has called and put a committee together, or whatever, to put together a new basic formula price. But most of that early testimony

was done before the crash of the cheese exchange. That was supposed to be in there. So some of that summation does not have any

relevance of where we are today as producers in losing that $4 a

hundredweight as producers losing it. So that should be reopened

and maybe thrown out, or at least revisited so that it is more

meaningful at the current time. I mean, times are changing that

fast, and we have to be up to current and looking at what is happening now, not at something that happened prior to and assuming

the National Cheese Exchange was going to be there as a pricer.

The other thing that we——

Senator SPECTER. Mr. Brey, could you summarize, please, at this

point?

Mr. BREY. The other one is that the basic formula price has to

be changed, and we hope that that could also be something that

you could work on quite readily.

The last one is we are not necessarily removing the National

Cheese Exchange, but as Wisconsin Senate passed the bill
106

bipartisanly, 28 to 5, to bring about trading against interest law,

that gives the indication that that is where the cheese exchange

has to be done only on the national level also, so that it is not

moved to another State and still creates the entity that it does in

pricing all our milk.

PREPARED STATEMENT

And this is what we are trying to do to provide stability, not only

to what the farmers have, but every time there is a spike or volatility in the market the consumer ends up paying also. And this is

why we want to have more stability in the market, and that is why

we are needed and we are very fortunate to be here today as producers on this panel. So thank you very much, Senator.

[The statement follows:]

PREPARED STATEMENT OF BILL BREY

Good afternoon. My name is Bill Brey. I am a dairy farmer in Sturgeon Bay, Wisconsin and I serve as president of the Wisconsin Farmers Union and on the board

for the National Farmers Union. Thank you for the opportunity to discuss viable

alternatives to the National Cheese Exchange. Replacing the NCE price as the main

price setting component in the basic formula price is critical to restoring fairness

and stability. My testimony today will address the position of the National Farmers

Union on price reform and will also outline action that should be taken pending the

reform.

POLICY OF THE NATIONAL FARMERS UNION ON PRICE REFORM

Ten days ago delegates to the annual convention of the National Farmers Union

passed policy calling for the replacement of the National Cheese Exchange in setting

the basic formula price. Delegates agreed that the most important factor in pricing

milk should be the cost of production, the same factor that other businesses use in

pricing their products. Delegates agreed that additional factors for calculating the

formula price should include both wholesale and retail prices.

1. Production Cost.—There are several ways to measure production cost. One possibility is to use the cost of production figure calculated every four years and indexed annually by the United States Department of Agriculture.

Another viable possibility calls for basing the cost of production on the milk-feed

ratio, i.e., the amount of feed a producer can buy for one pound of milk. This number is calculated on a monthly basis also by USDA. Using the milk to feed ratio

would let the formula reflect the producers’ bottom line. For example, many nonfarmers would see that milk prices were higher in February of 1997 than the previous month and therefore assume producers were better off. However, the milk-feed

ratio actually declined in February, indicating that feed prices rose faster than milk

prices and so the producer was actually in worse shape in February than January.

The following table of the milk-feed ratio shows how producers have fared in the

past six months. Keep in mind that producers do best when the milk-feed ratio increases.

Pounds of feed that can be purchased for 1 pound of milk

February 1997 ........................................................................................................ 2.30

January 1997 .......................................................................................................... 2.40

December 1996 ....................................................................................................... 2.61

November 1996 ...................................................................................................... 2.78

October 1996 ........................................................................................................... 2.89

September 1996 ...................................................................................................... 2.61

August 1996 ............................................................................................................ 2.27

July 1996 ................................................................................................................ 2.20

NOTE.—Calculations are based on a 16-percent dairy ration, and 3.67 test milk.

Source: USDA, NASS

The milk-feed ratio is especially critical to producers who are forced to purchase

a large share of the feed they use. However, it should be emphasized that while cost

of production is a critical factor in calculating the formula, it should not be the only

factor used.
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2. Wholesale Price.—The wholesale price will become available from the National

Agricultural Statistic Service (NASS) in May of 1997, and will be announced for the

nation as well as individual regions, on a weekly basis. It is based on the wholesale

price from cheese manufacturers throughout the United States, and is expected to

include over 90 percent of the nation’s cheese. We commend Secretary Glickman for

his decision to collect and publish this data.

3. Retail Price.—The retail price component could be based on the information collected by the Bureau of Labor, used for measuring the consumer price index (CPI).

While some adjustments may be needed, we believe such data is properly part of

the formula used to calculate dairy prices.

EXCHANGE TRADING

We are watching with interest the current effort of the New York Coffee, Sugar,

and Cocoa Exchange (CSCE) to develop a cash market for dairy. This may provide

an alternative to the National Cheese Exchange and has the potential advantage

of oversight by the Commodity Futures Trading Commission. However, since this

contract does not even exist yet, it is impossible to estimate its potential as a price

indicator. And, even if the CSCE successfully develops its cash market, the price

set there should not replace the cost of production factor as the key component in

setting the producers’ price.

USING AN ECONOMIC FORMULA

Of the alternatives we have reviewed, the economic formula proposed by University of Wisconsin Dairy Economist Ed Jesse is one of the few that uses the cost of

production in calculating the producers’ price. Jesse’s model is based on 3 factors

and reflects: (1) changes in the cost of producing milk, (2) disposable consumer income, and (3) prices for manufactured dairy products. We are optimistic that economic formulas, such as the Jesse proposal, are among the least affected by the

NCE price and seem to produce a relatively stable producer milk price. We still have

questions as to how the model might be adjusted to ensure it will yield a price that

allows the dairy farmer to earn an adequate return while continuing to provide a

stable supply of milk and dairy products to the consumer.

ACTIONS TO TAKE PENDING REFORM OF THE BASIC FORMULA PRICE

1. Setting a floor.—We commend Congress and the administration for enacting

legislation calling for reform of the basic formula price. Such reform takes time, yet

many producers need action now. For the short term, action should be taken to

enact a temporary price floor under the basic formula price. Emergency action

should assist producers in all regions, and should not be dependent on whether the

milk produced on a particular farm or region is used for fluid, ice cream or cheese.

In order to be fair, the price floor should be set under the BFP. If alternatively, a

floor is set under only class I or II, national pooling should be used to ensure an

equal distribution of the emergency assistance.

2. National Cheese Exchange Oversight.—As long as the National Cheese Exchange continues to be the biggest factor in setting producer milk price, the Commodity Futures Trading Commission should be directed to provide oversight of the

NCE. In addition, Congress should enact a federal rule prohibiting trading against

interest, a form of market manipulation. The Wisconsin Senate has passed a bill

at the state level, although action is still pending in the Wisconsin Assembly. In the

absence of federal legislation, the NCE can avoid regulation by moving to another

state.

3. Restoring Price Stability.—In addition to replacing the current basic formula

price, Congress and USDA should take action to rebuild market price stability. In

the past years under the dairy support price program, producers and bankers could

at least be certain of a price floor. With the enactment of the FAIR Act, the floor

will continue to decrease, disappearing entirely by the year 2000.

While price volatility may benefit exchange brokers, it is only a detriment to producers and consumers. Wild price fluctuations make it needlessly difficult for producers to meet their cash flow needs and make it difficult for financial institutions

to make loans. Volatility also harms consumers because the store price rises when

the farm price rises but fails to come back down a proportional amount when the

farm price falls. Congress should repair the safety net by reinstating the support

price at a level that would at least prevent free-fall of producer prices and eliminate

consumer price spikes.
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CONCLUSION

Thank you for the opportunity to testify today. We look forward to continuing to

work with Congress and the administration to ensure that there will still be family

farmers supplying consumers with a wholesome and readily available milk supply

in the future.

PRICE OF CHEESE LONG-TERM SOLUTION

Senator SPECTER. Thank you, Mr. Brey. The suggestions that you

made, Mr. Brey, are useful ones. They are looking to a long-term

solution, and what I have been looking to is not only a long-term

solution but a short-term solution.

It is true that Congress could change the milk price. We can do

lots of things here. If the President signs it, it is done. If he does

not, we can override a veto.

And I understand what you are saying, Mr. Tewksbury, and I reluctantly say that it is highly unlikely that that is going to happen.

We are not going to get a bill through the Congress. I have pushed

hard on this price of cheese because that is an immediate factor.

Now, we did not hear when we were in Pennsylvania on February 10 that there was going to be a very small differential. We

did not hear that, and I am not sure it is a small differential. I

want to know what the facts are.

I am going to get those 112 people who count for 99.2 percent

of the price of cheese, I am going to call them up, and I am going

to ask Mr. Tipton, who is going to testify next, what questions I

should ask them, because Mr. Collins did not—he went through a

lot of things about the size and the bulk and the containers, but

when I asked him what they were he said he did not know. That

was up to the economists, the statisticians.

I think this is a matter of policy. It is up to the Secretary of Agriculture to establish what enough statistics are, and I had expected

that if there was a sufficient evidentiary base—that is what I said

in northeast Pennsylvania, a sufficient evidentiary base that we

could get some relief here.

As Mr. Tewksbury said, he is disappointed, and so am I.

Mr. Tewksbury, pull the microphone over. We will give you the

last word for this panel.

Mr. TEWKSBURY. Senator Specter, we have tracked some of the

other cheese pricing points, and unfortunately we also are finding

that they are not responding to any large increase over the National Cheese Exchange.

It is possible that the same players are playing in the other markets that are playing in the exchange, and maybe what we thought

would raise the prices may not do it.

My question is, then—because I am asking a question now, instead of making a statement. If the Secretary cannot raise the

price to our dairy farmers, and if Congress cannot or will not step

in and raise the prices to our dairy farmers, and the cheese prices

have now been stagnant for 3 straight weeks and probably will be

for a fourth week tomorrow—we probably have seen the largest increase in the basic formula price we are going to have for a while—

and our dairy farmers are facing these figures that I have given to

you and other members of the panel have given to you, what do
109

we tell our dairy farmers back home tomorrow as to what they can

expect for the next 2 or 3 months, to have the prices go up?

Because January’s milk, regardless of what anybody has been

saying, was 81 cents per hundredweight less than it was in 1981.

That is 16 years ago, and we paid billions of dollars in to keep the

dairy program. That is one hell of a reward to our dairy farmers

to have those prices less than they were in 1981.

Senator SPECTER. Mr. Tewksbury, I do not have an answer for

you. I am struggling with the one opening that I saw, as I said,

on the cheese price, and you heard me ask the question to the experts here, Mr. Collins, who is the most technical expert above and

beyond the Secretary or the Assistant Secretary, because they have

had experience with it, and I went out into the hall—I had to step

out for a few minutes, went out in the hall, thanked the Secretary

for coming and said, Mr. Collins, I expect something imaginative.

We still have two more witnesses, Mr. Tipton and Mr. Coughlin,

to see if we can shed some additional light on this. I am prepared

to do everything I can. I am coming back to the Northeast. I am

going to be back in the Northeast, in Luzerne County, to talk to

farmers again. We break on recess—we are in session next week,

then we break on recess, and I will be up there on Tuesday the

25th to give you my best thinking. I am prepared to face the music.

The music, Mr. Jones, is a lot tougher than the music Mr. Collins

had. You should have been up there with 750 farmers. I thought

there were 500, but Mr. Tewksbury said 750.

Mr. TEWKSBURY. The bleachers held 500. Then there were all the

chairs around, which makes it 750.

Senator SPECTER. It was a big crowd, and it was a very unhappy

crowd.

I am prepared to go back and talk to them again to tell them

what I am trying to do so they will know there is at least some

interest here. This is a special hearing on this issue, and I have

an instinct that if we push at the edges hard enough we can find

something. I think we can, and I am prepared to do the work to

try.

Mr. TEWKSBURY. I am saying our farmers are going to be more

disappointed and more upset to learn that nothing can be done in

the immediate future to raise their prices. They are going to be

more upset than they were when they realized where the milk

prices went to in January and February. I think there are things

that are going to happen across the United States.

Senator SPECTER. Well, I am committed to keep working on it,

but I do not have an answer by myself.

Mr. TEWKSBURY. I appreciate that.

Senator SPECTER. OK. Thank you very much, Mr. Jones, Mr.

Brey, Mr. Zurin, and Mr. Tewksbury.

I would call our final panel now. Mr. E. Linwood Tipton and Mr.

Ed Coughlin. We thank you, gentlemen, for coming. We thank you

for being patient. We have Mr. E. Linwood Tipton, president and

CEO of International Dairy Foods Association, a long-time expert

in the field. Mr. Tipton and Mr. Coughlin, as I said.

We are on the balanced budget amendment and I have to make

a floor statement before 6 o’clock, so to the extent you can summarize your statements, we would appreciate it. Your full statements
110

will be made a part of the record, and if your statement does not

answer the question as to how we raise the prices of milk, that is

what I will ask you when you finish your statement.

Mr. Tipton, the floor is yours.

STATEMENT OF E. LINWOOD TIPTON, PRESIDENT AND CEO, INTERNATIONAL DAIRY FOODS ASSOCIATION

Mr. TIPTON. Thank you very much, Mr. Chairman. I appreciate

it. I have four points that I want to talk about, I think the same

four subjects that you have been talking about, volatility and

prices, the economics of milk prices, the cash markets for cheese,

and finally, the basic formula price and what our suggestions

might be with respect to that.

I think with respect to volatility there is one thing that I would

like to make a point of, and that is, while prices have changed

rather drastically recently in the milk industry, the fact is the volatility in the milk industry is still well below the volatility in virtually all of the other commodities. The prices of corn, wheat, soybeans, cotton, et cetera, are much more volatile than the price of

milk has been, and even this past year——

Senator SPECTER. Mr. Tipton, do those lines face the same kind

of crisis that milk is facing now?

Mr. TIPTON. Well, I think—I am sure when the prices are fluctuating they have found ways to deal with it, and that is what I

want to talk a little bit about, about how you deal with it, because

I think that everybody thinks we ought to get rid of the volatility,

and my point is that that is virtually impossible, and other commodities have more volatility, so there ought to be a way that we

ought to be able to deal with the volatility that we have.

In that connection there is, and we have already talked about it,

authority under the FAIR Act of 1996 for some training programs

as well as some pilot programs with respect to the futures markets,

and we would urge you to work with the Secretary of Agriculture

and make sure those programs get up and operative. I think that

is a great opportunity for everybody and would serve the industry

enormously well.

The second point that I wanted to talk about is the dynamics in

the milk pricing, and most of the discussion today has been the decrease that occurred in the price in September, from September

and October through December. The fact of the matter is that when

the Government got rid of its surpluses and got some lower price

support programs and the Government did not have surpluses of

powder or cheese or butter, that is what allowed the prices to go

as high, last fall, as they did. There was a problem. Grain prices

were going up, and farmers needed more money. Prices went up,

and that is the way the market ought to operate.

In the past, when the Government had surpluses, they sold

whatever their surpluses were back on the market once the price

had gone up 10 percent, so that effectively set a lid. They could not

go above that.

When we got rid of the surpluses, they can go up to whatever it

takes in order to generate a reasonable supply of milk and take

care of the economic situation on the farm. That is what occurred

last fall. We think that is appropriate and right.
111

Once the milk production started coming back, started increasing, the prices began to fall. They fell, and they have started correcting that.

Now, people were talking about them not coming back real fast

right now. They have come back significantly, I think, when you

are going into a period that is traditionally the flush period of the

milk production cycle, so it may be a couple of months, April or

May, when traditionally that is the largest milk production, that

they may be a bit laggard.

However, our prediction is, and the Secretary of Agriculture is a

tiny bit higher in his predictions than we were, that for 1997 milk

prices will be the second highest prices on record. 1996 was the

highest; 1997 will be the second highest; and feed costs are coming

down, and I think that 1997 will be a successful year for dairy

farmers.

Moving to the cheese market, the National Cheese Exchange has

been in effect since 1918, for a long time. It has had the scrutiny

of Federal and State agencies, including the State of Wisconsin extensively recently, including the Federal Trade Commission, and

including the Commodities Futures Trading Commission, all of

which have investigated it, and all of which have issued letters indicating that they had found no manipulation, no illegal activities,

nothing that would be out of the ordinary.

Senator SPECTER. Who has issued that, Mr. Tipton?

Mr. TIPTON. Excuse me?

Senator SPECTER. Who has issued the statement you say that

there is no irregularity or no manipulation, you say by the Green

Bay Cheese Exchange?

Mr. TIPTON. That is correct. The letters have been from the attorney general of the State of Wisconsin, from the Federal Trade Commission, and from the Commodities Futures Trading Commission.

Senator SPECTER. The statement by Mr. Tracy at the bottom of

the first page references the study conducted by researchers at the

University of Wisconsin and the report concluded, ‘‘As currently organized the exchange appears to facilitate market manipulation,’’

so that is at least one authoritative conclusion to the contrary.

Mr. TIPTON. Well, it is not an official body. That was two professors at the University of Wisconsin. Prior to that, the attorney general of the State of Wisconsin conducted his investigation and

found that there was no basis for taking any action. That was two

professors at the University of Wisconsin that had been commissioned by the Secretary of Agriculture to undertake that analysis.

Senator SPECTER. Well, the Secretary of Agriculture has adopted

their conclusion and thinks it is sufficiently reliable to adopt it. I

do not want to get into a dueling war about experts, but the Secretary of Agriculture makes a big point of it.

Mr. TIPTON. It is kind of beside the point in any event, in my

opinion.

Senator SPECTER. I did not make the point, Mr. Tipton.

Mr. TIPTON. The reason I say it is beside the point is because the

National Cheese Exchange, it is the intent of the associations I represent and the National Cheese Exchange to create a new exchange, either with the Chicago Mercantile Exchange or with the

Coffee, Sugar, and Cocoa Exchange.
112

Senator SPECTER. How soon will that happen, do you think, Mr.

Tipton?

Mr. TIPTON. It is our target to have that done by May 1. There

are a number of things to be done.

Senator SPECTER. Will they have a price in effect by May 1?

Mr. TIPTON. It is our target to have the trading occur on May 1.

Senator SPECTER. Well, if trading occurs, then you have a price.

Mr. TIPTON. Well, yes, it would have that week, yes.

Senator SPECTER. You would not have to send out a lot of questionnaires.

Mr. TIPTON. No.

Senator SPECTER. Make a lot of phone calls.

Mr. TIPTON. No.

Senator SPECTER. What questions should I ask tomorrow, Mr.

Tipton? What is this about containers and about size, all of those

things that Mr. Collins mentioned, rattled off, and then when I

asked him about specifics he said only statisticians knew that.

Mr. TIPTON. Well, I think people do have a tendency to think

cheese is cheese, as they often think milk is milk.

Senator SPECTER. Oh, no. I buy Swiss, I buy American, I buy

cheddar, I buy all different brands of cheese.

Well, what questions am I going to ask tomorrow when I call

these people?

Mr. TIPTON. I think I need to provide just a tiny bit of background, and then I will try to answer that, if I may.

Senator SPECTER. OK.

Mr. TIPTON. The tiny bit of background is that the National

Cheese Exchange and the new commodities, or new cheese exchange will deal with cheddar cheese only. That is the basic product.

So in asking people for prices, which they do in the survey, you

have to make sure that you get—and this is the kind of information that I think you would want to know as well if you were going

to base your prices on it. You are going to have to get that it is

a homogeneous product. Its age makes a big difference. Under the

exchange rules it cannot be more than 30 days old, and it cannot

be younger than 3 days old.

It has to be at what location it is delivered, what are the delivery

times. There is a lot of information that actually affects what the

contract price might be for selling cheese. It depends on what services they add to it. Are they adding services of certain delivery

services, certain time restrictions on when it is delivered, those

kinds of things.

Those are the things that complicate the issue, and those are not

issues under a cash market, because we specify under the terms

and the rules of that cash market what cheese it is that must be

delivered.

Senator SPECTER. Why is it only cheddar cheese? Cheddar is only

one kind of cheese. Why is it that, as opposed to some other type

of cheese?

Mr. TIPTON. Well, there is a tremendous range in the value and

cost of cheeses, and that is trying to get at one of the largest shares

of the market that is a homogeneous product.
113

Senator SPECTER. So it is an indicator of price to be calculated

into the milk price.

Mr. TIPTON. Yes; and it is a homogeneous product that you can

get a price on.

Senator SPECTER. So it is from 3 days to 30 days old, that is one.

Location, delivery time—well, I see the time. It has to be for a time

certain. Location depends—so that involves transportation.

Mr. TIPTON. But a lot of contracts might provide that I will deliver next month, not this month, and that is the price I am giving

you for next month.

Senator SPECTER. Well, that is not helpful. That is a futures

market.

Mr. TIPTON. No; that would be individual business transactions,

commercial transactions between companies.

Senator SPECTER. OK. It would be what the price is next month.

They are contracting today for delivery for next month, and we

want to know what it is today.

Mr. TIPTON. Yes.

Senator SPECTER. OK. I think I have the point.

Mr. TIPTON. Thank you.

The last point I would make is that we do expect to have that

new market up and running May 1. It may slip a little bit, but that

is our target, and we are doing the best we can to accomplish that,

but that does create a dilemma as the Secretary talked about, because at that point we would then anticipate that trading under

the National Cheese Exchange would be discontinued, and that is

the basis for the pricing under the formula, and so the Secretary

would be compelled at that point to find an equivalent—under the

law to find an equivalent series.

Senator SPECTER. I think he would be kind of happy to do that

at this point.

Mr. TIPTON. I hope so, and I hope that he would make the choice

then of this new exchange as the basis, at least in the interim until

they can get some other kinds of reform or look at other data to

see what might be a suitable way of doing it.

So it is our recommendation that the new exchange should be the

basis used in the basic formula price.

PREPARED STATEMENT

Senator SPECTER. Mr. Tipton, thank you very much for your testimony. We appreciate your expertise in the field. I had called

when I got back from northeastern Pennsylvania, and you were an

encyclopedia of information, and I appreciate your cooperation and

your assistance.

Mr. TIPTON. Thank you. You are very kind.

[The statement follows:]

PREPARED STATEMENT OF E. LINWOOD TIPTON

My name is E. Linwood Tipton, and I am President and Chief Executive Officer

of the International Dairy Foods Association (IDFA) and its constituent member, the

National Cheese Institute (NCI), a national trade association of processors, manufacturers and marketers of cheese and cheese products. NCI members market about

85 percent of the cheese consumed in the United States. Many of our members buy

and/or sell cheese on the National Cheese Exchange, which currently provides the

only cash market for cheese in the United States. I appreciate the opportunity to
114

appear before you today to present our views on the National Cheese Exchange

(NCE), the role of a cash market for cheese, and alternatives to the use of NCE

prices in determining the Basic Formula Price (BFP) used in Federal milk marketing orders to set class prices.

Questions about trading activities on the National Cheese Exchange and their effect on milk prices are not new. These subjects have been examined intently over

the past decade, by both state and federal authorities, with no findings of improper

or illegal acts. The real basis for concern today, however, is not the National Cheese

Exchange itself, but rather, recent changes in farm milk prices.

I. A COMPARISON OF MILK AND OTHER COMMODITY PRICE CHANGES

Price volatility is experienced by virtually every commodity. For several decades,

however, dairy commodity prices were stabilized by federal programs. Because of

this long period of price stability, the dairy industry did not develop futures contracts or other risk management tools that are common in other agricultural sectors.

As you can see from the attached graph, which compares the price volatility of seven

different commodities as recently as during the period 1991–95, milk prices experienced less volatility than other major agricultural commodities (see Graphs 1 and

2 attached).

When the Federal Government held inventories of dairy products, and dairy support prices were above what market prices would have been absent the high support

prices, the release of Government inventories effectively placed a lid on how high

dairy prices could go and the support price placed a floor on how low they could

go. This range was normally about 10 percent, because CCC inventories of dairy

products were released at prices 10 percent above the support price.

Now that market prices of dairy products regularly and substantially exceed the

support price and the CCC does not have a stockpile of dairy products, prices for

milk and dairy products are considerably more volatile. During 1996, this worked

to the great benefit of dairy farmers who were confronted with much higher feed

costs. Because the Federal Government did not have stocks to resell to the commercial market when market prices rose well above the former 10 percent lid, milk and

dairy product prices were able to increase to reflect the higher feed costs. This relieved much of the burden on America’s dairy farmers.

Under the current dairy program, therefore, increased volatility of milk and dairy

product prices should be expected. Dairy farmers and processors are beginning the

process of learning how to better cope with and manage this increased volatility. In

this regard, we urge USDA to implement an educational program within the dairy

industry to help dairy farmers, manufacturers and processors better understand

how to use available risk management tools. Authority for such a program was provided in sections 191 and 192 of the Federal Agriculture Improvement and Reform

Act of 1996 (the FAIR Act).

II. RECENT DEVELOPMENTS IN THE MARKET DYNAMICS OF MILK PRICES

Last year, a shortage of feedgrains drove up feed prices, which increased dairy

farmers’ costs of producing milk and led to a reduction of milk production. Tight

milk supplies coincided, however, with strong demand for milk and other dairy products. Milk prices paid to farmers therefore rose substantially, increasing more than

21 percent over the six months of March to September. By September of last year,

milk prices had soared to an all-time historic peak of $15.37 per hundredweight as

reflected in the BFP, and $16.30 per hundredweight as reflected in the all-milk

price.

At the same time, cheese production was higher than previous year’s levels. Although cheese sales were also above year-earlier levels through summer, they were

not keeping pace with production, and commercial inventories grew. In September,

when increased cheese and milk prices finally reached the consumer, sales declined.

Good harvest weather led to near-record crops, reducing costs and adding to both

the expectation and actuality of stronger dairy supplies.

As a result of all these factors, commercial inventories of cheese were building

and there was an overall surplus of cheese. This excess of supply over demand was

predictably reflected in a sharp decline of cheese prices on the NCE from the highest levels in history.

The confluence of these particular conditions in the market was, however, a temporary phenomenon. With lower cheese prices last fall, wholesale demand recovered.

As we moved into 1997, cheese prices began to rise. Similarly, after declining from

September through December, the BFP turned around and increased in January

and February 1997. I would note for your attention, however, that even with the
115

year-end declines, the average annual BFP for all of 1996 ($13.39) was the highest

in history (see Graph 3 attached).

As 1997 began, both producers and processors of dairy products were publicly optimistic about the outlook for milk prices. On January 3, our organizations and the

National Milk Producers Federation jointly issued a press release, projecting the

BFP in 1997 to be the second highest on record—second only to last year’s record

high. Our projections are for the BFP to average $12.66 this year. The first quarter

estimates are probably too low, since the February BFP is already at $12.46, suggesting that we may have been too conservative for the rest of the year as well.

In short, any discussion of recent volatility in milk prices must take account of

the fact that recent short-term price declines followed an historic surge in milk

prices, with even the annual average reaching an all-time high. Moreover, milk

prices paid to farmers today are again on the upswing.

III. THE NATIONAL CHEESE EXCHANGE AS A CASH MARKET FOR CHEESE

The National Cheese Exchange in Green Bay, Wisconsin, has been in operation

since 1918. As with all cash markets, the NCE provides a method of trade that allows those who have more cheese than they want or need, to sell it to those who

want or need more. Its primary functions are to provide a means of inventory management and of price discovery. These are the primary purposes of virtually any

cash market exchange. It is supply-demand driven. It is an open outcry market. The

buyers, sellers, prices and quantities of trade are known immediately. This is the

epitome of an open competitive market, where knowledgeable buyers and sellers

openly trade.

As previously mentioned, questions about the National Cheese Exchange and its

role in dairy prices are not new. At various points in time, trading on the NCE has

been the focus of examination by state and federal authorities, in response to allegations of price manipulation, or other improper trading activity. None of the authorities has ever found evidence of price manipulation, or any legitimate basis for taking action against the NCE or its trading members.

—In 1988, after an inquiry concerning potential state antitrust violations, the

State of Wisconsin’s Attorney General stated that no evidence of price fixing

agreements or violations of Wisconsin antitrust laws had been found, and determined that no further action was warranted.

—In July 1996, after reviewing a controversial study of the NCE conducted by two

University of Wisconsin professors, the Federal Trade Commission (FTC) found

no factual basis for a violation of Federal antitrust laws, and determined that

no further review by the FTC was warranted.

—The Commodity Futures Trading Commission (CFTC) also reviewed the University of Wisconsin study, and similarly found insufficient facts to warrant further

action under its authority, in June 1996.

—On February 27, 1997, the CFTC issued a report specifically on the National

Cheese Exchange, in connection with an application by the Coffee, Sugar and

Cocoa Exchange to trade a futures contract based on the Basic Formula Price.

Because of the linkage between the BFP and NCE prices, the CFTC closely examined the operations of the NCE. It found the NCE to include a wide variety

of both buying and selling interests, with no significant barriers to membership.

Trading activity was observed to be regular and transparent. Importantly, the

CFTC found the NCE transactions to represent a ‘‘significant portion’’ of the

spot market for cheese. No aspect of the NCE gave the CFTC cause for concern,

and it formally approved the BFP futures contract application.

In short, no state or federal authority has found evidence of price manipulation,

or of any illegal trading activity at the National Cheese Exchange, despite repeated

allegations and reported suspicions. Even the criticism of it being a ‘‘thinly traded’’

market was discounted by the CFTC in its most recent report, which noted that ‘‘a

number of the contract markets trading pursuant to CFTC designation are ‘thinly’

traded.’’ (CFTC report at p. 15, n. 15). (Copies of these documents have been provided to the committee staff.) Moreover, the volume of trading on the NCE has been

increasing, tripling over the past four years.

What can be accurately stated about the National Cheese Exchange is that its

prices reflect the prevailing conditions of supply and demand in the market at the

time. This fact has been corroborated by a former chief economist of the U.S. Department of Agriculture, as well as by current USDA policies and practices. In July

1996, Dr. Bruce Gardner, former USDA Assistant Secretary for Economics from

1989–92 and then a Distinguished Professor at the University of Maryland’s Department of Agricultural and Resource Economics, found that ‘‘general supply-demand

factors had quite consistent and statistically strong effects on NCE prices.’’ He stat-
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ed, ‘‘the data clearly show that the NCE reflects supply and demand conditions, and

shows no evidence of manipulation by the actions of any individual trader or group

of traders.’’

IV. A NEW CASH MARKET FOR CHEESE

Notwithstanding our confidence in NCE prices as a reflection of demand and supply conditions, the members of the National Cheese Institute realize that repeated

controversies over the NCE are undermining its sustainability. Earlier this year,

momentum built within the Wisconsin state legislature to enact legislation restricting trading activities on the NCE. This series of developments, in conjunction with

NCI’s interest in developing more viable dairy futures markets, led the NCI to pursue actively the establishment of an alternative cash market for cheese that would

also improve the structures and processes which provide for cheese transactions.

Over the past month, the National Cheese Institute along with the NCE has been

engaged in a private sector initiative to establish a new cash market for cheese. Our

efforts to date have been very productive, and the opening of a new cash market

for cheese may occur as early as May 1997. When trading begins on the new cash

market, trading on the NCE is expected to cease.

Like the NCE, the new cash market will provide the industry with a competitive

forum to buy and sell cheese on a spot basis. A new cash market, however, will have

several characteristics that are designed to improve and expand its use. For example, the new cash market will likely allow for more frequent cheese trading sessions

and use a broader network of established brokers which will make it more accessible

to a wider spectrum of food industry participants.

Furthermore, the new cash market will be part of an established exchange which

has a long history and distinguished reputation for managing futures contracts pursuant to the regulatory requirements and oversight authority of Federal regulators.

By affiliating the cash market with an exchange that also offers dairy futures contracts, we will be strengthening the links between the cash and futures markets,

and moving the dairy industry another step closer to more viable futures markets

for price discovery and risk management purposes. As discussed previously, the lack

of viable futures contracts has made it very difficult for the dairy farmers and processors to manage price volatility.

The details for establishing a new cash market are still being worked out and,

therefore, I am not able to provide many of the specifics at this time. A committee

of NCI members has been tasked with reviewing proposals by the Coffee, Sugar and

Cocoa Exchange and the Chicago Mercantile Exchange, both of which have indicated

serious interest in starting a cash cheese market. Next week on March 17, representatives of these two exchanges will be making presentations of their specific

proposals to NCI and NCE board members. A final decision and announcement of

the establishment of the new cash market will hopefully be forthcoming soon thereafter. If all goes well, we look forward to a seamless transition from trading on the

NCE to trading at the new exchange.

V. THE BASIC FORMULA PRICE (BFP) FOR MILK

After years of bitter complaints and challenges by various parties, the Secretary

of Agriculture eliminated the ‘‘Minnesota-Wisconsin’’ price series from use in setting

Federal milk class prices, and began using a new formula. The Minnesota-Wisconsin

price series used the prices paid to dairy farmers in the states of Minnesota and

Wisconsin for manufacturing grade milk (Grade B) during the preceding month as

the base. This base was updated or adjusted by prices paid to the same dairy farmers during the first half of the month to which it applied, plus an estimate of what

would be paid for the rest of the month. The Minnesota-Wisconsin price was announced by the 5th of the month following the month to which it applied. With the

decline in the amount of manufacturing grade milk and the fact that fewer companies made separate payments for the first half of the month, continuing to use this

formula was difficult to justify.

The Secretary noticed and convened a hearing to find an alternative. The result

of that process was the announcement in January 1995 of the current formula for

calculating the BFP. This formula uses the prices paid to Minnesota and Wisconsin

dairy farmers for Grade B milk in the preceding month, the same as the base price

used under the old Minnesota-Wisconsin price series. To update the previous

month’s price, it uses changes in (1) the price of cheese as reflected by trading on

the NCE, (2) butter prices on the Chicago Mercantile Exchange, and (3) powder

prices obtained by survey. These commodity prices are weighted according to the

amount of milk in Wisconsin and Minnesota used to make each product. This formula, or slight variants of it, was broadly supported by processors, manufacturers
117

and dairy farmer organizations, and the Secretary said that ‘‘after reviewing the

various formulas, it is concluded the best updater would include’’ the price series

just enumerated. In its decision of just a little over two years ago, USDA concluded

that NCE’s cheddar cheese, 40 pound block price reflected supply-demand conditions

and should be the primary price adjuster in the basic formula price. The following

year, after conducting a rigorous analysis of NCE prices and comparing it to other

price quotations for Wisconsin and elsewhere, Dr. Bruce Gardner concluded that

‘‘the NCE price is a good indicator of national cheese market conditions. There certainly is no evidence of any better indicator to be found.’’

Nevertheless, the NCE will soon discontinue trading, which necessitates the Secretary finding an equivalent price to replace the NCE price used in this formula.

Each Federal milk order contains the following provision:

‘‘10xx.54 Equivalent price

If for any reason a price quotation required by this part for computing class

prices or for other purposes is not available in the manner described, the Market Administrator shall use a price determined by the Secretary to be equivalent to the price that is required.’’

The IDFA organizations including the National Cheese Institute believe that the

new cash market for cheese will be an improved, equivalent price series which the

Secretary should identify as an ‘‘equivalent’’ price within the meaning of the law.

We believe that it will reflect supply and demand conditions for cheese; will represent trade and traders from a broad number of companies and interests; and is

better than any other alternative. This action can be taken administratively by the

Secretary. However, if the BFP is to be modified in other ways, it would require

a full fledged hearing subject to procedures prescribed in the law. This would probably take considerable time to complete.

The Secretary of Agriculture already has underway a review of many elements

of Federal milk marketing orders including the Basic Formula Price. We urge the

determination of the equivalency of the new cash market for cheese as the best alternative to the NCE, pending more indepth review of long-range solutions and

changes in Federal orders.

Some have urged USDA to develop a survey of cheese companies to determine

what they were paid for cheese they manufactured. We think such a survey could

have merit as a basis of providing more market information. We are therefore cooperating and assisting USDA in its design and efforts to obtain industry participation. We believe such a series could be helpful in evaluating markets and provide

another basis of price discovery. However, it is a brand new technique which needs

to be evaluated as to how well it may reflect supply and demand conditions There

are a number of issues to be addressed regarding such a survey. For example, will

participation be adequate to be representative and reliable? Will the same companies complete the survey every week, week after week? How will services provided

to the buyer be excluded from the value of the unprocessed cheese? How will quality

and service premiums be excluded?

IDFA and NCI have pledged their willingness to work with USDA to develop such

a survey and the association members hope it can be accomplished successfully, but

whether it should be used as part of the Basic Formula Price remains subject to

serious open question.

VI. CONCLUSION

To support continued growth, the dairy industry needs to continue moving in the

direction of being market-driven. This means that there will be price volatility, as

there is in all other market-driven sectors of agriculture. It also means that the entire dairy industry, from the dairy farmer on, needs the same kind of capabilities

to manage price volatility that producers and processors of other commodities enjoy.

IDFA and NCI will continue their efforts to enhance those capabilities.

Mr. Chairman, in conclusion, we would like to leave you this afternoon with four

main points in mind—

(1) The volatility of milk and dairy product prices has increased.

(2) Last year’s record-high farm milk prices are likely to be followed this year by

the second-highest recorded prices.

(3) The NCE should be replaced by a new cheese cash market in a few months.

(4) When that occurs, the Secretary should use the new cheese cash market as

one of the ‘‘adjusters’’ in setting the Basic Formula Price.

I appreciate the opportunity to appear before you today to share these views with

you.
118
119

STATEMENT OF ED COUGHLIN, ACTING CEO, NATIONAL MILK PRODUCERS FEDERATION

Senator SPECTER. I would like to turn now to our final witness,

Mr. Ed Coughlin, acting chief executive officer of the National Milk

Producers Federation. The floor is yours, Mr. Coughlin.

Mr. COUGHLIN. I will be short.

Senator SPECTER. Thank you.

Mr. COUGHLIN. The National Milk Producers Federation is a

commodity group of about 60,000 dairy farmers, and what we have

today, basically that is about 60 percent of all the dairy farmers

in the country.

A year ago about this time the House addressed some of the

same issues we are addressing here today. At that point in time,

the federation members maintained that the trading level on the

National Cheese Exchange was accurately reflecting the value of

cheese and could be used to determine the Federal milk order

price. Our position today is the same.

The federation and its members are aware of the controversy

surrounding the National Cheese Exchange, and they are very sensitive to the concerns expressed by producers who lack confidence

in that market. Dairy producers, as has been stated earlier, have
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a very important financial interest in the National Cheese Exchange prices, since the cheese prices are the single most important factor used in establishing milk prices in the United States.

It is important that the industry have confidence in the method

used to determine prices, and that confidence be restored as

promptly as possible.

We believe that the complaints that the National Cheese Exchange is not functioning in the best interests of dairy farmers and

their cooperatives is unfounded. Now, the National Cheese Exchange is going to close, so it appears as though that is a foregone

conclusion. Closing the exchange creates a Federal order pricing

problem. Specifically, in the Federal order the 40-pound block cheddar cheese price of the National Cheese Exchange is used in determining the Federal milk order basic formula price.

I would suggest to you that one of the things you want to do if

you want to look at prices is, the National Cheese Exchange has

specific criteria for the cheese that is sold on that exchange. If you

call up cheese plants, you say, here are the criteria. Let us say I

want a quote from you of, if this cheese was sold on the exchange,

what would your price be, I think that would probably—there is a

set of criteria that is there. That may not encompass all of what

you want to find out. For example——

Senator SPECTER. Mr. Coughlin, will they have that same kind

of criteria with the new cheese exchange that Mr. Tipton is talking

about?

Mr. COUGHLIN. I would defer to Mr. Tipton on the answer to

that, but I am sure that they would have to.

Mr. TIPTON. It would be our intent that the rules of trading, at

least the description of the product that is traded would be very

similar.

Senator SPECTER. Thank you. Mr. Coughlin.

Mr. COUGHLIN. That provides the homogeneous product. In other

words, they are not comparing apples and oranges. You are comparing a product, that here is what you are looking at.

To deal with the situation where the Secretary needs a price

quote and where one is not available, every order, every milk order

contains a provision whereby the Secretary of Agriculture can determine an equivalent price quotation. Thus, absent the 40-pound

block price the Secretary of Agriculture will have to make that. As

you suggested, he might like that.

But there are two sides to that. You know, we have talked today

about the producer side. Mr. Tipton did not talk about it, but when

the Secretary of Agriculture establishes a price, he is establishing

a price that every plant must pay, so that he is establishing a minimum obligation for the plants that have to pay.

Now, when you establish that, you have got to be very concerned

that you do not establish a price that the market does not return,

so if you establish a price for x cheese company and x cheese company’s price that you establish exceeds the price you get out of the

market, and you do that under a Federal order regulation, that is

a problem, because x cheese company does not get the money to

pay that.

Now, it would be nice if x cheese company got that money and

they could pass that on to their producers, but there are two sides
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of this transaction, that processors have to pay that price, and they

have to get the money out of the marketplace, and the best measure of the marketplace, as you heard Mr. Collins say today, is the

National Cheese Exchange, and that, in our opinion, is still the

fact.

Our members make a lot of cheese. Mr. Jones was up here. He

represents Mid-America Dairymen. They make a lot of cheese, but

they have to account for that price, and then whatever is left over

from what they get out of the marketplace is what they can pay

to their producers, so I think those are important. That has to be

considered.

You cannot just go out and set the price at a higher level. The

manufacturers have to be able to get that out of the marketplace

in order to be able to have the money in their bank account to pay

it. I mean, there is a cash flow problem there.

But we would certainly—I represent producers, and we feel

strongly that producers deserve a fair price, but at the present time

we have not seen a better basis than the National Cheese Exchange.

However, we do not quite go along with Mr. Tipton. We do not

think that the Secretary should automatically use the new cash

market that might be established. I mean, we want to see what

happens.

I would love to say that yes, we can jump in and use the new

cash market, and if the first month the prices on the new cash

market went up and prices to producers rose, that makes somebody

look good. But on the other hand, if the prices went down, I do not

want to be the one that gets blamed because we are using that new

cash market.

So we do support improvements in the National Cheese Exchange and ways to find a better alternative. A key improvement

to broaden trading activity, we think that would be done on the

new exchange, expanded trading hours, I think that is in the process, electronic trading. Anonymous trading is another thing that I

think is very important, and I think that would be accomplished

with this new change.

Another goal is additional oversight. You know, using the existing exchanges, I think that brings a track record of some success

in managing it.

Whatever the exchange is for the cash market, whether it is the

National Cheese Exchange or another exchange, the important

point is that any changes made yield an accurate price for U.S.

dairy products.

I would say another thing that was testified to, and this was not

in my formal statement, the National Milk Producers Federation

did ask Secretary Glickman to establish a $13 per hundredweight

floor under the basic formula price in Federal orders for purposes

of establishing the class I price. We did it for a temporary period,

January to June, period.

Secretary Glickman has turned that proposal down. That leads

me to conclude that the supply-demand conditions which currently

set established milk prices will continue to establish those milk

prices.
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PREPARED STATEMENT

Senator SPECTER. Mr. Coughlin, may I interrupt your testimony

for just a minute? I am going to have to step out for just about 3

or 4 minutes. We will recess for just a few minutes, and then I will

be right back.

[A brief recess was taken.]

[The statement follows:]

PREPARED STATEMENT OF EDWARD T. COUGHLIN

Mr. Chairman, I am Edward T. Coughlin, Acting Chief Executive Officer for the

National Milk Producers Federation (NMPF), the national farm commodity organization that represents dairy producers and the dairy cooperatives they own and operate throughout the United States. I appreciate the opportunity to testify today

about issues involving the National Cheese Exchange (NCE) and pricing milk used

to produce cheese.

Last year I testified before the U.S. House of Representatives on the same issue

we are addressing today. Simply stated, the Federation’s position is the same as it

was last year. The Federation members maintain that trading levels on the NCE

accurately reflect the value of cheese and can be used to determine federal order

prices.

The Federation and its members are aware of the controversy surrounding the

NCE and are sensitive to the concerns expressed by producers who lack confidence

in the NCE as a viable cash market. Dairy producers have an important financial

interest in NCE prices. Cheese prices are the single most important factor in establishing the milk price that all U.S. dairy producers receive each month. It is important that industry confidence in the method used to determine milk prices be restored promptly. We believe that complaints that the NCE is not functioning in the

best interests of dairy farmers and their cooperatives are wholly unfounded.

The NCE may close soon. Closing the NCE will create a federal milk order pricing

problem. The 40 pound block Cheddar cheese price at the NCE is used in determining the federal milk order Basic Formula Price and in determining the protein price

in some orders that include a multiple component pricing program.

To deal with a situation where a price quotation needed to determine a federal

order price is not available, every order contains a provision whereby the Secretary

of Agriculture determines an equivalent price quotation for the information that is

not available. Absent an NCE 40 pound block Cheddar cheese price, the Secretary

of Agriculture will have to make an equivalent price determination.

At the present time, the National Milk Producers Federation believes that the

Secretary should consider all relevant information in making an equivalent price determination. Relevant information would include the 40 pound block Cheddar cheese

price on any new cash market, information USDA gathers during the Cheddar

cheese price survey that was started recently and any other pertinent data.

Perhaps after we gain some experience with a new cash market and evaluate the

survey data that USDA has started to collect we can support a specific alternative

to the NCE 40 pound block Cheddar cheese price. For now, we think the best alternative is to allow the Secretary of Agriculture discretion in determining an equivalent price.

The National Milk Producers Federation supports improving the NCE or finding

a better alternative. A key improvement would be to broaden the trading activity.

This might be achieved through expanded trading hours, electronic trading and

anonymous trading. Another goal is additional oversight. This might be accomplished by establishing a cash market with an exchange that has a successful track

record for managing its operations.

Whether within the NCE or through another exchange, the important point is

that any changes made yield an accurate price for U.S. dairy producers.

This concludes my testimony. Thank you, Mr. Chairman. I will be happy to respond to any questions.

REQUEST TO ESTABLISH PRICE FLOOR

Senator SPECTER. We will reconvene. Mr. Coughlin, please pardon the delay, and proceed.

Mr. COUGHLIN. Mr. Specter, I was just about through with my

testimony. The point I was making is that the National Milk Pro-
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ducers Federation did ask Secretary Glickman in December to establish a $13 per hundredweight floor under the basic formula

price in Federal orders for purposes of establishing the class I.

Senator SPECTER. Who made that request?

Mr. COUGHLIN. The organization I represent, the National Milk

Producers Federation.

Senator SPECTER. Yes.

Mr. COUGHLIN. We asked that that be done on a temporary basis

for the period of January through June 1997. Secretary Glickman

turned that request down. That leads me to the conclusion—you

asked in the question about what has to be done to raise milk

prices—that we are going to continue to see a system of supply-demand base prices based off of the National Cheese Exchange or

some other exchange unless the Congress takes some action to

change milk prices.

Senator SPECTER. Mr. Coughlin, when you asked the Secretary

to do that in December, did he tell you it would take 6 months for

it to be effectuated?

Mr. COUGHLIN. He did not tell us it would take 6 months. I do

not want to argue with the Secretary. There are administrative

procedures whereby the Secretary could go today and issue a hearing notice on 3 days’ notice, hold a hearing on an emergency basis,

issue an emergency decision, and there is existing authority under

the Rules of Practice and Procedures for Marketing Orders that it

can be done a lot quicker than 6 months.

Senator SPECTER. What would be the minimum time?

Mr. COUGHLIN. Let us see, today is the 13th. I suspect, on using

emergency procedures, if the Secretary wanted to, he could try to

implement something the first of next month.

Now, I am giving you an answer to a question in a very—what

can be done. The industry, the producers, would have to go to the

Secretary and convince the Secretary that, one, there were emergency conditions that warranted it.

Senator SPECTER. Do you think there are emergency conditions

which warrant it?

Mr. COUGHLIN. What I would look at as evidence is the level of

milk production. Is the level of milk production declining so that

we do not have enough milk supply in this country? The data published by the Department of Agriculture does not indicate that to

be the case. We would look at prices. Certainly, the prices, as has

been pointed out here, the prices have recovered somewhat from

their low point, so the standard that is in the Agricultural Marketing Agreement Act is a supply-demand standard.

So I think the Secretary would have to conclude, to operate on

an emergency basis that there were real emergency conditions, that

there was not adequate milk supply or we were facing a prospect

of an inadequate milk supply. Do those conditions exist today? I

think it would be hard to determine that they do exist. I think such

an action would be challenged in the courts, and I think the Secretary’s record, because the record of that hearing would be what

would have to be presented to the court to be judged on the basis

of the evidence in the record, I think it would be difficult to present

a solid case that the emergency conditions that would enable the

Secretary to act are there.
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Senator SPECTER. Do you think it might be overturned as being

arbitrary and capricious on his part?

Mr. COUGHLIN. Yes.

Senator SPECTER. Could you provide me with a short memorandum as stating the best case to present to the Secretary, which I

will transmit to him, ask for his consideration on that?

Mr. COUGHLIN. Yes.

Senator SPECTER. I ask you to do that because you have the expertise in the field, and you also represent the milk producers. I

would like to see that, and I will transmit it promptly to Secretary

Glickman.

That, and the price of cheese, to whatever extent that would

change, are there any other avenues which could provide some immediate relief for the farmers?

Mr. COUGHLIN. The single-most important thing that the Secretary of Agriculture can do was mentioned here earlier today with

respect to the dairy export incentive program. In the past the dairy

export incentive program has done a significant job.

Senator SPECTER. The export program?

Mr. COUGHLIN. Yes, the dairy export incentive program. The

dairy export incentive program has done a good job of moving products out of the United States into export markets.

Senator SPECTER. To raise the price of milk.

Mr. COUGHLIN. Yes; it does have the impact of tightening the domestic supply.

Senator SPECTER. Is there more the Secretary should be doing on

that?

Mr. COUGHLIN. Yes; I think somebody mentioned the December

19 meeting earlier. At that time, one of the things that our organization urged the Secretary to do was to do what the FAIR Act said,

which was to make full use of the dairy export incentive program.

Senator SPECTER. Is he not making full use of it?

Mr. COUGHLIN. Under the Uruguay Round GATT agreement we

have a certain quantity of dairy products that can be exported with

a subsidy under the dairy export incentive program. That year for

the exports begins July 1, 1996, and runs through June 30, 1997.

Now, we are already 8 months, close to 9 months, into the period

of time, and the quantity of product that has been exported is

roughly—I am going to say 20 percent. I could furnish you exact

numbers.

In other words, we have got 3 or 4 months left of the year to

comply with what the Congress said in the 1996 farm bill, make

maximum use of it, export everything we can. That has not been

done, in my opinion.

Senator SPECTER. Could you give me a short memorandum on

that?

Mr. COUGHLIN. I will.

Senator SPECTER. I will take that up with him, as well.

So we now have three options we are talking about, the cheese

price, the export increase, and the administrative action he would

take, which you think there is not really a sound evidentiary base

or may not be so viewed, either by the Secretary or by the courts.

Anything else?
125

Mr. COUGHLIN. Again, I say if the Secretary did it I believe the

action would be challenged in court, because what you are doing is

raising the price that processors would have to pay. So I think the

processors would see that as an opportunity to go to court.

Senator SPECTER. But the Secretary has pretty broad discretion.

They would have to show it was an arbitrary and capricious exercise of discretion.

Mr. COUGHLIN. Well, the Secretary would have to demonstrate

that the record in the hearing demonstrated that he had an emergency condition that warranted taking such action.

Senator SPECTER. And those who challenged it would have to

prove that he was arbitrary and capricious.

Mr. COUGHLIN. You are the lawyer. Yes.

Senator SPECTER. OK. Anything else that you might have to suggest that we could look toward here?

Mr. COUGHLIN. No; I do not have anything else.

Senator SPECTER. Mr. Tipton, do you have any suggestion as to

what we might look toward here to provide a short-term correction?

Mr. TIPTON. Well, as I said in my statement—before I answer

that, if I could, I think I need to correct the record. I apparently

misspoke, and it is 4 to 30 days old cheese that is traded on the

exchange, and I think I said 3 to 30.

Senator SPECTER. Yes; it is 4 to 30, then.

Mr. TIPTON. Yes; I am sorry.

We believe that the market itself is correcting the situation, and

I have a very difficult time understanding that there is a dire

emergency that warrants a 3-day hearing when we are looking at

a situation in which the prices in the United States came off of an

all-time high, and second, this year will most likely be the second

highest prices ever recorded. So, that is, the Secretary would have

to go to an evidentiary hearing, and I think it would be very difficult to make that case.

Senator SPECTER. OK. You think option two is not a very good

one. My question is do you have an option four?

Mr. TIPTON. No; I do not, other than the market, and I think the

market will do it. It seems like there is always difficulty in recognizing that the market may take care of some of these things.

The market took care of the price last fall by going up enormously,

and I think that it will do that again this year.

Senator SPECTER. All right. I am delighted to yield back the

gavel to our distinguished chairman, Senator Cochran.

Senator COCHRAN. Senator Specter, thank you very much for

suggesting this hearing. I think it has been helpful in getting a

broad range of input on this issue and this question about what

can be done, if anything, about the pricing of dairy, the calculations

of it, the formulas used, and the inputs that are analyzed, and I

think we will study the statements with profit in our effort to understand it better. And, I appreciate Mr. Tipton and Mr. Coughlin

being here to help give us a balanced view of this situation.

SUBMITTED QUESTIONS

I have additional questions and several members of the subcommittee have questions which will be submitted to be answered
126

for the record. We also have questions from Senator Rod Grams

and Senator Rick Santorum.

[The following questions were not asked at the hearing, but were

submitted to the Department for response subsequent to the hearing:]

QUESTIONS SUBMITTED BY SENATOR COCHRAN

DAIRY PRICE MECHANISMS

1. USDA has recently proposed 6 options to make changes to the Class I price

structure. The options would still use a market-driven basic formula price plus an

added differential. Differentials are made up of one or more of the following: (1) a

fixed component; (2) a location adjustment; (3) an adjustor relating to utilization;

or (4) the cost of balancing the market. Many of these options would hurt farmers

in the Southeast. Milk differentials are very important to Mississippi.

Question. How does lowering the price of milk in a deficit area, such as Mississippi, encourage increased milk production for the market?

Answer. The effects of lowering the Class I differential in a deficit area cannot

be answered without also considering adjustments in Class I differentials elsewhere.

Ultimately, a national price surface must be determined that reflects local, regional

and national supply and demand for milk. Prices established under the Federal

order program are minimums, and these minimum prices are not intended to encourage production beyond what market forces dictate. Moreover, as minimums,

Federal order prices may be exceeded in particular markets as supply and demand

conditions warrant.

The Department continues to accept comments from interested parties on Federal

order consolidation and reform, and the Department has not made any decision regarding the pricing structure under Federal Milk Marketing Orders. All options remain under consideration at this time, which include options that would lower as

well as raise Class I differentials.

Question. If differentials are reduced in one area where a short supply of milk exists, how does this help dairy producers in a different area which may be called on

to provide supplemental milk supplies?

Answer. A lower differential in a deficit market could lead to lower blend prices

and therefore lower milk production in the deficit area and increased milk shipments into the deficit market from surplus areas. This could raise milk prices in

surplus areas. In addition, lower milk prices in the deficit area would reduce the

amount of milk available for the manufacturing milk market, supporting manufacturing milk prices nationally. However, the effects of lowering the differential in a

deficit market on producers in surplus areas depends on how Class I differentials

are adjusted in fluid surplus markets. In addition, Federal orders only establish

minimum prices for milk according to use, with actual pay prices to producers in

many deficit markets exceeding the minimum Federal order blend price. Lowering

Class I differentials in those markets where producer prices exceed the Federal

order blend price may have only a modest effect on prices paid to producers.

2. Many have alleged that the National Cheese Exchange is subject to manipulation of dairy prices.

Question. Is there any evidence that this is true? Do you believe that it has cost

producers or consumers money?

Answer. The University of Wisconsin study concluded that there was evidence of

manipulation on the National Cheese Exchange (NCE) by large traders. Both the

Federal Trade Commission and the Department of Justice reviewed the University

of Wisconsin study and concluded there was no evidence to suggest either a conspiracy or monopolization theory. A subsequent study from the University of Maryland

found problems with the University of Wisconsin study’s methodological approach

and conclusions. The alleged problems have been disputed by the researchers involved in the University of Wisconsin study. Most recently, the Commodity Futures

Trading Commission examined the issue of manipulation as part of the approval

process for a new fluid milk futures contract and concluded the potential for manipulation of NCE prices was not sufficient to deny contract approval.

To address concerns raised by dairy producers, the Department announced in late

January that it was seeking comments on the use of NCE prices in the determination of minimum prices under Federal orders. This comment period ended on March

31, and we are currently reviewing those comments. In addition, the Department

started in early March a weekly survey of cheddar cheese prices in response to concerns about the accuracy of NCE prices and are in the process of reviewing that in-
127

formation. The Department has no clear-cut evidence to indicate that the NCE has

cost consumers or producers.

QUESTIONS SUBMITTED BY SENATOR MCCONNELL

Question. What is the status of the NASS weekly/monthly price survey and when

does USDA expect it to be operational?

Answer. The Department has been collecting the cheese price survey data on a

weekly basis since early March. Tentative plans call for the first release of the data

in early May. We continue to work with the cheese industry to ensure maximum

cooperation and that the data collected are accurate, timely and useful to the dairy

industry.

Question. If the National Cheese Exchange (NCE) price no longer exists, or if

USDA delinks it from the Basic Formula Price (BFP), what price series will the Department use for cheese in the calculation of the BFP or its replacement?

Answer. The Department has not made any decision on what price series it will

use once the NCE price series is no longer available. We continue to review possible

options and will continue to work with interested parties to develop a satisfactory

replacement.

Question. Mr. Secretary do you support the current Class I differentials that exist

throughout the Federal Order System? If not, what changes are you contemplating

and what impact will these changes have on mink prices in states such as Kentucky?

Answer. The Department has not made any decision regarding Class I differentials and continues to accept comments from interested parties. When the Department presents its proposed rule for Federal order consolidation and reform this winter, the Department will provide estimates of the effects of the proposed changes

on regional milk prices.

Question. Do you think milk prices will be less volatile with the elimination of

the National Cheese Exchange? Will milk prices to dairy producers be any higher?

Answer. Several very unusual events caused milk prices to be especially volatile

in 1996 and we should not gauge 1996 as the norm. However, the events of 1996

do point out how government intervention in the past helped to stabilize milk

prices. The variability in milk prices probably has much less to do with the NCE

than with the reduction in support since the early 1980’s. Producers should not expect to see any major increase in milk prices following elimination of the NCE, since

the BFP is not determined by the level of cheese prices on the NCE but by the

month-to-month change in those prices and many cheese transactions occurring off

the NCE tend to reflect the NCE price.

QUESTIONS SUBMITTED BY SENATOR BUMPERS

Question. If state legislation or other actions result in the closing of the National

Cheese Exchange, how quickly can USDA implement another pricing structure to

establish the Basic Formula Price?

Answer. There exist ‘‘equivalent pricing provisions’’ under each of the Federal orders. These provisions would enable the Secretary to substitute an ‘‘equivalent’’

price for the NCE price in the BFP without USDA going through formal rulemaking

procedures, assuming an equivalent price exists. Such provisions could be implemented as quickly as needed.

Question. Does the Secretary have the authority to resume use of the MinnesotaWisconsin pricing system?

Answer. If the NCE closes and there was no other ‘‘equivalent’’ price that could

be substituted for NCE prices, one option would be to revert back to the M–W price

series. However, the Department replaced the M–W series with the BFP starting

in May of 1995 because of concerns about whether the M–W price was statistically

reliable as an indicator of the value of milk, and statistical reliability may be even

more of a problem now. In addition, using the former M–W price series doesn’t address the need to price protein, which is currently tied to the price of cheese on the

NCE, in those orders with multiple component pricing.

Question. To what extent have changes in the 1996 Farm Bill increased farm

price volatility in both direct crop prices, like feed grains, and indirect prices, like

dairy?

Answer. The 1996 Farm Bill probably had very little to do with the recent volatility in grain prices. Going into the 1996/97 marketing year, government inventories of corn amounted to only about 30 million bushels, about one day’s use. So,

the 1996 Farm Bill was not responsible for the increase in price volatility for grains
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in recent months. Rather, the increase in price volatility reflects government policies

beginning in the mid-1980’s to reduce price support rates and government stockpiles

combined with reduced yields and strong export demand.

Question. Do you think the volatility of milk prices last fall, if caused at least in

part by changes in the 1996 Farm bill, will soon be seen in other commodity areas?

Answer. Traditionally, milk prices have been more stable than prices for grains

and, despite the events of this last fall, that trend seems to be holding. For example,

the all-milk price declined by 18 percent from September 1995-February 1996, while

corn prices declined 24 percent over the same period. Of course, such large fluctuations in prices for both commodities over such a short period are certainly not the

norm.

QUESTIONS SUBMITTED BY SENATOR KOHL

Question. What criteria will you use in deciding whether a new cash market or

new price survey for cheese is credible enough for use as a reference price in setting

the BFP?

Answer. We will use several criteria to judge the merits of any replacement for

NCE prices in the BFP. We would like any price estimate to be based on a reasonably large number of transactions of a standardized product and be accurately reported. We especially believe that the new replacement should have wide acceptance

within the dairy industry. Dairy producers must have confidence they are receiving

a fair price for their milk, and dairy processors must have confidence the reported

price is an accurate reflection of the value of cheese.

Question. When the comment period ends on the issue of delinking the BFP from

the Cheese Exchange, do you anticipate acting immediately to make a change, or

are there other hurdles that need to be crossed before any action can be taken?

Answer. After the comment period closes on March 31, we will review the comments received and consider the available options. ‘‘Equivalent pricing provisions’’

in each of the orders will allow us to act as quickly as necessary to replace NCE

prices in the BFP, if we choose to do so following a review of the comments or after

obtaining further input from the dairy industry.

QUESTIONS SUBMITTED BY SENATOR GRAMS

I understand from remarks made by the former head of the President’s Council

of Economic Advisers that the Northeast Interstate Dairy Compact will increase the

cost of food nutrition programs by 10 percent in the affected region. This includes

food stamps, WIC, and school lunch. I also understand that other States, including

15 in the southeast are contemplating a compact of their own.

Question. Mr. Secretary, if low-income Americans are not intended to absorb this

hit, how do you intend to pay for the increased costs to these programs that result

from the Compact?

Answer. I believe that assisting dairy farmers in the Compact region should not,

and need not, come at the expense of low-income people in the region. I sought to

address those concerns by laying out my expectation that the Commission provide

assistance to offset any increased burden on low-income families in the Compact region. My finding of a compelling public interest in the Compact region assumes that

the Commission will address these concerns, and I will consider revoking my authorization of the Compact or taking other actions if the Commission does not address those concerns.

Question. Would you provide me a copy of the letter you received from the President’s Council concerning the Compact?

Answer. You should contact the Chairman of the Council of Economic Advisers

to obtain a copy of the letter you refer to.

QUESTIONS SUBMITTED BY SENATOR SANTORUM

1. The dairy industry was protected from large price swings when the CCC held

stocks that were available to be sold back to the industry at 10–15 percent above

the support price. While price stability was the norm for many years, the support

program encouraged overproduction. However, cheese and nonfat dry milk stocks

have largely not been available for sell-back from government stocks since mid-1988,

and butter has not been available since 1995. As a result of this history of price

stability, the dairy industry has been late in developing and leveraging the tools

commonly used in other industries to manage price risk, such as futures markets.
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Question. Do you believe the industry currently has adequate risk management

tools to deal with the price volatility inherent to all agricultural commodities?

Answer. This question is best left up to the dairy industry to answer. The Department stands ready to help the dairy industry develop better risk management tools,

but we also believe that any effort should be in partnership with the dairy industry.

Ultimately, the success or failure of those efforts will depend on whether the dairy

industry chooses to use those tools.

Question. What additional tools and training can USDA provide the industry to

allow the private sector to better address the inherent price risks of supply and demand-driven markets, both on the input (feed, etc.) and output (milk) side?

Answer. The Department stands ready to work with the dairy industry to identify

and develop appropriate risk management tools and to help provide training in the

use of those risk management tools. We believe that such efforts, if conducted in

partnership with the dairy industry, can be accomplished within existing budgetary

constraints.

2. In 1996, the dairy industry experienced record high dairy commodity and milk

prices levels, previously approached only briefly in the late eighties when a combination of drought and international market forces combined to increase cheese

prices to $1.545 ($.15 below last year’s peak). Most economists have suggested that

the record high dairy prices in 1996 were largely the result of reduced milk production related to price strength in the feed sector, particularly corn. Corn prices, according to the NASS Agricultural Prices report, rose to $4.43 per bushel, before

dropping back $1.80 to $2.63 per bushel in December. Clearly, we are now focused

on the volatility in the dairy sector, but the price comparisons between both agricultural sectors stimulates some questions. The U.S. all-milk price dropped $3 per hundredweight (or 18 percent) from its record peak of $16.30 in September to its February low. This drop has resulted in an outcry from the producer community that

has ranged from a request to floor the BFP to claims of market manipulation. In

contrast, the corn price drop of $1.80, representing 41 percent of the peak value,

has not led to similar calls and allegations.

Question. What characteristics between the two sectors are causing the very different responses to the supply and demand-driven price declines, and what can the

dairy sector learn from the crop production sector to be better able to weather price

volatility in the future?

Answer. The amount of price volatility in a market depends on a variety of market factors, such as the sensitivity of supply, demand and commercial stocks to

changes in prices, and the size of external shocks to supply, such as weather. In

addition, there are differences between grain and milk which can affect the ability

of producers to withstand large variations in market prices. Grain is a storable commodity, so grain producers can avoid the consequence of some variability by storing;

dairy producers cannot. Grain producers generally receive production flexibility contract payments which can cushion the effect of variability on farm income; dairy

producers do not receive payments. Finally, grain producers have many options to

use futures or forward pricing; dairy producers have fewer pricing options available

to them.

The lesson for dairy producers is that with the gradual phase out of the price support program dairy producers can expect milk prices to be more volatile. Increased

price volatility does not necessarily mean lower average prices for producers. In fact,

last year milk prices were record high.

Question. How does dairy price volatility compare with other agricultural commodities?

Answer. It would appear that milk prices are less volatile than grain prices at

present. This continues a long tradition of grain prices exhibiting larger annual

swings than milk prices. Grain prices likely show more volatility because grain supplies are more prone to weather than milk production.

3. Prior to implementing the current Basic Formula Price in May of 1995, your

staff undertook an extensive review of numerous options and selected the base

month M–W updated with changes in dairy commodity values as the most accurate

reflection of the value of milk for manufacturing.

Question. Is there any reason to believe that the conclusions reached less than

two years ago were wrong?

Answer. This is no reason to believe that the decision to replace the M–W price

series was wrong. In fact, that decision was supported by evidence provided at a

national hearing on replacement of the M–W price series. However, producers must

also have confidence they are receiving a fair price for their milk.

Question. Is there any reason to believe that the current BFP does not accurately

reflect supply and demand conditions (or that it reflects those conditions to any lesser extent than the old M–W price)?
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Answer. Overall, it would appear that the BFP is just as accurate an indicator

of supply and demand conditions for milk as the M–W price series. The Department

replaced the M–W price series with the BFP in May 1995. Over the 21-month period

from May 1995 through January 1997, the BFP exceeded the base month M–W

prices in 11 months by an average of $0.13 per cwt., and the BFP was below the

base month M–W price in 9 months by an average of $0.19 per cwt. The base month

M–W price averaged $12.79 and the BFP averaged $12.78 per cwt., or just $0.01

per cwt. lower since May 1995.

While the BFP and M–W price have averaged nearly the same since May 1995,

we are concerned that the BFP may be more volatile than the M–W price. The BFP

has generally exceeded the base month M–W price during the spring and summer

months but has been significantly below the base month M–W price during the last

quarter of the year. During the last quarter of 1996—a period of rapidly declining

milk prices—the BFP averaged $0.32 per cwt. below the base month M–W price.

4. In response to the Federal Order reforms required under the FAIR Act, a

USDA committee has been reviewing the basic formula price and potential replacements. As part of this review, the committee has collected data on actual sales

prices for cheese and has performed some statistical analysis to examine the correlation with the National Cheese Exchange.

Question. What kind of correlation have you found between the NCE and the actual prices received for cheese?

Answer. The statistical analysis conducted to date shows a strong correlation between NCE prices and survey prices.

Question. What conclusion does this correlation lead you to regarding the validity

of the National Cheese Exchange?

Answer. At the present time, the only conclusions drawn from this analysis are

that cheese prices are closely linked to NCE prices, but the direction of causality

is not clear. Regarding the comparability of prices, a much larger survey over a

longer time period would be needed. It is envisioned that the Department’s weekly

survey of cheese prices would provide a more accurate indicator of cheese prices and

provide a better basis for evaluating NCE prices.

5. The existing Basic Formula Price used in the Federal Order System incorporates five commodity price series (NCE cheddar 40# blocks, CME Grade AA butter, Western States nonfat dry milk, Western States buttermilk powder) to quantify

the change in milk value from the base month period to the current month.

Question. How have you validated each of these price series as representative of

their respective markets?

Answer. The M–W price series was replaced with the BFP following a national

hearing on replacement of the M–W. The price series used in the update of milk

prices from the base to the current month reflects industry input and the expertise

of dairy marketing specialists within and outside of the Department. All of the series used were recommended by the industry and judged by industry experts as

being the most representative markets for cheese, butter, nonfat dry milk and buttermilk powder.

Question. Are you comfortable that each of these price series correlates with

broader based measures of the respective markets?

Answer. The Department believes these price series correlate very well with actual market conditions in each product market. But, the Department remains open

to alternatives. While the comment period on the use of NCE prices in the BFP

closed on March 31, 1997, the Department continues to accept comments on Federal

order consolidation and reform, including replacement of the BFP.

Question. Has the replacement of the current month payment estimate for grade

B milk in the old M–W with the commodity price updating calculation in the current

BFP significantly impacted the correlation between cheese prices and milk prices?

Answer. Replacement of the M–W price series with the BFP has not significantly

changed the correlation between milk prices and cheese prices. Both the M–W price

series and the BFP begin with a survey of prices paid for milk by plants purchasing

Grade B milk in Minnesota and Wisconsin. The only difference between the two series is the method for updating the survey information to the current month. The

BFP uses product prices to update the survey information, while the M–W price series used a supplemental survey of plant pay prices. Since most of the milk in Minnesota and Wisconsin goes into cheese production, both the M–W and the BFP price

series are highly correlated with cheese prices.

6. You have invited public comment on the role of the National Cheese Exchange

price in the updating portion of the current Basic Formula Price calculation.

Question. How does the current request for comments interface with the broader

Federal Order Reform process and the efforts already underway by the BFP Committee?
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Answer. The current request for comments relates specifically to whether NCE

prices should be used in the BFP and, if not, what alternatives to NCE prices exist.

Under Federal order reform, much more fundamental questions regarding minimum

pricing are being considered, such as whether the BFP should be eliminated, whether Class I and II prices should be decoupled from the BFP, whether the BFP should

be replaced entirely with a product price formula and what are the appropriate components to use in constructing a BFP.

Question. Is there greater risk in making a hasty change to the BFP that is not

properly deliberated than in focusing your efforts on the longer term objective of

comprehensive reform?

Answer. The Department will not make a hasty decision. We will carefully consider all of the options available and work with the dairy industry before contemplating any change. In addition, we will not let short-term expediency adversely

affect our long-term objectives of consolidation and reform of Federal milk marketing orders.

7. Senators Feingold and Kohl have asked the Coffee, Sugar, Cocoa Exchange to

develop an alternative cash market to the NCE. Additionally, I understand that the

industry has solicited proposals for establishment of an alternative cash market

under the umbrella of the existing Futures Markets.

Question. Will the establishment of a new cash market under the umbrella of the

existing Futures Markets bolster USDA’s confidence in the validity of the price?

Answer. It would be premature to respond to this question since we do not know

the characteristics of such a market. Our ideal would be a market with a large volume and many traders. Unfortunately, these characteristics have not been the norm

for most cash and futures markets for milk and dairy products. In addition, we believe other features, such as affiliation with an existing exchange, which could offer

resources for oversight and surveillance, daily trading, anonymous trading and trading limits, would lend integrity to a new cash market.

Question. Would USDA use this new cash market in a similar manner to the existing NCE as a price mover in the BFP?

Answer. Whether the Department elects to use this new cash market in the determination of the BFP would depend on many factors, such as the volume of trading

on the cash market and how well that market tracked with other indicators of the

value of cheese. In addition, it would depend on what, if any, other options are

available as possible replacements for NCE prices. We will carefully review comments from interested parties and review available options before reaching any decision regarding replacement of NCE prices.

8. Minimum pricing under the Federal Milk Marketing Order system is sometimes cited as an impediment to developing the dairy futures markets. Specifically,

proprietary handlers that are subject to the FMO minimum pricing provisions are

limited from hedging on the futures market and offering forward pricing to dairy

producers that may result in a price below the minimum regulated price.

Question. Since forward pricing and the use of the futures market are valuable

tools in managing the price volatility that has been of such great concern in recent

months, does USDA have the flexibility, authority and desire to allow proprietary

processors an exemption from minimum pricing provisions to the extent that they

have a bona fide forward price contracts with producers and those contracts are appropriately hedged on a futures market?

Answer. The Department would have to use formal rulemaking procedures, including a national hearing, to establish the merits of such a provision, with the final

decision based on the hearing record. In addition, any modification to the orders has

to be approved by producers in a referendum.

9. One challenge inherent to the Federal Order reform process is the development

of analysis that does not rely heavily on historic relationships, since those historic

relationships were likely distorted by past policy. This challenge would point to the

use of a model that is not confined by current milk movement assumptions, but instead seeks a solution based on nonregulatory factors. Also, in addition to the traditional goals of ensuring an adequate supply of fresh, wholesome milk, etc.; an appropriate goal for the Federal Market Order System should be to encourage an efficient

market. It appears that the only option discussed in the Summary Report on Class

I Pricing Options released last Friday that attempts to reflect the value of milk

based on what would likely result from an efficient market is Option 1A. This option

is based on a complex model run by Cornell University that considers production,

demand, and transportation costs to determine relative prices across the country.

Question. Do you agree that milk price regulations should encourage an efficient

market?

Answer. The Department agrees that the Federal order system should encourage

an efficient market for milk. However, we also believe that Federal orders should
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help ensure that producers receive a fair price for their milk, producers are treated

equitably and all producers have a market for their milk.

Question. What approaches, other than Option 1A, are consistent with this goal

of an efficient market?

Answer. The Department agrees that analysis of Federal order pricing options

should not depend on historical data, since historical relationships may be distorted

by past policy. However, nearly all dairy economic models are based on historical

data. For example, the Cornell model uses historical data on production, consumption and the location of processing facilities to determine the least cost way of distributing milk to consumption areas. In addition, the results on any model are contingent upon a variety of assumptions and subject to alternative interpretations. For

example, Option 1B in the Department’s report is also based on a run of the Cornell

model. In addition, we believe efficiency in milk markets is not the only goal of Federal orders. The options presented in Department’s pricing report reflect a range of

efficiency and equity considerations.

10. In the Summary Report on Class I Pricing Options released last Friday, several options (2 and 3B) include an adjustment to the Class I differential based on

the ratio of Class I milk to other milk pooled in the Order. Although this approach

has some initial intuitive appeal since it would seem to adjust automatically with

supply and demand conditions, this approach has several problems in application.

Specifically, milk is not pooled based on its geographic location, but rather can be

affiliated with a pool in another location or can remain unpooled if sold for other

than Class I use. For example, there is a long history of some Texas milk being affiliated with the Chicago Regional Order. Additionally, manufacturers purchase

mostly pooled milk in some areas, and mostly unpooled milk in other areas of the

country. Both of these scenarios result in the Class I percentage in the pool not accurately reflecting local supply and demand conditions.

Another cause for concern under this ‘‘self-adjusting’’ scenario is the inherent disruption in processor sales that will be caused when the adjustment in neighboring

orders does not move on a parallel track. I am advised that is quite conceivable,

for example, that the Class I differential could be adjusted upward in one Order,

while being simultaneously adjusted downward in a neighboring Order. The result

would likely be very disorderly marketing as buyers shift markets in response to

the new price relationships.

Question. Do these two issues—first, the potential inaccuracy of Class I utilization

in reflecting local supply and demand, and second, the disruption caused by lack of

price alignment that would result from the automatic adjustment feature—argue for

the elimination of utilization formulas from consideration for Class I pricing?

Answer. The above points are valid. However, the problems mentioned could be

partially overcome by restricting how milk is pooled or by restricting the frequency

with which differentials are adjusted. In addition, allowing Class I differentials to

adjust over time based on Class I utilization would eliminate the existing rigidity

in Class I differentials, which would eliminate potential distortions in the current

Federal order system.

CONCLUSION OF HEARING

Senator COCHRAN. The next hearing of this subcommittee will be

on March 18 in this room, 138 of the Dirksen Senate Office Building, where we will continue to review the budget request of the Department of Agriculture for fiscal year 1998.

That concludes the hearing. The subcommittee will recess and reconvene at the call of the Chair.

[Whereupon, at 5:48 p.m., Thursday, March 13, the hearing was

concluded and the subcommittee was recessed, to reconvene subject

to the call of the Chair.]

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