U.S. GOVERNMENT PRINTING OFFICE

67–541 CC WASHINGTON : 2000

S. HRG. 106–721

FEDERAL DAIRY POLICY

HEARING

BEFORE THE

COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

ON

FEDERAL DAIRY POLICY

FEBRUARY 8, 9, 2000

Printed for the use of the

Committee on Agriculture, Nutrition, and Forestry

(

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina

THAD COCHRAN, Mississippi

MITCH MCCONNELL, Kentucky

PAUL COVERDELL, Georgia

PAT ROBERTS, Kansas

PETER G. FITZGERALD, Illinois

CHARLES E. GRASSLEY, Iowa

LARRY E. CRAIG, Idaho

RICK SANTORUM, Pennsylvania

TOM HARKIN, Iowa

PATRICK J. LEAHY, Vermont

KENT CONRAD, North Dakota

THOMAS A. DASCHLE, South Dakota

MAX BAUCUS, Montana

J. ROBERT KERREY, Nebraska

TIM JOHNSON, South Dakota

BLANCHE L. LINCOLN, Arkansas

KEITH LUSE, Staff Director

DAVID L. JOHNSON, Chief Counsel

ROBERT E. STURM, Chief Clerk

MARK HALVERSON, Staff Director for the Minority

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C O N T E N T S

Page

HEARING:

Tuesday, February 8, 2000, Federal Dairy Policy ................................................. 1

Wednesday, February 9, 2000, Federal Dairy Policy ............................................ 211

APPENDIX:

Tuesday, February 8, 2000 ..................................................................................... 69

Wednesday, February 9, 2000 ................................................................................ 271

Document(s) submitted for the record:

Tuesday, February 8, 2000 ..................................................................................... 195

Tuesday, February 8, 2000

STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, Committee

on Agriculture, Nutrition, and Forestry ............................................................. 1

Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois ....................................... 38

Craig, Hon. Larry E., a U.S. Senator from Idaho ................................................. 33

Santorum, Hon. Rick, a U.S. Senator from Pennsylvania ................................... 24

Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, Committee

on Agriculture, Nutrition, and Forestry ............................................................. 22

Leahy, Hon. Patrick J., a U.S. Senator from Vermont ......................................... 34

Specter, Hon. Arlen, a U.S. Senator from Pennsylvania ...................................... 4

Grams, Hon. Rod, a U.S. Senator from Minnesota ............................................... 5

Kohl, Hon. Herb, a U.S. Senator from Wisconsin ................................................. 7

Jeffords, Hon. James, a U.S. Senator from Vermont ............................................ 8

Feingold, Hon. Russell, a U.S. Senator from Wisconsin ....................................... 11

Wellstone, Hon. Paul, a U.S. Senator from Minnesota ........................................ 13

WITNESSES

Kind, Hon. Ron, a U.S. Representative from Wisconsin ...................................... 9

Green, Hon. Mark, a U.S. Representative from Wisconsin .................................. 15

Ryan, Hon. Paul, a U.S. Representative from Wisconsin ..................................... 16

Thompson, Hon. Tommy, Governor, State of Wisconsin ...................................... 2

Panel One - Review of Federal Dairy Policy

Collins, Keith, Chief Economist, U.S. Department of Agriculture, Washington,

DC.; accompanied by Larry Salathe, Senior Economist, USDA ....................... 25

Panel Two - Current structure/status of the Dairy industry

Bok, Wayne, Dairy Farmer, Geddes, South Dakota ............................................. 56

Engles, Gregg L., President and CEO, Suiza Foods Corporation, Dallas,

Texas ..................................................................................................................... 43

Gorder, Richard, Wisconsin Farm Bureau Federation, WI .................................. 54

Hoover, Gordon, National Milk Producers Federation, PA .................................. 53

Rudgers, Nathan L., Commissioner, New York State Department of Agriculture and Markets ............................................................................................ 19
Page

IV

Vanderstelt, Dennis, President, Western States Dairy Producers Trade Association, ID ............................................................................................................. 50

Wilson, John, Corporate Vice President for Marketing/Economic Analysis,

Dairy Farmers of America, MO .......................................................................... 48

Yoder, President, Indiana Professional Dairy Producers, IN ............................... 46

APPENDIX

PREPARED STATEMENTS:

Lugar, Hon. Richard G. .................................................................................... 70

Helms, Hon. Jesse ............................................................................................ 190

Santorum, Hon. Rick ........................................................................................ 110

Harkin, Hon. Tom ............................................................................................ 108

Leahy, Hon. Patrick ......................................................................................... 135

Breaux, Hon. John ............................................................................................ 191

Grams, Hon. Rod .............................................................................................. 80

Schumer, Hon. Charles, E. .............................................................................. 189

Specter, Hon. Arlen .......................................................................................... 77

Wellstone, Hon. Paul ........................................................................................ 87

Green, Hon. Mark ............................................................................................. 92

Kind, Hon. Ron ................................................................................................. 85

Kohl, Hon. Herb ................................................................................................ 83

Ryan, Hon. Paul ................................................................................................ 96

Bok, Wayne ....................................................................................................... 186

Collins, Keith .................................................................................................... 112

Engles, Gregg L. ............................................................................................... 150

Gorder, Richard ................................................................................................ 182

Hoover, Gordon ................................................................................................. 174

Rudgers, Nathan L. .......................................................................................... 102

Thompson, Tommy G. ...................................................................................... 71

Vanderstelt, Dennis .......................................................................................... 170

Wilson, John J. ................................................................................................. 164

Yoder, Martin .................................................................................................... 159

DOCUMENT(S) SUBMITTED FOR THE RECORD:

Statement of the American Association of Grain Inspection and Weighing

Agencies ......................................................................................................... 196

Letter to Hon. Richard G. Lugar, from James A Graham, Commissioner,

Department of Agriculture, Raliegh, North Carolina, submitted by Hon.

Jesse Helms ................................................................................................... 199

Letter to Hon. Richard G. Lugar, from John W. Lincoln, President, New

York Farm Bureau ........................................................................................ 201

Testimony by the National Grange Regarding Current U.S. Dairy Policy

and the U.S. Dairy Pricing System ............................................................. 204

Comments on the Federal Milk Marketing Order program from Fred

LaClair ........................................................................................................... 209

Survey on bottled milk and cheddar cheese prices in several states,

and the Market Administrators Bulletin, submitted by Fred LaClair

(this information is retained in the Committee files) ................................

Wednesday, February 9, 2000

STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, Committee

on Agriculture, Nutrition, and Forestry ............................................................. 211

Santorum, Hon. Rick, a U.S. Senator from Pennsylvania ................................... 245

Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois ....................................... 231

Grassley, Hon. Charles E., a U.S. Senator from Iowa .......................................... 223

Grams, Hon. Rod, a U.S. Senator from Minnesota ............................................... 228

Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, Committee

on Agriculture, Nutrition, and Forestry ............................................................. 238

Leahy, Hon. Patrick J., a U.S. Senator from Vermont ......................................... 247

Conrad, Hon. Kent, a U.S. Senator from North Dakota ...................................... 221

Daschle, Hon. Tom, a U.S. Senator from South Dakota ...................................... 212
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V

Lincoln, Hon. Blanche L., a U.S. Senator from Arkansas .................................... 224

WITNESSES

Brey, Bill, President, Wisconsin Farmers Union, Sturgeon Bay, Wisconsin,

on behalf of the National Farmers Union .......................................................... 258

Clayton, Kenneth G., Associate Administrator, Agricultural Marketing Service, U.S. Department of Agriculture; accompanied by Richard M. McKee,

Deputy Administrator for Dairy Programs, Agricultural Marketing Service,

U.S. Department of Agriculture, Washington, DC. ........................................... 213

Jaeger, Arthur S., Assistant Director, Consumer Federation of America,

Washington, DC. .................................................................................................. 226

Jensen, Larry J., Senior Vice President of Supply, Distribution and Business

Development, Leprino Foods, Denver, Colorado ................................................ 236

Frydenlund, John E., Director, Center for International Food and Agriculture

Policy, Citizens Against Government Waste, Washington, DC. ....................... 252

Furth, Mark, General Manager and Chief Executive Officer, Associated Milk

Producers, Inc., New Ulm, Minnesota ................................................................ 229

Hinsdale, Clark W. III, President, Vermont Farm Bureau Inc, on behalf

of The American Farm Bureau Federation, Richmond, Vermont .................... 248

Hughes, Will, University of Wisconsin, Center for Cooperatives, Madison,

Wisconsin .............................................................................................................. 254

Meyer, Dennis, Member, Board of Directors, Family Dairies, USA, Bernard,

Iowa ....................................................................................................................... 238

Paul, Eugene, Legislative Coordinator, National Farmers Organization, Ames,

Iowa ....................................................................................................................... 256

Scarlett, John N., New Market, Tennessee, on behalf of the South East

Dairy Farmers Association .................................................................................. 249

Tillison, James, Alliance of Western Milk Producers, Sacramento, California .. 234

Vanblarcom, James, Columbia Cross Roads, Pennsylvania ................................. 232

APPENDIX

PREPARED STATEMENTS:

Fitzgerald, Hon. Peter ...................................................................................... 148

Harkin, Hon. Tom ............................................................................................ 379

Daschle, Hon. Tom ........................................................................................... 272

Grams, Hon. Rod .............................................................................................. 373

Baldwin, Hon. Tammy ..................................................................................... 274

Brey, Bill ........................................................................................................... 362

Clayton, Kenneth C. ......................................................................................... 279

Erb, Debora, A. ................................................................................................. 371

Frydenlund, John E. ......................................................................................... 331

Furth, Mark ...................................................................................................... 296

Hinsdale, Clark W. III ..................................................................................... 323

Hughes, Will ..................................................................................................... 339

Jaeger, Arthur S. .............................................................................................. 288

Jensen, Larry J. ................................................................................................ 312

Meyer, Dennis ................................................................................................... 317

Paul, Eugene ..................................................................................................... 355

Scarlett, John N. ............................................................................................... 326

Tillison, Jim ...................................................................................................... 306

Vanblarcom, James .......................................................................................... 298

DOCUMENTS SUBMITTED FOR THE RECORD:

Testimony on the Northeast Dairy Compact, submitted by Linda Smith

Dyer, Chair, Northeast Diary Coompact Commission (this information

is retained in the Committee files) ..............................................................

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FEDERAL DAIRY POLICY

TUESDAY, FEBRUARY 8, 2000

U.S. SENATE, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY, Washington, DC.

The Committee met, pursuant to notice, at 9:00 a.m., in room

SH–216, Hart Senate Office Building, Hon. Richard G. Lugar,

(Chairman of the Committee), presiding.

Present or submitting a statement: Senators Lugar, Fitzgerald,

Craig, Santorum, Harkin, Leahy, and Conrad.

OPENING STATEMENT OF HON. RICHARD G. LUGAR, A U.S.

SENATOR FROM INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

The CHAIRMAN. This hearing of the Senate Agriculture Committee is called to order. We have this morning a number of distinguished witnesses including the distinguished governor of Wisconsin, at least six of our colleagues in the U.S. Senate, 4 members

of the House, and the Commissioner of Agriculture, Mr. Rudgers of

New York. And we look forward to hearing from all you. I will dispense with an opening statement except to say that the hearing

comes about through agreement at the end of the last session of

the Congress. Those of you were following our deliberations on that

day will recall that pledges were made to Senators who were conducting extended debate on the dairy issue that the Committee

would hold hearings on dairy policy in which all views could be

heard and which once again we could examine this very, very important industry in America.

And so this is the first of the 2-days of hearings. Tomorrow we

will have another full day of opportunities and we have called witnesses from public life. Likewise, the United States Department of

Agriculture; we will have Keith Collins reviewing from the standpoint of USDA agricultural policy and dairy policy, and then, including that this morning, a number of witnesses describing the

current status and structure of the dairy industry.

It is my privilege to call upon the distinguished witnesses and I

will ask the governor of Wisconsin to testify first and then we will

proceed through our colleagues in the Senate. I will ask each of

you, if you will, to give 5-minutes of testimony. Your remarks in

full will be published in the record, but as a courtesy to all of the

witnesses, because we know that our public witnesses will take us

well into mid-morning, if not longer, and then we still have the

USDA and the other witnesses, we will try to proceed with the 5-

minute time limit for testimony. Likewise, for comments or ques-
2

tions from Senators if we come to those rounds. Governor Thompson, it is good to have you, as always.

[The prepared statement of Senator Lugar, can be found in the

appendix on page 70.]

STATEMENT OF HON. TOMMY THOMPSON, GOVERNOR, STATE

OF WISCONSIN

Governor THOMPSON. Well, thank you so very much, Chairman

Lugar, and thank you so very much for holding this hearing. It is

wonderful and I thank you so very much for taking me out of order.

Mr. Chairman, I would like to thank you for holding these hearings. I certainly appreciate your interest in agriculture and your

desire for agriculture and for this committee to reclaim the issues

associated with dairy, issues that affect Wisconsin probably more

so than any other state in America.

Wisconsin is the Nation’s top producer of cheese. In fact, if Wisconsin were a Nation, it would be the second leading cheese producer in the world, second to New Zealand. My state has more

dairy farms than the states of California, New York, and Pennsylvania combined. However, the number of family farms in my state

is dwindling rapidly, and with their loss, we are witnessing the demise of the very people who helped build this great country, our

proud farm families.

In 1990, to give you some idea, 34,000-dairy farm families existed in Wisconsin. Today, that number has plummeted to 21,000,

representing a loss of three daily, farms each day for an entire decade. What is most distressing is the dramatic increase in the number of farms that have gone out of business since the Northeast

Dairy Compact was enacted. Between 1997 and 1998, more than

2,000-family farms have folded, increase of roughly 100-percent

over the previous average yearly loss.

Ladies and gentlemen, to say Wisconsin’s dairy farms are in

trouble is an understatement. They are in dire straits and I am at

a loss to understand why Congress continues to stand with a heavy

foot on the throat of the Wisconsin dairy farmer. As all of you

know, Wisconsin dairy farmers have been discriminated against

under the Federal milk marketing order system commonly known

as the Eau Claire rule ever since 1937.

Congress has attempted to update this pricing regime for years.

Farm bills in 1980, 1985 and 1990 all called for reform but failed.

When discussions began to take place in the last farm bill, we

thought our dairy farmers might finally get equal treatment. However, when the final version of the 1996 farm bill emerged, there

were no market based reforms. Instead the farm bill let the USDA

decide what type of changes were necessary to reform the 1937 system and was able to consolidate the 31-milk marketing regions nationwide. It did consolidate it to 11.

It also granted temporary consent to the Northeast Compact

while the USDA considered action. In January 1998, Agriculture

Secretary Dan Glickman proposed two potential approaches to reforming the milk pricing system. While I personally as governor

was not pleased with the scale of the reforms, I was pleased finally

that some reforms would be implemented and that the Northeast
3

Dairy Compact would be eliminated when the new fiscal year

began October 1, 1999.

I was confident the reforms the USDA created would be implemented because there was no reason to believe otherwise for the

Senate held no debates on the Federal milk marketing order system or dairy compacts in any committee nor on the Senate floor.

However, as the Congress was wrapping up the final appropriation

conference bill, dairy became the issue. At the last minute, a bill

was added to the final package to throw out the reform plan the

USDA spent 2-years developing. The spending package also included language to extend the Northeast Dairy Compact until September 30, 2001.

Wisconsin farmers, along with many of their Midwestern peers,

were again left on the political auction block. Compacts were supposedly designed to save family dairy farms. Instead the opposite

has proven to be true. Together compacts and the Federal milk

marketing orders have resulted in a devastating effect on Midwestern dairy farmers, driving milk prices to record lows and family dairy farms closing to new heights.

Mr. Chairman, some individuals argue that a compact in one

area of the country has no effect in another part of the country.

This is either economic ignorance or intentional misrepresentation.

Try as we might, we cannot evade the power of the marketplace.

A compact in one region will lead to lower prices in another region

because we are lessening, not increasing, consumer demand due to

higher prices.

When supply outstrips demand, something has to give. In the

case of compacts, the Federal Government is again asking consumers in the compact regions and dairy producers in the non-compact

regions of the country to do the giving. Vermont’s production increased 4-percent in 1998. Production in the other five compact

states was up 21⁄2-percent. In fact, a University of Wisconsin—I got

one final page and I will finish up quickly, Mr. Chairman—in fact,

a University of Wisconsin study estimates the real cost of dairy impacts exceed $145,000 in lost farm revenues per year in non-compact regions.

Even those states with compacts are witnessing a decline in

small family farms, as Vermont is losing farms with herds with

less than 100-cows. So while the United States is charging into the

longest period of economic growth in history, our dairy farm families are watching it roll by and over them.

Simply stated, we are doing our national dairy industry a real

disservice if we continue to price milk based on the location of the

cow and proceed down the path of regional pricing compacts. What

the Wisconsin and American dairy farmer will benefit most from is

bold and dramatic reform that eliminates Eau Claire as the standard for setting milk prices paid to farmers and forgets about pricing milk regionally.

Mr. Chairman, I urge you strongly and this committee to rid the

entire country of dairy compacts and do not create more. Thank

you so very much for having this opportunity, Mr. Chairman.

[The prepared statement of Governor Thompson, can be found in

the appendix on page 71.]
4

The CHAIRMAN. Thank you very much, Governor Thompson. The

Chair will say that as each of our distinguished public witnesses

concludes, he or she is free to leave the podium as opposed to participating in the further dialogue, and I will call upon our distinguished colleagues from Congress in the order in which they have

appeared. And that will be Senator Specter, Senator Grams, Senator Kohl, Senator Jeffords, Congressman Kind and Senator Feingold. Senator Specter.

STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM

PENNSYLVANIA

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

thank you for convening these important hearings. This is an extraordinary group of witnesses in this major Senate hearing room

so I will be very brief. My full statement, I know, will be included

in the record as you have announced.

The CHAIRMAN. Included in full.

Senator SPECTER. And I appear to strongly support the dairy

compact being extended to the Mid-Eastern states, states like

Pennsylvania. There has been an extraordinary fluctuation in the

price of milk, as high as $17.34 per hundredweight in December of

1998 to exactly 1-year later $9.63 per hundredweight. And with

that kind of a fluctuation, it is just impossible for dairy farmers to

plan and more fundamentally for dairy farmers to stay in business.

Pennsylvania has many small dairy farmers and in the era from

1993 to 1998, Pennsylvania lost between 3- to 500-dairy farmers a

year, more than 11-percent of the farmers in the state. Now, it is

a Pennsylvania issue that agriculture is Pennsylvania’s number

one industry and that dairy is the largest component of Pennsylvania’s agriculture. But it is a national matter to maintain an adequate supply of milk so that it gets to the consumers and there is

a delicate balance to be maintained between a free market and just

the bit of governmental assistance which will maintain the small

dairy farmer.

We do not want to see a situation arise where the large corporations control dairy, nor do we want to see a situation arise where

certain states which may have a competitive advantage because

grain costs dominate the market and, in effect, squeeze out other

dairy farmers. The compact which has been in existence in the

northeastern part of the state has been very successful—northeastern part of the country—has been very successful and when

some of the states, Vermont, New Hampshire, Massachusetts, Connecticut, have the benefit of these compacts, as a matter of fundamental fairness, it ought to be extended to states like Pennsylvania and other states which wish to participate.

There is not a matter of cost to the Federal Government and it

is a matter of basic fairness. Now, we had a fierce battle last year

known to those even beyond the people assembled in this room,

and I sit next to one of my best friends, Senator Herb Kohl, who

chaired with me the hearings on Ruby Ridge in this room where

we saw eye to eye and we see eye to eye on most matters, and I

believe this matter can be accommodated so that Pennsylvania

farmers can live as well as Wisconsin farmers. So I urge you, Mr.

Chairman—I know your fairness and your astuteness and your ex-
5

perience—I know you will give consideration, but I think the merits support extension of the compacts to states like mine. I yield

the balance of my time, Mr. Chairman.

[The prepared statement of Senator Specter can be found in the

appendix on page 77.]

The CHAIRMAN. Well, thank you very much, Senator Specter, and

I appreciate your compliment. This really requires the wisdom of

Solomon and beyond.

Senator SPECTER. I still feel confident about the judgment in this

matter, Mr. Chairman.

The CHAIRMAN. I appreciate that. Senator Grams.

STATEMENT OF HON. ROD GRAMS, A U.S. SENATOR FROM

MINNESOTA

Senator GRAMS. Thank you very much, Mr. Chairman, and the

members of the Committee. I want to thank you for the opportunity to be here today and to address you concerning the critical

issue of Federal dairy policy. It is my hope that these hearings will

shed some light on the unfair and the outdated pricing structure

that we currently live under and help turn the tide in our country

to free markets for our dairy farmers.

Mr. Chairman, I want to point out first today that milk, which

is an important member of the food group, is also a beverage that

competes with a host of other beverage choices for the consumer’s

dollars. In 1998, each American consumer drank 23.8-gallons of

fluid milk products. This is compared to 56.1-gallons of soft drinks,

15-gallons of fruit juices, 13.9-gallons of bottled water. In fact, per

capita beverage milk consumption has declined from 28.6-gallons in

1975 to just 23.9-gallons in 1997.

Our Federal pricing policies also run counter to the conventional

wisdom that we need to be promoting milk consumption as an important part of a healthy diet. If we continue to artificially raise

milk prices, we cannot expect farmers to be successful in the longrun competing against each other and other beverages available in

the grocery store. Our daily policy must be focused on permitting

farmers to capture additional market share, both domestically and

internationally.

That is one of the reasons I have introduced legislation, Senate

bill 1930, which would eliminate the Federal milk marketing orders and allow farmers to compete in the free market. Eliminating

the milk marketing orders would end the regional price discrimination that hamstrings Upper Midwest dairy producers and would obviously benefit the consumer, especially low income families with

children that need milk for good health and spend a high percentage of family income on food.

The milk marketing orders artificially inflate prices for beverage

milk and other dairy products within a region which prevents producers from lower cost regions, such as in the Upper Midwest, from

penetrating markets in other areas. Not only does it keep Upper

Midwest producers from increasing market share in other regions

with lower cost, high quality milk, but the Federally mandated

higher prices for fluid milk in other regions stimulate production

there resulting in more milk flowing into the production of manu-
6

factured dairy products which in turn depresses prices that Minnesota producers receive.

So the adverse effects of milk marketing orders on Minnesota

farmers are twofold. In fact, the milk marketing order system,

while raising the price farmers receive for beverage milk, actually

depresses the prices farmers receive for manufactured dairy products, and the Upper Midwest Federal Order used only 13-percent

of its milk as beverage milk in January 1999, the remaining 87-

percent going to the production of manufactured dairy goods.

Mr. Chairman, without Federal orders, Upper Midwest farmers

would receive a higher price on the 87-percent of its milk used for

production of processed products. How can Congress possibly justify

artificially raising the price that farmers receive for fluid milk and

depressing the price they received for processed products? It cannot. Congress absolutely should not be picking winners and losers

in such an arbitrary manner.

Minnesota farmers do not want special advantages. They simply

want the heel of an antiquated system off their neck. No other consumer food product is micromanaged as much in America as the

dairy industry. As our colleague, Phil Gramm, memorably put it

last year, ‘‘dairy compacts would make a Soviet commissar blush.’’

The same goes for the U.S. milk marketing order system. The communist countries used to price goods and services using complicated formulas representing estimated values of input. Like the

Federal milk marketing orders, it had little to do with supply and

demand.

Mr. Chairman, my bill would allow the production of milk in the

United States to be based on a fair playing field for all producers

and would that be good for the Upper Midwest? Yes, it would.

Would it be good for the consumer and for American agriculture as

well? Yes. The Upper Midwest is blessed with the natural conditions conducive to milk production including a favorable climate,

low feed costs and ample water supplies. We are the most competitive producers in the country and the American consumer should

be able to reap those benefits.

So, Mr. Chairman, in closing, I just want to thank you again for

holding these hearings. I hope it does lead to some changes in this

dairy industry or the pricing. Our dairy farmers, as Governor

Thompson pointed out, are just at the mercy of antiquated, oldfashioned, outdated milk marketing order system. We would never

put a dairy policy like this in place if it were being constructed

today. So I just hope we can put some fairness into this dairy policy so when I go home that I can tell my dairy producers, our farmers who get up every morning to go out and milk those cows, that

we are not going to discriminate against them.

Mr. Chairman, I also have the remaining part of my statement

I would like to have entered into the record as if read.

[The prepared statement of Senator Grams can be found in the

appendix on page 80.]

The CHAIRMAN. The record will include your statement in full.

We thank you, Senator Grams.

Introducing our next testimony of Senator Kohl, I would simply

mention, as I said at the outset, before Senator Kohl arrived, that

on the concluding day of our session, our Majority Leader, Senator
7

Lott, called me to the floor because he said that Senators from Wisconsin and Minnesota in particular wanted assurance from this

committee, as did Senator Lott, that we would hold hearings. And

one reason for concluding the debate on that day was a pledge on

my part on behalf of our committee to hold the hearings. So I am

very pleased that Senators from Wisconsin and Minnesota are

here. Senator Kohl was a leader of that debate and it is good to

call upon you and have you here in our hearing this morning,

Herb. If you would commence with your testimony.

STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM

WISCONSIN

Senator KOHL. We thank you, Mr. Chairman, and we thank you

for holding these hearings today as you promised you would. We

also thank witnesses who have come a long way to help us sort out

our antiquated and unfair dairy pricing system. Mr. Chairman,

there are those who think that these hearings are meaningless.

They argue that Wisconsin dairy farmers need justice and we are

only giving them words. They point to the long history of backroom

deals and last minute betrayals that have tilted our current dairy

laws hopelessly against the family farmers of the Upper Midwest.

Mr. Chairman, I am not ready to give up on my colleagues in

Congress. I continue to hope that they will side with us when they

come to understand how far our dairy pricing system has strayed

from the basic American principle of honest pay for honest work.

Last November, as you point out, when we forced Senate leadership to look at our argument literally by barring the door, we got

strong and open commitments from the majority and minority leaders to fight the regional dairy pricing fixing cartels known as dairy

compacts.

This year with hearings like this and with legislation I hope this

committee will report and through the efforts of those of us from

the Midwest committed to this fight, I believe that we can change

more minds. The current pricing system is like a vampire. It cannot survive in the light of day. So I am not ready to give up on

Congress and I am certainly not ready to give up on the struggling

family dairy farmers of my state.

Right here with me today I have a list of the 10,519-dairy farmers who stopped milking over the last 3-years. If these were farmers ruined by a natural disaster, then it would be a list of those

eligible for FEMA loans and grants to rebuild their businesses. If

these were farmers put out of business by unfair trade practices in

other countries, then it would be a list of those eligible for trade

adjustment assistance. But because their ruin was brought on by

an unfair policy intentionally imposed by their own Federal Government, this is only a list, a sad, sad record of a way of life that

should not have to die.

Mr. Chairman, we in the Upper Midwest are not asking for a

bailout. We are only asking that Congress end a dairy pricing system that is uncompetitive and un-American. The facts are clear,

number one, increased prices in some regions either through compacts or Federal orders result in overproduction that lowers prices

for farmers outside the protected region. History shows this to be

demonstrably true.
8

Number two, dairy compacts are an unprecedented price fixing

scheme contrary to the principles of free markets that have made

America’s economy the strongest in the world.And three, the way

to end regionalism and divisiveness is not to expand compacts and

exacerbate milk price distortions but to develop and enact policies

that help all farmers equally. Those who suggest we can have a national dairy policy to help all farmers and regional policies like

compacts are just plain wrong.

Mr. Chairman, it is ironic that the Midwest is often accused of

regionalism for opposing policies which help only other regions. The

Upper Midwest has never sought special treatment. We have only

sought a level playing field. We need a national dairy policy that

will help all family dairy farms throughout our country, that will

neither distort markets nor tax consumers. And we need you, Mr.

Chairman, and the members of your committee, to commit to pursuing that goal and pursuing it openly. Congress should never

again agree to a last minute special interest dairy deal that goes

against every basic principle of fairness and American free enterprise. I thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator Kohl. Senator

Jeffords.

STATEMENT OF HON. JAMES JEFFORDS, A U.S. SENATOR

FROM VERMONT

Senator JEFFORDS. Thank you, Mr. Chairman. It is a pleasure to

be here with you. As you know, I have been deeply involved in

dairy policy since I got here some 20-odd years ago and so I have

been through a number of trials and tribulations and programs and

all, and it is just seems to us here in Vermont that the one that

we have now certainly is the best one we have had as far as allowing compacts to be able to satisfy the needs of a region.

We have to remember what the basic policy of the dairy policy

is and that is each region of this country is entitled to have an adequate supply at a reasonable cost of fresh milk. To say that it can

all be supplied from the West or the Midwest is not consistent with

the policy nor is it consistent for the Nation as we have varying

times when various production levels are available. Again, the

basic policy is to assure consumers of adequate and dependable

supplies of pure wholesome milk products from the least costly

source.

I recognize that my Senate colleagues from the Midwest have,

and very understandably, raised the dairy issue to a new level of

concern and I welcome the opportunity to respond to their call for

productive changes in our dairy policy. There is nothing I would

like more to do than to join my friends from the Midwest in common cause to improve our dairy situation. I say I have worked over

the years with the Midwest and time and time again we have

found common ground. It is time to work together again.

But let me be frank with each other. The key issue that has divided us in our time here and which continues to divide us is the

insistence that one part of the country should be seen as the source

of our nation’s supply of milk beverage. This insistence has been

and still remains simply contrary to the overwhelming will of Congress and contrary to the law. The real issue, the very nature of
9

our basic supply and demand, so extends way beyond the mere interest of a single constituent group, regionally and on behalf of the

Nation as a whole, the Congress simply will not yield to the destruction of our local supplies of fresh wholesome drinking milk

which is the basic law.

So I call upon my colleagues in the Senate, especially my friends

from the Midwest, to look elsewhere than to reformation of the

fluid marketplace for the solution of our problems that dairy faces.

I make this call in the spirit of cooperation and with a positive

spirit. One looks at the increase in milk production and cow numbers in the western states, such as California, Arizona, New Mexico, Idaho, Washington, and one could determine that the fight is

not regional supplies of milk, but it is the production of cheese and

other manufactured products which when overproduced caused depressed farm milk prices across the country and difficulties.

Let me go through what has happened in that regard and I ask

my members from the Midwest to take note. USDA’s Commodity

Credit Corporation purchases of surplus dairy product percentage

by regions show that in fiscal year 1996–97 the Midwest accounted

for 56.8-percent of surplus dairy products purchased, 43.2-percent

from the West, 0-percent from the East.

In 1997–98, the Midwest percentage was 9.6-percent and the

West was 90-percent, and the East was .2-percent. As of April

1999, the West contributed 97.2-percent of the Commodity Credit

Corporation [CCC] purchases. It is clear that the overproduction is

not in the East; the solution may be in the East, but it is the West

that is the problem. I also have here to show you what has happened for consumers in our area. The price to consumers has gone

down. It is just purely coincidental that we picked Kohl’s Market

out in Wisconsin to compare with, but I would point that in Vermont at this particular time the price per gallon was $1.39 and out

in Wisconsin it was $1.79. So we have a compact which has cut the

cost to the Government, which has cut the cost to consumers,

which has aided our farmers, and it is something that ought to be

looked at as a solution because it is not the problem. Thank you.

The CHAIRMAN. Thank you very much, Senator Jeffords. I call

now upon Congressman Kind of Wisconsin. We are glad to have

you at our hearing this morning.

STATEMENT OF HON. RON KIND, A U.S. REPRESENTATIVE

FROM WISCONSIN

Mr. KIND. Thank you, Mr. Chairman. I am delighted to be here

and thank you for the opportunity of having not just myself but a

couple of my colleagues from the House side testifying in regards

to this very important matter, and let me just begin by coming to

the defense of my esteemed Senator from Wisconsin that some of

the best consumer purchases that can be made in the country can

be found in Kohl’s department stores so I hope you are not under

any illusions with that last graph that was just put in front of you.

But, Senator Lugar, I represent a district in western Wisconsin

that is one of the largest dairy producing districts in the Nation.

It also happens to be home of a very fine city called Eau Claire.

And I am sure the Chairman is aware of the significance of that

geographic location. I have over the last 3-years representing that
10

district found it incredibly difficult trying to explain to the family

farmers back home why we have a milk pricing system that discriminates upon them merely because of geography and location.

And the bottom line is that there is no real economic justification

for it anymore. What may have made sense back in the 1930s to

ensure an adequate supply of fluid milk in certain regions of the

country that had deficient milk supplies no longer holds true today,

not with the interstate highway system, the ability for us to transport milk to all regions of the country with relative ease overnight.

There is no economic justification anymore today.

The dairy industry is the largest industry in the state of Wisconsin. It is a very proud industry. We have approximately 22,000-

dairy farmers that produce close to 23-billion pounds of milk yearly. Gross milk receipts for 1998 were approximately $3.5 billion.

Roughly 160,000-people are employed in our state’s dairy industry.

85-percent of Wisconsin’s milk is processed into cheese and other

manufactured products and Wisconsin cheese is recognized nationally and internationally.

What does not exist in the state of Wisconsin, and this is true

for the Upper Midwest, are our family farmers who are looking for

any particular advantage. All they are asking for is the ability to

compete fairly in our own domestic market with a level playing

field and to end the regional competition that now exists in this

country. What also does not exist in Wisconsin, and it is true in

the Upper Midwest, are large corporate dairy farms. In fact, there

have been some fallacies perpetuated out here with some members

of Congress in the national media who think that the representatives from the Upper Midwest are here going to bat for large corporate interests back home. Just the opposite is true. The average

dairy herd size in Wisconsin is 59-head, compared to Vermont

which is 85-head; New York has 81-cows. In Wisconsin, just 2-percent of our farms have over 200 cows. In Vermont, it is 7-percent

of their farms over 200-cows. In New York, 6-percent over 200-

cows. So it is not as if we have a lot of large corporate dairy interests that are demanding change. What we have are a lot of small

family farmers who are just asking for an opportunity to make a

decent living, compete domestically, so they can provide for their

families. It is a very proud history.

One other point I would like to make to the Chairman here

today, there are, I believe, international trade implications with

our dairy policy in this country and we saw the results of the

World Trade Organization [WTO] talks in Seattle. One of the

greatest obstacles we have in a new round of international trade

talks is in the agricultural sphere. Agriculture is our number one

export market industry in this country and yet if our trade representatives are to have any credibility going into a new round of

trade talks, we need to get it right at home first.

In fact, I along with Senator Pat Roberts, a distinguished member of this committee, and a handful of other representatives had

a chance about a year ago to go to Brussels to meet with members

of the European Commission and members of the European Parliament in regards to the changes or proposed reforms of their common agricultural policy. We all know that the European Union

[EU] has a heavily subsidized export dairy program in place right
11

now and as we discussed with them in gentle terms the desire for

change, their response was quite illuminating. Basically they responded do not come over here—and I am paraphrasing, of

course—and lecture us on our dairy policies and our state subsidies

to the dairy industry when you cannot even get it right at home.

And I think we are going to run into this difficulty in future

trade talks with other nations as long as we are quick to point the

finger of blame on other countries who refuse to negotiate in good

faith and practice good fair trade policies in accordance with WTO

policies, so long as we pit region against region, continue this 1930

antiquated milk pricing system in our country, and I just leave

that with you today, Mr. Chairman. I have a more fully and detailed written statement that I will submit for the record, but

thank you again for the opportunity to testify. Thank you.

[The prepared statement of Representative Kind can be found in

the appendix on page 85.]

The CHAIRMAN. Well, thank you for coming. Your statement will

be published in full. I take the point that you have made, Mr. Kind,

that WTO apparently yesterday made a late announcement that

they are going to attempt to revive agriculture, and not the large

agenda that was in Seattle that crashed and burned. But now the

embers are being blown on again. Perhaps some negotiations starting in March with no promise of when they will conclude, but certainly your point is well taken and I appreciate your interest in

this.

Let me just now call upon your colleague from Wisconsin, Senator Feingold. Russ, it is good to have you as always. Would you

please testify?

STATEMENT OF HON. RUSSELL FEINGOLD, A U.S. SENATOR

FROM WISCONSIN

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

want to thank the entire committee for holding these hearings and

I especially want to thank my colleagues from both the Senate and

my friends from the House and Governor Thompson for all joining

together to testify today. And I would ask that my whole statement

be placed in the record.

The CHAIRMAN. It will be published in full.

Senator FEINGOLD. Mr. Chairman, I am here to simply underscore the simple point that the current Federal dairy policy is not

helping anyone. In fact, to put it very simply, Mr. Chairman, it is

destroying farmers. It is hurting consumers and it is hurting taxpayers. Over the past 70-years, we have witnessed a tragic transformation of America’s dairy industry. Year after year, consolidation and consolidation and concentration have run rampant

through our dairy industry and I certainly agree that in nearly

every region, whether it be the Northeast, Midwest or west coast,

we have seen the disappearance of small and moderate size family

farms. But nowhere in the United States has this trend been more

glaring than in America’s dairyland, my home state of Wisconsin.

Let us just again look at the effect of the Federal dairy policy on

Wisconsin dairy farmers. Mr. Chairman, in 1950, Wisconsin had

over 143,000-dairy farms. After 50-years, Wisconsin is left with

only 20,000-dairy farms. During the 1990s alone, Wisconsin lost
12

more than 39-percent of its dairy farms. In other words, the number of farms we started the decade with, by the end of the decade

we had 39-percent less. That is three dairy farms a day being lost

for a total of over 13,300-dairy farms. So Wisconsin has lost over

39-percent of its dairy farms in the past 10-years.

Now my colleagues can imagine the impact that this has on communities across Wisconsin. When dairy farms that have been in a

family for generations are forced out of business, rural communities

are truly devastated. Unfortunately, it seems that the main result

of America’s dairy policy is its depressing effect on prices. If these

policies continue, our farmers will soon be paid 1930s prices for

their milk.

Instead of collectively addressing the challenges facing our dairy

farmers, Congress has played political games with America’s dairy

policy. The most significant changes over the past few years, the

Northeastern Dairy Compact and the implementation of Option 1–

A, failed to ever pass the Senate as a discrete issue on which the

Senate voted yes or no. In fact, the only Senate vote explicitly on

the Northeast Dairy Compact, and which I was very much involved, resulted in a clear rejection of the dairy compact.

So I have to take this opportunity to take exception to the continuing assertion that compacts are an answer to the problems facing America’s dairy farmers. Despite its original intent, I think

dairy compacts have hurt small independent producers. Since the

Northeast first implemented its compact in 1997, small size family

dairy farms in the Northeast have gone out of business 41-percent

faster than they had in the two previous years. In fact, compacts

often act simply as a device to transfer wealth to large farms. Compacts afford large farms a per farm subsidy that is 20-times greater

than the meager subsidy afforded to small farmers.

However, compacts only exacerbate the regional inequalities inherent in our current system. So my message is simple. Just as the

compacts ought to end, I think these regional arguments have to

stop. We need to restore equality, stop regional bickering, and work

to ensure that our nation’s dairy farmers can get a fair price for

their milk. The simple fact is that our Federal dairy pricing policy

is failing to protect our nation’s farmers. In fact, one of the greatest

forces driving Wisconsin dairy farmers out of business and off the

land, Mr. Chairman, is the current structure of the Federal dairy

program. And I am not going to go through the whole history of

that again as my colleagues have done.

Let me just say that Congress has to recognize that America’s

dairy market is truly national and that we are in need of a national solution or, to put it more personally, I look forward to the

day when I can think of the name of Eau Claire being associated

with the fact I hope my daughter is studying hard at the University of Wisconsin Eau Claire today rather than a pricing system

that is putting a knife in the heart of Wisconsin dairy farmers.

Finally, Mr. Chairman, I do want to mention one other trend

that has gone unchecked and substantially unaddressed and that

is the increased concentration in America’s dairy industry which is

causing farmers to receive a declining share of the retail dollar. In

1981, dairy farmers were receiving a national average of $13.76 per

hundredweight, while fluid milk at the grocery store was selling for
13

about $1.85 per gallon, while in August of 1997, dairy farmers were

receiving a national average of $12.70 per hundredweight and retail fluid prices were at $2.76 per gallon.

While we have heard a great deal about the merger mania in the

grain and livestock industry, market concentration in the dairy industry has gone unnoticed for far too long. We need to address the

potential problems raised by the vertical integration of cooperatives, mergers of cooperatives and retailers, and possible price manipulation by retail stores. Mr. Chairman, since you were kind

enough to allow me last week to present some of the specifics of

this merger mania, I will not go over it again, but I believe this

is part of the problem for us in the Upper Midwest and I would

say to Senator Jeffords for farmers across the country.

So instead of dealing with an important issue like that of market

concentration, Congress has instead been playing political games

with America’s dairy policy. So again the message is simple. The

backdoor deals, Mr. Chairman, have to stop. American dairy farmers deserve a fair and truly national dairy policy and one that puts

them on a level playing field from coast to coast, and again thank

you very much for following through on your commitment to hold

these hearings. I do appreciate it.

The CHAIRMAN. Thank you very much, Senator Feingold, and

thank you also for your testimony on the agricultural concentration

issue. These are both very serious issues and that is why the Committee in its first 2-weeks has tried to tackle both and we appreciate your testimony on this occasion likewise. Senator Wellstone.

STATEMENT OF HON. PAUL WELLSTONE, A U.S. SENATOR

FROM MINNESOTA

Senator WELLSTONE. Thank you, Mr. Chairman. I have a complete statement that I would like to submit for the record.

The CHAIRMAN. It will be published in full in the record.

Senator WELLSTONE. And I want to just mention that Mark

Furth from the Associated Mike Producers of Minnesota, I think,

will be also testifying later. Let me thank you, Mr. Chairman, and

Senator Conrad, for holding the hearings. Let me thank all my colleagues and I think rather than going with any prepared statement—you will just have that on the record—let me just highlight

a couple of things that have been said.

First of all, I mean probably the informal way for me to say it

is that the extension of the Northeast Dairy Compact, I think, as

much as what it means substantively to us, and we have a different interpretation than my colleague from Vermont, is the way

in which it was done. I do not think any of us think it was appropriate that it was put on to the omnibus bill. I think there is a lot

of anger about it. I think that is what Senator Feingold meant

when he talked about a kind of backdoor process.

Second of all, let me also mention this milk marketing order system which is just irrational and very discriminatory toward the

Midwest, and we thought Secretary Glickman was taking a step in

the right direction, and again what sort of adds salt to the wound

is that his, I think, proposal, which was constructive and helpful,

was basically blocked.
14

Third of all, I want to mention this whole issue of forward contracting and where I think—you know, I just have had the most

poignant meetings and conversations with hog producers, and they

just basically have pretty much lost their right to be entrepreneurs.

And, you know, what happens you get low prices, which, of course,

with this unbelievable fluctuation in dairy prices is happening to

our producers, and then they forward contract with these processes

and it becomes vertically integrated, and before you all know it, it

just becomes a very corporatized agriculture with conglomerates

kind of muscling their way to the dinner table and the kind of family farm structure of agriculture that we all cherish is gone. And

I want to signal to you that I think that is an incredibly important

issue.

And then finally, I just want to say that ultimately I would like

to be up here working together with Senator Jeffords because I

think the other issue that we are faced with is that we were at

16.26 and then we went down to 9.63-per hundredweight. I mean

producers just cannot survive this kind of wild fluctuation. We

need some kind of a stability. We need some kind of decent price.

We need some kind of price targeted toward our midsize producers

and ultimately I will just tell you if we do not do that, then we are

just going to lose our producers.

Finally, I want to emphasize what my colleagues from Wisconsin

said, which is, you know, our typical dairy farm is 60-cows. We are

the fifth largest producer in the Nation. It is a $1.2 billion business

for those farmers and that dollar multiplies over and over again,

and if I was to add to what is happening to dairy farmers with

what is happening to some of our crop farmers with what has happened to some of our livestock producers with what is happening

to our small banks and our small schools and our hospitals and our

rural communities, I would say that you have an absolute economic

convulsion taking place in rural America.

And I just hope we do not sort of go about our business as usual

because I think we need to respond to it. I know that there is a

wonderful effort being planned, led I think by the religious community and farm organizations and AFL–CIO and environmental organizations, to come to Washington with a focus on rural America,

around March 20, March 21, and I think lots of people will be here

with really good meetings with Senators and representatives, and

I think that will be good because we just cannot put into parentheses or put aside what is happening in our rural communities.

I really appreciate your holding these hearings, Mr. Chairman,

and while I do not always agree with you on some of your positions, I always respect your integrity and I never doubt your word.

I thank you.

[The prepared statement of Senator Wellstone can be found in

the appendix on page 87.]

The CHAIRMAN. Well, thank you very much, Senator Wellstone.

I appreciate your leadership in rural America and wish that you

were a member of our committee so you could be a part of this dialogue day by day, but thank you for coming again this morning.

I would like to call now on Congressman Green.
15

STATEMENT OF HON. MARK GREEN, A U.S. REPRESENTATIVE

FROM WISCONSIN

Mr. GREEN. Thank you. Thanks, Mr. Chairman. Thanks for the

privilege of being able to appear and offer some thoughts. The disadvantage of going so late in the process is perhaps you are already

confused by all these contradictory details and bizarre details of

milk marketing orders. The advantage, however, from my standpoint is I will only summarize my testimony and not have to repeat

much of what has been said.

Mr. Chairman, I would ask that my written testimony be submitted in full to the record.

The CHAIRMAN. It will be published in full.

Mr. GREEN. Thank you, Mr. Chairman. Mr. Chairman, as you

have heard, farmers all across America are hurting. You have

heard that not only here but obviously back home and dairy is no

exception. When members of this house and the House of Representatives voted to overturn the very modest reforms proposed by

Secretary Glickman, many did so with the best of intentions, responding to the pain, the suffering that they are hearing in their

home states and their dairy sector. But perhaps what they did not

fully appreciate is the depth of the crisis and suffering in the

Upper Midwest. You have already heard it from Senator Feingold,

but in Wisconsin by this time tomorrow we will have lost at least

three dairy farms, three per day.

Over the last 10-years, we have lost more dairy farms than every

other state save Minnesota ever had. That is the depth of the crisis

that we are facing. The farmers, the observers back in my home

state, have a number of frustrations. I will summarize five frustrations that they see.

The first frustration is that many of those who voted to overturn

the proposed reforms who voted to restore the current system, have

argued that they need this system because of fluctuating prices and

instability. Let us not forget those fluctuating prices and instability

are under the current system, not under the reforms that the

USDA has proposed.

Second, the reforms that the USDA, that Secretary Glickman

proposed, were so very modest, they would not have had a huge effect. In fact, they probably would have benefitted just about every

district in this Nation, congressional district, just about every state.

My consumers are frustrated because if we cannot get these very

modest reforms, what hope is there for the more fundamental reforms that we need? When I testified before the counterpart to this

committee in the House, Governor Ventura of Minnesota said that

in his state people become so frustrated that they have concluded

it would be easier to physically relocate the city of Eau Claire to

the west coast than to actually get relief within Congress.

My third frustration, frustration we are hearing back home, is

that overturning the very modest reforms that have been proposed

ignores history. It as if the supporters of the current system are

part of the flat earth society. They are locked in a time warp. We

all understand why this system was created in the first place back

in the 1930s. Since then, technology has changed things. We have

refrigeration. We have an interstate highway system. My dairy
16

farmers can get their milk product to your consumers almost as

fast as the dairy farmers in your home state.

Now I will not go over it in detail, but Mr. Chairman, you have

before you a chart. Actually it is a cartoon from the Pioneer Press

that poses the question which of these is Federal policy? All computers are price adjusted according to their distance from Seattle?

All oranges are price adjusted according to their distance from

Florida? All country music price adjusted according to its distance

from Nashville? Or all milk is price adjusted according to its distance from Eau Claire? We know the answer unfortunately.

Fourth frustration. The system that we have now is out of line

with current economic and trade policy. And you have heard that.

We have in our compact system mini-cartels. We have trade barriers between our own states. At the very time that we are going

to every Nation around the world and saying lower your trade barriers or else, we have trade barriers between the states. At the very

time when we have missionaries of capitalism from this country

going from the tip of Africa to Southeast Asia, telling those nations

that their economy does not make sense, that they have to introduce capitalistic forces, in our dairy sector, we are going the other

way. That is crazy.

And the final frustration that I would point to in direct contradiction to my colleague and friend Senator Jeffords is the reforms that we are looking for are reforms supported by looking not

just at our home state but around the Nation. The coalition which

has come together on our side of the issue ranges from the teamsters to Americans for Tax Reform to the Congressional Black Caucus to the National Restaurant Association. The system that we

have in place costs taxpayers $149 million per year in tax dollars.

It is a tax on milk that artificially drives up the cost of milk to consumers. That chart that the Senator pointed to, those prices are

under the current system, the system that we want to change and

reform.

And finally, this system weakens WIC and other poverty relief

programs by driving up the cost of milk to consumers and weakening the benefits that they receive from the Federal Government. So

this is not only current law, bad for our dairy farmers, but more

significantly it is bad for taxpayers. It is bad for consumers. It is

bad for those who we are trying to help through our poverty relief

programs. It is time to end the flat earth society. It is time to recognize modern technology. It is time to restore some basic ideas of

capitalism and free trade into our system. Thank you, Mr. Chairman.

[The prepared statement of Representative Green can be found

in the appendix on page 92.]

The CHAIRMAN. Thank you very much, Congressman Green, for

coming and for offering your testimony this morning. Congressman

Ryan.

STATEMENT OF HON. PAUL RYAN, A U.S. REPRESENTATIVE

FROM WISCONSIN

Mr. RYAN. Thank you very much, Chairman Lugar. I appreciate

it. Thank you, Senators Harkin and Conrad. It is a pleasure to be
17

here. I ask that my full written text of my comments be inserted

into the record.

The CHAIRMAN. It will be published in full.

Mr. RYAN. Thank you. And I too know that at the end of the

hearing, you do not want to read your long full statement so I

would like to just paraphrase. And I know that my colleagues

talked about the issue. I would like to talk about the politics of the

issue. What happened this last year shows me as a new member

of Congress that it is very difficult to get dairy, modest dairy reform from Congress. We have entrenched regional political differences, not based on fact, not based on the merits of the case, not

based on core principles that we as elected officials aspire to

achieve, but based on regional politics. Basically it is the rest of the

country versus the Upper Midwest. That is really what it boils

down to.

I will not rehash all the arguments. We in Wisconsin between

1990 and 1998 lost 11,000-dairy farmers. As Mark said, we are losing three a day. This time tomorrow another three dairy farmers

we will lose. In my district, which is the southern part of the state,

we have lost 3,000-dairy farmers this decade. Why are we losing

it? Because we are held at a competitive disadvantage. Rather than

going into the facts and the reasons why we are held at a competitive disadvantage, why we are operating under this sort of horse

and buggy economic system, let us look at the politics of this.

1996, in the 1996 farm bill that you, Chairman Lugar, did so

well to help achieve was a very momentous time for agriculture. In

1996, that farm bill attempted to decouple and give farmers the

freedom to farm. That was the case with a lot of our commodities.

However, in dairy, because of the difficulties of this issue and because of the regional politics tilted against the Upper Midwest in

this issue, we had a problem. So what we solved and tried to do—

I was not in Congress at that time—was to get the USDA to come

forward with reforms after the 1996 act. The USDA did do that.

They came with very, very modest reforms in an attempt to try and

equalize and liberalize the dairy markets, try and give more equity

to all dairy farmers. So that their success will be determined upon

their ability not so much as their proximity to Eau Claire, Wisconsin.

Well, that was what we face this year. Yet, those very modest reforms, which arguably put other regions of the country in a better

position or a very similar position such as the Northeast and other

parts of this country, were rejected out of hand. What I am convinced is necessary is a strong administration that will push this

issue all the way to the end, a USDA that did its work that we saw

last year, but an administration working hand in hand with principled members of Congress with midwestern members of Congress

to see this through so that at the end of a budget cycle when you

are going down the road and you have a big appropriations battle,

winding up in October we do not see the capitulation that we saw.

What we saw this last year was a capitulation on the part of the

administration and leaders in Congress to bend to the prevailing

political forces meaning the plurality of the vote from the Northeast and the South. We need to stand against that. We need a

strong administration proposal, an administration that is willing to
18

back its proposal to the end, and leadership in Congress that will

see this through to make sure that farmers can prevail based on

the merits, farmers can prevail based on the markets, not based on

how far away from an arbitrary location in this country they live.

Thank you.

I want to summarize it with basically that, but I just want to tell

you, Mr. Chairman, you have provided leadership on this issue. Everybody here on this committee understands the issue. We do not

have to rehash it, and I think if you talk to our colleagues from

the Northeast, some of them in confidence have told me you are

right, we agree, but the politics are too strong. I believe that if

those members of Congress went home and actually discussed what

was included, what were the details of the USDA’s proposal, I

think that we could have made some momentum.

Lastly, one of my colleagues who was voting against us on the

floor—we had several amendments during this—told me that they

lost 20-dairy farmers in the last 5-years in their district. We lost

20-dairy farmers in the last week in my district. So I think that

the proportionality of this problem has yet to be realized. I think

that we have members of Congress who are sticking with their region, not necessarily with their district or with their consumers,

who purchased milk pricing. This committee can help educate the

rest of Congress. It is an issue that most members of Congress do

not know about. It is an issue that most members of Congress, unless they represent dairy districts, have no conception of what is

actually happening.

This committee by having this hearing can elevate these issues.

I encourage you to continue to do so. I thank you for this and what

we need is to work together to push the administration to stand

firm behind their proposal and work with our leaders in Congress

to see that we do not undercut them. Thank you very much, Mr.

Chairman.

[The prepared statement of Representative Ryan can be found in

the appendix on page 96.]

The CHAIRMAN. Thank you very much, Congressman Ryan. Let

me just comment because you have offered a historical note about

the 1996 farm bill. Obviously, great leadership was given by many

members of our committee and the House Agriculture Committee,

but the compromise that was reached in the conference, and which

I think most of us at this table were present throughout that night,

early morning, and so forth because dairy was decided last, was essentially, as you have stated, that USDA would offer proposals to

try to take the 38-marketing orders or however many there were

at that time down to a much smaller number to rationalize the system more along market principles and that the New England Dairy

Compact would terminate what amounts to a year ago of October,

I guess, the first of October 1998.

Senator Leahy, the distinguished former chairman of the Committee, ranking member at the time, a strong proponent of the

dairy compact. Many were likewise backing that position and many

thought we ought to rationalize the system. So the compromise was

a new marketing order business in America and the dairy compact

concluding. Now, both of these situations have been frustrated, and

so we are at this point, as you have suggested, through legislative
19

process other than direct action by our committee through its authorizing procedures or through the farm bill at this pass.

So I understand the dispute vividly, having experienced for many

years, but nevertheless that is the purpose of the hearing today.

Our committee is a part of American democracy. We have many

members with strong views. If there is a consensus in our committee to act upon any of a number of legislative proposals, we will

attempt to do so, and I presume the House will act correspondingly, and the parliamentary procedures will be as they always are

in the Senate, in which we have unlimited debate and considerable

leverage, particularly when the session runs long, when appropriations bills are not passed and literally everything is up for grabs

including dairy policy.

At that point, our committee is no more effectual than any of you

individually, but this is one reason for acting in February to hear

this. And we appreciate all the members of Congress taking time

this morning in your busy schedules to be with us to offer this testimony.

The CHAIRMAN. I want to conclude this panel by asking for our

final governmental witness, at least governmental in the sense of

Congress, and something other than the USDA and the industry,

the Commissioner of Agriculture of New York, Nathan Rudgers.

And we appreciate your coming, Sir.

STATEMENT OF NATHAN L. RUDGERS, COMMISSIONER, NEW

YORK STATE DEPARTMENT OF AGRICULTURE AND MARKETS

Mr. RUDGERS. Thank you, Senator Lugar, and I appreciate very

greatly the opportunity to address this panel in the final position

this morning. My comments this morning are going to be somewhat

different than my written testimony. I would ask that you submit

that for the record.

The CHAIRMAN. It will be published in full.

Mr. RUDGERS. I appreciate that. You are to be commended as

well as the rest of your committee for having these hearings. Governor Pataki and my department have been both very involved in

dairy policy and we witnessed first hand some of the challenges

that Congress has had in working through this complex issue, and

we appreciate the opportunity to address you today.

In New York, we value our antiques and we recognize the opportunity sometimes to take them off the shelf and dust them off, and

Congress is to be praised for having the vision and fortitude to direct USDA to change the rules by which price discovery is accomplished in the dairy industry and effectively consolidating a still

vital and relevant Federal milk marketing order system. Simply

put, milk remains a perishable product which is difficult to value

and orderly market. The Federal milk market order system accomplishes those tasks. Effective price discovery mechanisms and the

orderly marketing of milk are two essential components of a

healthy dairy industry nationwide and certainly in New York.

Milk and dairy products are New York’s leading agricultural

commodities and are processed by leaders in the cheese and soft

dairy products industry. Production in 1998 totaled 11.7-billion

pounds with a value of $1.8 billion and that was 56-percent of our

total farm gate sales which are just over $3 billion. We have 8,000-
20

dairy producers and 140-dairy processing plants. These statistics

hopefully show you the importance of dairy to New York’s economy.

Besides being the third largest producer in the U.S., New York

is a part of a regional block of producers that provides the east

coast with dairy products from Maine to Washington, DC. That

percentage is about 20-percent of the Nation’s milk supply. Our resources are plentiful as they are in the Midwest: water, good soils,

and a cool climate. Our farmers are progressive and our industry

is well positioned for the future. We have an advantage in our

proximity to major markets. The richest market in the world is a

750-mile circle centered in New York state. Within this region, you

will find half of the United States and Canada’s population, personal income and wholesale and retail trade.

The state of dairy farming in New York is one of a dynamic industry, one that is poised to use these advantages competitively in

the new millennium. Our dairy farmers tell me that the regional

future looks very promising. However, they need some short-term

help while they position themselves in the new volatile dairy environment. Policy tools exist that Congress can provide to help our

family farms transition and react to changing conditions in what

is a very competitive marketplace.

One of those tools is obviously the dairy compact and it should

be expanded to reflect the regional nature of our market. The low

prices our farmers are currently facing is the most pressing issue

ahead of them right now as prices are at their lowest level in 20-

years. The Class III price, the new benchmark price, was announced on Friday at $10.05 a hundredweight. Now forecasters

predict that, that price will increase slightly later in the year. However, I do not believe that some more of our dairy farmers can last

that long at those price levels.

On January 1 of 2000, the long awaited Federal reform was finally implemented. The three northeastern orders were consolidated into one and after careful review USDA determined that the

northeast region should extend from New England to Washington.

It would be appropriate for Congress to follow in a similar manner

by permitting the Northeast Compact to be extended to cover that

region.

Additionally, with regard to the compact, some issues have been

articulated about the declining share of the retail price that farmers have. In the compact region, the compact provides a tool for increasing that share of the farmer’s price. Some concerns have been

articulated by this panel this morning about fluctuations in price.

In the compact region, those fluctuations in price have been blunted.

At this panel this morning, there was some concerns about the

compact being a trade barrier. My state is not a member of the

compact currently. However, a thousand of my dairy farmers participate within the compact region. Clearly, there is no trade barrier for those producers.

With regard to additional tools that could be offered, we would

call on USDA to use their authority through the Commodity Credit

Corporation to directly assist and increase purchases of cheese and

other commodities for school lunch programs. Additionally, it would

have been thoughtful for the USDA to use the 125-million appro-
21

priated by this committee to address the butter-powder price tilt to

support nonfat dry milk at a higher level. This also would have

supported the price nationwide.

I additionally applaud you and Congress for directing USDA to

hold hearings on the Class III pricing formulas under Federal milk

market orders. This is an important and time sensitive issue that

impacts all dairy farmers nationwide. I would also ask that Keith

Collins, if possible, enter into testimony the information collected

by USDA on the mailbox price survey for prices paid to farmers

from all over the Nation. What I think that survey will show is

that the price disparities articulated at this table this morning

might not be so profound and actually might be a little bit different

than what has been articulated.

We continue to need Congress’ help in providing tools as we transition our dairy industries, and in closing I should mention that I

was raised on a dairy farm. I have two brothers still operating

farms in western New York. Dairy farming is something I am close

to and it is a part of me. It is also an intrinsic part of the rural

landscape culture and heritage of New York state. It is because of

this importance that Governor Pataki and I have worked so hard

and so closely with our congressional delegation in New York to see

New York join the Northeast Compact.

If New York is not permitted to join the compact, then our continued efforts to transition farmers to be more market oriented and

able to succeed in the new dairy economy will be much more difficult. I hope these discussions today can lead us to the goal of

helping our farmers succeed and we can have healthy prospering

dairy operations throughout New York and the United States.

Thank you again, Senator Lugar, and the rest of the Committee for

inviting me here to testify today and I look forward to working

with you as we address the issues that face our dairy industry.

[The prepared statement of Mr. Rudgers can be found in the appendix on page 102.]

The CHAIRMAN. Thank you very much, Commissioner Rudgers.

Let me just say that in structuring the hearing this morning because of a large number of our colleagues from the Senate, the

House, as well as the distinguished governor of Wisconsin and the

commissioner from New York, the Chair made an arbitrary decision that I hope was fair and that was that we not get into crossexamination among yourselves. That is a mini-Senate debate as

you were offering direct testimony quite apart from a mini-Senate

debate with us at this point.

Often when we do have congressional witnesses, and there are

a few of them, and they are the major cause, why we have had dialogue back and forth, but it seemed to me given the importance of

the issue, the number of witnesses in addition to all of yourselves

that we want to deal with, we thought we would ask you to testify

for 5-minutes each, offer your full testimony for the record that we

will digest, and it could very well be that members of our committee will want to interrogate you personally or by correspondence as

they have further questions. The issue clearly will not be resolved

today. We will all be back together, I suspect, in one form of another. But I very much appreciate your coming and giving us this

time this morning.
22

Senator JEFFORDS. Mr. Chairman.

The CHAIRMAN. Yes.

Senator JEFFORDS. Could I have 30-seconds on a couple of things

that were raised?

The CHAIRMAN. Of course.

Senator JEFFORDS. Now, first of all, the compact was put in sort

of as a demonstration program. At least, as you know, I was the

one that worked this deal out.

The CHAIRMAN. Yes.

Senator JEFFORDS. To see whether it worked. Well, it has

worked. So I think to say it should end now because it was that

kind of a program when it works you ought to be improving on it.

second, OMB was requested to do a study of the compact by the

Midwest and they came back and found there were no increase in

the cost of Federal food programs. There is some testimony to the

contrary on that. I wanted just to bring that up.

And second, New England is a negative producer as the last witness pointed out and Wisconsin could ship milk down to there now.

Of course, as we saw with the evidence we put on, it would end

up probably having over $2.00 a gallon a milk versus $1.39. So just

thank you, Mr. Chairman.

The CHAIRMAN. All right. Well, we will have at least an equal rebuttal then from, yes, Mr. Green.

Mr. GREEN. Thank you, Mr. Chairman. The Senator is pointing

out that dairy producers within compact states are benefiting from

the compact. We will stipulate to that. That is not the issue. The

issue instead is how it is benefiting producers and consumers all

around the Nation. I think the evidence is pretty clear that we are

suffering as a result. And with respect to whether or not there are

trade barriers as a result of the compacts, I suppose it was legally

true that OPEC nations could purchase oil from the U.S. However,

I would doubt that would be the case given the advantage that

their cartel had given them and the same thing is true with compacts: maybe not a legal barrier to the entry of our products but

clearly with the forces and restrictions within those compacts, it

put outside states’ producers at a tremendous disadvantage.

The CHAIRMAN. Thank you. Having announced the rule and now

having violated it twice———

[Laughter.]

The CHAIRMAN.—still that was a useful exchange and I just trust

the members will know that we will try to weigh as carefully as

possible.

Senator JEFFORDS. I would like to go back———

The CHAIRMAN. Thank you very much for coming. Before I call

Keith Collins, our next witness before us, let me ask the distinguished Ranking Member if he has any opening comment or statement?

STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM

IOWA, RANKING MEMBER, COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

Senator HARKIN. Mr. Chairman, thank you very much. I have

been reading the testimony and am delighted to listen to the witnesses. I am sorry I was late. I had a couple of prearranged meet-
23

ings I had to go to this morning. But I just want to note for the

record that from I believe 1980 to 1984 I was chairman of the Livestock, Dairy and Poultry Subcommittee on the House Agriculture

Committee. All I can say is I am sure glad we got this dairy thing

worked out at that time so we are not having any problems with

it today.

But some of these problems have been around for a long time.

I also want to say, Mr. Chairman, in case I have to leave I know

the Indiana Professional Dairy Producers are up. I was reading

their testimony and Mr. Yoder here had this statement here. He

said it is no secret that how milk is priced is the second-greatest

mystery known to man. I take issue with that. It is the greatest

mystery known to man, not the second.

And I also wanted to, for the record, note that—well, now I lost

his testimony—one of the individuals from Wisconsin put the formula in the back of his statement. I recommend it to everyone—

to work out—again, I forget who that was. Anyway, one of the congressmen from Wisconsin had the formula in the back for how you

get the basic price for milk.

Mr. Chairman, I did want to correct one other—just say one

thing about some of the statements that were made that, well,

would you price computers how far they are from Seattle or oranges from Florida or beer from St. Louis, Anheuser–Busch? Well,

milk is different. I mean, you know, if you are producing too many

computers, you can slow down the line, you can lay a few people

off and slow it down a little bit. You do not have to produce that

many. You cannot slow down a cow, you know, it just produces

milk, and you just cannot quite slow it down. I suppose you could

feed it a little bit less, I suppose. But you really cannot slow it

down.

And what the heck, I might as well state again for the record

that last summer I bought some beer. I stored it in the refrigerator.

I opened one the other day and it is still good. You know so beer

can stay for a long time in your basement and milk cannot.

And third, there is a value to the consumption of milk for

healthy bodies and for kids. Like I said, we have been through

these debates before. Looking back, I think what should have been

done a long time ago was two things. One, basic formula price for

milk should have been based on solids, not fat. It should have been

done a long time ago. Dairy industry was way behind the eightball

in this, way behind it. Consumers are moving ahead. They did not

want to consume so much fat. And they wanted a more high protein product and yet we continued to base it on butterfat content.

Well, now they have changed it a little bit. They now include proteins and lactose and some other things in the price, but way too

late.

And second, we should have had a two-tier pricing formula a

long time ago. Congressman Gephardt and I proposed that in the

mid-1980s. I proposed it earlier on. We fought for it. We never got

it. But I think if we had had a two-tier pricing formula in existence

for the last 10-years, 15-years, I do not think we would be where

we are today. The marketing orders are outdated in many ways.

We can transport milk more rapidly. I do understand that there is

a problem. Senator Jeffords said it appropriately. I mean if you are
24

transporting it halfway across the country, obviously it is going to

cost more for consumers in one part than it is in another part.

Well, maybe yes, maybe no. Again, it depends upon how you

price it and just how far you have to transport it. But it may be

a little bit more costly, but there are ways of getting around that,

too. So, Mr. Chairman, there are a lot of cross-currents in this

whole dairy policy, and it has become one of the most bitter regional conflicts that we face today. We do need some common

ground. I hope we can find an equitable, fair and sustainable national dairy policy, one that is good for farmers and fair to consumers and processors, and so again I still believe there should be an

adequate safety net.

There is in the Northeast now. There is a safety net for the dairy

farmers in the Northeast. But there is not out our way. So there

should be a better safety net. So I hope that we can find some way

to end the unfair regional preferences that we have in dairy policy

today and move ahead with some equitable system. Like I said, I

think there are some things in the past that we could take a look

at that might be more equitable than marketing orders are today.

And there may be some way of taking care and addressing the

problem of transportation of fluid milk to deficient areas and that

might be cheaper in the long run than keeping this outdated, antiquated marketing order system going.

So Mr. Chairman, I congratulate you for calling these hearings.

This is a byzantine area and it is, as I said, it just has provoked,

as you know, just a lot of regional conflicts in the Senate and it

cross-currents. It is not Democrat or Republican. It just flows

across all kinds of different lines, and I hope through these hearings we could hopefully find some equitable solution. Thank you,

Mr. Chairman.

[The prepared statement of Senator Harkin can be found in the

appendix on page 108.]

The CHAIRMAN. Thank you very much, Senator Harkin. Senator

Santorum, do you have a comment?

STATEMENT OF HON. RICK SANTORUM, A U.S. SENATOR FROM

PENNSYLVANIA

Senator SANTORUM. Very briefly, Mr. Chairman. Just let me

thank you for holding these hearings. There is probably no issue

in my state that, as Senator Specter, I am sure, testified to, has

gotten more concern and more angst not just among dairy farmers

but among all of us in rural Pennsylvania. As I always say here

on the ag committee and rural affairs committee, we have the largest rural population of any state in the country in Pennsylvania

and we are the fourth largest dairy producing state. Agriculture is

the number one industry in Pennsylvania and dairy is the number

one industry within agriculture.

And so this is an incredibly important issue, not just to our dairy

farmers, but to all of rural Pennsylvania, and I listened with great

interest to what Senator Harkin just referred to as these incredible

cross currents as we see in this industry. And listening to some of

the congressmen from Wisconsin talking about how much their

dairy farmers are hurting, I will match my hurt in my dairy farmers with your hurt in your dairy farmers any day, and it is not just
25

in Wisconsin or the Midwest. Our folks are hurting, too. And we

have on top of that the problems with drought last year which has

made it even tougher for our folks and I will remind my colleagues

we did not do very much on drought relief last year, as my farmers

are going into the FSA office and being told they are going to get

30-cents on the dollar when some folks across the country are getting double Agricultural Market Transition Act [AMTA] payments

and gosh knows what else in support, and my folks have no crops

to sell, have low dairy prices, and are getting a pittance for relief.

So I think we have some more work to do on that front, but obviously on the fundamental look at dairy and how we can structure

a system that can provide stability as well as a solid price is something that we should strive to attain. I thank the Chairman for

looking into this.

[The prepared statement of Senator Santorum can be found in

the appendix on page 110.]

The CHAIRMAN. Thank you very much, Senator Santorum.

Keith Collins, always good to have you, a fount of wisdom and

good counsel for the Committee. You have heard already a number

of distinguished witnesses. So you may take almost any position

you want and at least find some support here today. But thank you

for coming and we will give you 10-minutes or whatever is reasonable because I know Senators will have questions of you after you

conclude. We are glad to have you, Mr. Salathe, with Keith Collins.

Please, proceed.

STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF AGRICULTURE, WASHINGTON, DC., ACCOMPANIED BY LARRY SALATHE, SENIOR ECONOMIST, USDA

Mr. COLLINS. Thank you very much, Mr. Chairman and Mr. Harkin and Mr. Santorum. On behalf of USDA, I want to thank you

for again inviting me up here to participate in this review of dairy

policy—always a challenge, a challenge that we welcome today. My

task this morning, my invitation asked me to explain and to review

the major Federal dairy programs concentrating on their economic

effects and also to offer a couple of thoughts on the coming year

for dairy to provide a context in which dairy policy will operate.

Dairy policy has had a lot of objectives over the years. They have

ranged from ensuring adequate supplies of milk to protecting farm

income to expanding demand, just to name a few. Well, when you

have many objectives, sometimes the consequence of that is many

programs and we have many Federal programs that affect dairy

which I think should be considered when you think about the Federal role in dairy policy. We have the price support program. We

have the marketing order program. We have the compact, dairy export incentive program, checkoff programs, and the the loan and

payment programs. I would point out that, for example, in the year

2000, we estimate that the average dairy farm business in the

United States will receive about $6,000 in direct government payments from these programs.

We also have import controls. We have food and nutrition assistance programs. We have research and extension programs and all

of these things have to be considered as a package when thinking

about Federal dairy policy. Having said that, because you were
26

kind enough to give me 10-minutes, I am just going to focus on two

of these programs, which are mainly the price support program and

the Federal milk marketing order program.

Well, prior to 1981, we had milk price support levels tied to parity and generally they trended up. In the 1980s, late 1970s, and

early 1980s, we started to see very strong productivity gains in

milk combined with the firm price support floor. The result of that

was we saw increasingly imbalanced and unsustainable dairy markets. Congress, as a result of that, trying to restore balance to

these markets, did several things. They implemented supply controls in the 1980s for milk. They implemented producer assessments and they lowered the price support level. In fact, between

1981 and 1990, the price support level was reduced about 25-percent.

The result was that when you look at the price support program

in the 1990s, you see a program that has operated very differently

than had operated during the 1980s. In the 1980s, we had year

after year after year of billion dollar costs in the program. The

record was $2.5 billion in 1983. But by the time we get to the mid1990s, 1995, the cost of the dairy price support program is basically

zero. Government stockpiles, the legendary caves were gone, and

disposal programs had largely disappeared.

However, one consequence of this is that producers have faced

greater price variability as the lower support level has permitted

market forces to operate over a much wider price range. The price

support program thus has gone from being quite distortionary in

the 1980s with very pronounced economic consequences to being

pretty benign by the mid-1990s. Over the past couple of years, however, we have seen the role of price support start to pick up, as we

have started to buy more nonfat dry milk, and most recently the

price of cheese has fallen to near support.

If we look out to the year 2001 when the price support program

is expected to terminate, we think that without the program, the

annual average all-milk price would decline 35- to 55-cents a hundredweight or about three to 4-percent. Because of the income support the price support program is now providing, the administration has proposed extending the price support program through the

year 2002.

Tomorrow we have a couple of USDA staff that will be reporting

to you on Federal milk marketing orders. They run the program.

So I am not going to say too much about orders, but I want to give

a couple of thoughts on their general effects. And I think it is helpful to contrast the price support program with the Federal milk

marketing order program. The price support program reduces the

available market supply of butter, cheese and nonfat dry milk because the Government purchases the product and takes it off the

market.

Now that pushes up the price of those products. It pushes up the

price of the milk that is used to manufacture those products. The

price is higher than it would otherwise be. This also pushes up the

price of fluid milk because, of course, the minimum Class I price,

the Federal order price of fluid milk, is tied to the price of manufacturing milk. So the price support program at least temporarily
27

raises the whole spectrum of dairy product and milk prices, and it

does it in all regions of the United States.

Federal orders have very different effects. If Federal orders

raised prices above competitive levels in one use or in one region

of the country, prices would decline in another use or another region of the country. This has to happen because Federal orders do

not have supply controls. So the national supply and demand for

milk must balance. Orders establish minimum prices for milk in

four uses with Class I being the minimum for fluid products. And

the Class I prices, of course, vary by location.

Now suppose that USDA does not have it right. Suppose we do

not have the right Class I differential, and by that I mean suppose

in an order we set a differential that is higher than a differential

that would prevail in a freely competitive market. Then the price

of fluid milk is being supported in that region. The higher fluid

price reduces fluid consumption which makes more milk available

for manufactured uses and reduces the price of milk for manufactured uses.

If an order has a higher proportion of its milk going into Class

I use, then the average producer price would be higher than in a

freely competitive market. And that would encourage milk production. If a low proportion of milk is going into Class I use, then the

average price, or the blend price, would be pulled down by the

lower manufactured price, and that would discourage milk production relative to a freely competitive market.

So the whole debate about Federal milk marketing orders and its

economic effects and whether they are distortive or not, I think,

really comes down to whether the Federal order minimum Class I

price is supporting the Class I price or not in markets across the

United States. Well, what do economists think about that? I think

they think this occurs to some degree, not a huge degree, but that

it occurs. A review of economic studies suggests that nationally

farm level milk prices would decline by 1- to 3-percent in the absence of Federal orders with U.S. farm income and consumer expenditures on dairy products falling by a parallel amount.

However, producers in markets where Class I use is high would

see larger price declines and producers in areas where Class I milk

is low could actually see a price increase. In the last year the Secretary reached the same conclusion and concluded that Class I differentials were unduly high in some regions and too low in others

and proposed lowering the Class I differential on average in the

United States from $2.57 per hundredweight down to $2.28 per

hundredweight. That was a 29-cent per hundredweight decline that

was proposed. Well, we all know the fate of that proposal.

I would like to point out that despite widespread concern that

the Secretary’s proposal was going to reduce the average blend

price to producers, we have gone back and calculated what that

price would have been over the last 18-months using the data

which is available starting in September of 1998. And the Federal

order blend price would have averaged about 20-cents a hundredweight higher under the Secretary’s proposal had that been in effect since September.

Well, a comment on dairy compacts. I think they essentially have

the same general effects as Federal orders. They raise farmers’ in-
28

comes by trying to raise the price of milk used in fluid products.

Studies have indicated that resulting higher production in a compact area leads to more milk production and higher retail prices for

fluid milk consumption. This makes more milk available for manufacturing uses, pushes down prices for those products and prices to

producers marketing outside the compact. And the adverse effects

on producers outside the compact would be amplified as more

states were to join a compact.

Let me conclude with a couple of comments about the financial

condition of dairy farmers. We have seen quite a price collapse in

the last couple of months with the Basic formula price [BFP] in November and December reaching 21-year lows. Fortunately, record

high milk prices this past marketing year and low feed costs have

put most dairy farmers on a fairly solid financial footing going into

the year 2000. We estimate that 11-percent of dairy farm businesses were having debt repayment problems by the end of 1998.

That compares with 22-percent for all farm businesses. Lower milk

prices this year we think could increase those debt repayment

problems to about 17-percent by the end of this year.

Structural adjustment in the dairy industry continues with no

end in sight. In 1999, the number of operations having milk cows

dropped 5-percent from 117,000 to 111,000. That continues the

long-term trend. Over one-half of all dairy farms have fewer than

50-cows and their numbers dropped by 8-percent. Two-percent of

all dairy farms have more than 500-cows. And their numbers increased by 6-percent. And milk production continues to expand rapidly in the West supported by favorable weather and forage availability.

It is hard to see how dairy programs or market conditions will

have much effect on these structural trends over the next few

years. And that concludes my comments. We would be happy to

take any questions.

[The prepared statement of Mr. Collins, can be found in the appendix on page 112.]

The CHAIRMAN. Thank you very much, Mr. Collins. Let me just

pick up where you left off. You point out in your testimony that in

the past decade, milk production increased about 1.2-percent a

year. Production per cow increased about 2.2-percent a year during

the decade while milk cow numbers declined about 1-percent per

year. And you point out that this year we are now in, however,

would be the second largest percentage increase in milk production

during the decade of the 1990s surpassed only by last year’s 3-percent increase, a sizable increase last year and this year, as distinct

from pretty level lie for the previous years in the decade.

Having said that, you also point out that dairy farms improved

their financial positions in 1998 and 1999 and that concentrated

expenses dropped 10-percent in 1998 and further in 1999. A drop

in feed costs likewise. So this has led, by and large, and this is always the problem of average statistics because the problems of

those who are in trouble are not average, but you point out that

farms with gross sales of 50,000 or more averaged—the income,

cash income—averaged 95,000 in 1998 and in 1999 compared with

1994–98 average of 64,800.
29

Now the net cash income of dairy farms this year, you think may

fall by 21-percent to 74,900. But as you are pointing out, in comparison to all of agriculture, the debt structure problems for dairy

farms appear to be substantially less, although given this year

2000 situation they might increase. And as you pointed out, the

number of dairy farms total has been in decline throughout this

century, perhaps for two centuries, as has been the case with corn

farms, soybean farms or whatever. Thus, confirming a higher degree of concentration.

You pointed out the larger cow situation has gone up by 6-percent and other situations declined by 8. That is the smaller. Now

taking a look at this whole situation, the Cato Institute, to be the

devil’s advocate for a moment, suggested that about $400 million

is transferred from the general public consumers to the dairy industry, whatever the size might be of the farms or whatever the

configuration of our programs, by the marketing orders or the supports that you have described.

In other words, a transfer payment of consumers to dairymen,

however many there are, 400-million a year. Now earlier this

morning we heard a contention that within this $400 million of

support from taxpayers, about 145-million transfers to the New

England situation away from everybody else so that, as you pointed

out, it is a fairly stable pie, whatever it may be, but the pieces are

redistributed through the politics and the polls of this situation.

First of all, do you believe that the Cato Institute’s idea that essentially the rest of the taxpayers of the country are supporting

dairymen by 400-million is correct, and is the transfer to New England from the rest of that size, and if not, can you give us any idea

of the proportions of these shifts?

Mr. COLLINS. First of all, I would say that the Cato Institute

study was really a summary of other people’s work and it is consistent with the one to 3-percent I mentioned.

The CHAIRMAN. In other words, the programs themselves probably increased dairy income by one to 3-percent?

Mr. COLLINS. Right. I indicated that the national average all

milk price might be 1- to 3-percent lower without orders, sort of a

summary conclusion from lots of studies. One to 3-percent would

be about a—the midpoint would be about a $500 million increase

in consumer expenditure or a $500 million increase in farm income.

The CHAIRMAN. Stated another way, if you had no programs, no

dairy programs, we had free market, consumers would pay 1-percent to 3-percent less for milk on average throughout America?

Mr. COLLINS. Yes, that is sort of a general finding. So that would

be consistent with the Cato study. Apart from that, there are also

the effects of the dairy price support program, which actually right

now and over the next year or so would probably be greater, I

think, than the effects of the milk marketing order program.

The CHAIRMAN. In other words, they increase production?

Mr. COLLINS. They will increase production. They will have a

larger effect on the all-milk price than the Federal milk marketing

order program would in the aggregate across the Nation.

Now regarding the compact, I cannot really tell you. I have not

done a calculation on what the distribution of the gains are by different regions of the country due to the compact over-order price.
30

That, of course, varies from month to month. Since the compact

was first implemented, and they established a minimum $16.94 per

hundredweight price on Class I milk. That was a fair amount

above the Federal order minimum Class I price. Then as time went

on and milk prices got stronger, of course, that difference dissipated. As the difference dissipates, then there is no differential

effect of the compact. So the effect sort of depends on looking at

prices over a period of time and I have not done such a calculation.

The CHAIRMAN. Has anyone done so? Obviously, this is a part of

our debate as you heard this morning. It was described as a regional dispute with winners and losers.

Mr. COLLINS. I would let Dr. Salathe respond, who I might say

has assiduously spent a career at USDA decoding Federal dairy

programs for their effect on consumers, producers and taxpayers.

The CHAIRMAN. Well, give us the benefit of your wisdom.

Mr. COLLINS. So I will let him take a shot at that.

Mr. SALATHE. Well, I will try to live up to that. But I would refer

back to the OMB study that was done and looked at the period

from July 1997 through the end of 1997. That study basically indicated that if you looked outside the compact, the effect was fairly

small at that time. And the all-milk price outside the compact was

probably reduced about 2-cents a hundredweight which if you multiply that by milk production outside the compact would come to

on the order of about $30 to $40 million. Now that is just for that

second half of 1997.

The CHAIRMAN. So the losses to the people outside the compact

you think were 30- to 40-million———

Mr. SALATHE. Yes.

The CHAIRMAN.—on an annual basis?

Mr. SALATHE. Right.

Mr. COLLINS. And then there would be whatever consumers in

New England had to pay for higher fluid milk as a result of the

compact. That would be another transfer.

Senator LEAHY. Well, wait a minute. Consumers, the record will

show, Mr. Chairman—I do not want to let that one just slip

through here—in the compact, consumers are paying a lot less for

their milk in New England than they are in Minnesota and Wisconsin and these places that object to the compact. I mean that is,

as GAO has found, that is an absolute fact.

Mr. COLLINS. There is no disputing that. I think the question for

economic analysis is what would the price of fluid milk be in New

England with and without the compact? Not so much how it compares with other regions of the country. And I think there have

been studies that have shown that there is an effect, an increase

in the price of milk in New England as a result of the compact.

Senator LEAHY. Mr. Chairman, I find this—and I am sorry to

butt in on your time—but I mean these are the kind of

misstatements we keep getting on this. There is an objective report

done requested by the, primarily by those who were opposed to the

compact, and it came back that milk costs less in the compact area

than it does in places like Minnesota and Wisconsin where they do

not have a compact.
31

The CHAIRMAN. Well, that point apparently is not in dispute, you

know, without trying to mediate between the Senator and the witness.

Senator LEAHY. I understand. I apologize.

The CHAIRMAN. But the question is even low as the prices are in

New England, would they be lower still without the compact, at

least as I understand the issue with economists? So that is my understanding. Now, let me just ask one final question and that is

policy wise why do we have a dairy program? In other words, last

year a distinguished colleague in the House, Congressman

Boehner, offered legislation, as I understand, simply to terminate

all of this so we would not need to have any more debate. People

just simply would sell milk in a free market situation without need

for either compacts, marketing orders, supports, Eau Claire and

distances or all the rest. As a matter of policy, why do you support,

or if you do, a program at all?

Mr. COLLINS. I try not to support or not support anything, just

to comment on their effects. I would say that the answer to that

question obviously is an economic, political, and social collection of

reasons for having programs. From the economic point of view, you

trade off the effects on consumers or economic efficiency against

the gains you are providing to producers. And the political system

has decided that those benefits to producers outweigh those other

effects and so that is why we have the program. Effectively, the

gains to produce from a price support program would be higher

prices than would otherwise be the case when markets are weak,

some measure of stability provided to prices for producers. It prevents prices from falling to unduly low levels that might not prevail in the longer term and therefore keep people from going out

of business that might be able to persist in business if the prices

were prevented from falling to those levels that we know they are

not going to stay at. So I think that is a strong reason for the price

support program that the political system has recognized.

I think with respect to milk marketing orders, part of its rationale goes back to Senator Harkin’s comment about distinguishing

between the perishability of fluid milk plus the durability and the

storability of manufactured products and the need to ensure an

adequate supply of fluid milk in fluid milk markets, understanding

that there is seasonality in production and seasonality in demand

that do not match up.

The free market system would provide a pattern of differential

prices across the United States: higher prices for Class I use because much Class I use takes place in metropolitan areas like Boston, New York, Philadelphia and so on. The milk obviously is not

going to be produced there; it is going to be shipped in, there are

going to be transportation costs. As economists say, the elasticity

of demand for Class I milk is very inelastic and so there is going

to be a higher value to that milk and that would occur in a free

market. And so the order system in imposing minimum differentials is in some sense mimicking what might occur in a free market

system.

So then the question becomes, well, if the free market would provide this pattern of differentiated prices and provide the incentives

to move milk, why do you have to have the Federal Government
32

ensure that minimum? And I think there the question gets into

very difficult issues to evaluate such as balance of competitive

power and negotiation between dairy producers and dairy processors.Does the order system help producers compete with concentrated processing markets?

Another example I think that is probably more cogent is this

question of balancing fluid needs. Because the seasonality of production, and the seasonality of demand differ, you are going to

have a draw for milk into fluid uses for fluid processors at certain

times. Needs are going to swing up and down. If you happen to be

a producer that lives close to the fluid bottling plant, then maybe

all of your milk 100-percent of the time will go to that fluid bottling

plant, but if you live further away, then when the fluid plant needs

extra milk, your milk will get pulled in. When the fluid plant does

not need extra milk, then your milk is going to go to some manufacturing plant for a much lower value. And so this person that

lives a further bit away is, in effect, paying the costs of balancing

the fluid milk market.

So the order system is an attempt to have everyone share in

those costs and have everyone share in the higher value that comes

from the Class I use. So that Class I differential that is paid by

a processor goes into a pool and is paid out to everyone including

the person who is performing the balancing function. So there is a

lot of things going on in Federal milk marketing systems that have

to be weighed, and I think it is because of this whole constellation

of effects that take place that the administration and Congress

have continued the system.

The CHAIRMAN. I thank you for that comprehensive answer. It is

a very important part of our testimony and I appreciate that excellent summary. Now I am going to ask each Senator to try to take

only 5-minutes in the first round and if there are additional comments and questions, we will have a second round. I call now upon

my distinguished ranking member, Senator Harkin.

Senator HARKIN. I thank you, Mr. Chairman. And I appreciated

that last question you asked and the response from Mr. Collins.

Those of us who have been through this for the last, as you have

been, for I do know not how many years recognize that there is an

imbalance. I mean most milk production is in the spring, the spring

flush. The biggest demand is in the fall and the winter. Most people buy their milk on the weekends, but cows do not just wait till

the weekend to produce the milk. They do it everyday and so you

have got not only weekly fluctuations, you have got annual fluctuations.

And the dairy price support program if it does cost one to 3-cents

more, 3-percent more as the Cato Institute said, I figured that

would add to half a gallon of milk probably about a penny, maybe

2-cents at the most, $1.89, about 2-cents maybe. How much then

would that milk fluctuate to the consumer if we did not have such

an order and in the springtime, yeah, a consumer might buy milk

pretty cheap in the spring, but wait till next winter. You are going

to get stuck for higher prices. So I am just saying that on an

annualized basis, the consumer is probably spending less under the

system of orders than they would if we had this sort of total free

market.
33

I am just saying that. I do not know. Because you are going to

get spikes in prices in the wintertime even though you might have

lower prices in the spring. I just think on an annualized basis. Plus

it is a more stable price. You could see this if you just opened the

doors and did away with everything, you could see milk in the

spring. You could probably buy it for almost nothing. Wintertime

you would pay through the nose for it.

So I think there is some need for stability in the system. Having

said that, do I believe that we do not need to change the system.

I am not saying that at all. I think perhaps the recent action of

reducing the number of orders was probably well overdue. It perhaps could be reduced even further. I do not know. We could look

at that. In terms of the compacts, with all due regard to my good

friend from Vermont, I am not certain that the compacts really are

benefiting the entire Nation in terms of milk production and milk

pricing. And it could lead to a whole regionalization of the whole

milk thing and we will be back where we were before.

While my good friend from Vermont is right that the price is

cheaper than it is in Minnesota and in Wisconsin, I am not certain

that the consumers in that area of the country would not be better

served without the compact in terms of their overall prices. And

the steady price at which they pay on an annualized basis. Mr.

Chairman, thank you very much.

The CHAIRMAN. Well, thank you very much, Senator Harkin.

Senator Craig.

STATEMENT OF HON. LARRY E. CRAIG, A U.S. SENATOR FROM

IDAHO

Senator CRAIG. Mr. Chairman, let me ask unanimous consent

that my statement become a part of the record.

The CHAIRMAN. It will be published in full.

Senator CRAIG. And I thank you very much for building a record

on this issue. I think it is continually important as the Northeast

Compact has stayed in place for a time, I think we are going to get

a better evaluation of the market and how the producer and the

consumer reacts to it than we have had. And gentlemen, let me

thank you for your testimony.

Mr. Collins, when you examine inside the Northeastern Compact

the stability of the producer, is the attrition or the change in production any different than it was prior to the implementation of the

compact? I mean dairies going out of business, size of dairy scopes,

that kind of thing. Have you spent any time looking at that?

Mr. COLLINS. I have not, but there has been a recent study that

was done and issued in November of 1999 that looked at that. Unfortunately, I do not recall the result. Do you, Larry?

Mr. SALATHE. Well, we have looked at the number of farms with

milk cows in the compact area since 1997 through 1999, and basically it shows a similar pattern outside the compact as well: declining number of small farms, farms with 50-cows or less, and increasing numbers of farms with 200-cows or more.

Senator CRAIG. Yeah. Well, that has been my understanding. The

mantra here was to save the family dairy farmer and while those

larger dairy farms may be family or family business oriented, my

guess is you do not save the small farmer by creating artificial
34

kinds of marketplace involvements and my guess is it is not happening from what I understand in the Northeast. And I think that

my colleague from Vermont and I can debate price, but we also

cannot compare apples and oranges when we debate price as it relates to what prices would have been for producer and consumer

with or without the compact. There are clear records of reality

forces that deal with the price in the northeast and what it is today

versus what it was. And I think that is what we can argue if that

becomes an argument. There are plenty of studies out there that

I think justify that.

The reason obviously I am sensitive to dairy—a lot of people do

not think of Idaho as a dairy state. We think of Wisconsin and we

think of the Northeast and Minnesota. Well, we are now sixth,

headed for fifth, in production in the Nation. Obviously, the dairies

of my state are large dairies and growing larger. We now have

5,000-cow units out there. We milk around the clock. We produce

cheese and manufactured products around the clock. There is a

whole dynamic in the West that is significantly different than the

East and so the marketplace is important and policy program here

is important.

Let me thank you for your testimony, and Mr. Chairman, let me

say that I wanted to recognize—I think I will be able to stay, but

in your next panel, we have Dennis Vanderstelt, who is president

of the Western States Dairy Producers Trade Association from my

state of Idaho, a producer from the Kuna area. I am pleased that

you have allowed us to help you shape a broad base of those who

come to testify because I think it is clearly important that as we

look at this industry and our policy that we hopefully will emerge

out of regionalism into the reality of a marketplace and our policy

will reflect that. Thank you.

The CHAIRMAN. Well, I thank the Senator for his suggestion of

the witness. We look forward to hearing from the distinguished citizen from Idaho. Senator Leahy.

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR

FROM VERMONT

Senator LEAHY. I would say to the distinguished Senator from

Idaho, if you would to have it totally on the market, does that

mean that we in the East would no longer have to subsidize water

and all throughout the West as we have for———

Senator CRAIG. Well, it is our water out there. We do not need

you to subsidize it.

Senator LEAHY.—for decades. And, of course, they have paid

every cent of the dams, the river changes and all the rest, but that

is theirs. Mr. Collins, of course, continually ignores the fact that if

we get rid of the compact, 30- to 40-percent of the farmers in Vermont and New England would probably go out of business, which,

of course, would raise the prices very substantially.

But it is a good thing, though, to have this hearing, Mr. Chairman. I am a person who believes in inclusive, and it was so great

to see all the people you brought together here. These poor folks

from some of the dairy processors, you know, just, I mean they

have to spend all the money to take a cab or a limousine or whatever to come here to the Hill. I do think one thing about the com-
35

pact. It does bring people together. It is the one thing that Mrs.

Clinton and Rudy Juliani both agree on and so I think possibly

there is hope for both of them in that regard.

But in dairy farms, dairy families, it is a serious topic and I do

not want dairy farmers in Minnesota, Wisconsin, and Mississippi

or Iowa, North Carolina or Idaho or Vermont or anywhere else to

go out of business. I will say this to everybody. I will support, I will

vote for, as I have, a reasonable legislation that helps the dairy

farmers in each of those places and I will work with any region of

the country. But back in my office I have got this huge stack of diatribes against the dairy contract. Scores of charges were made before the compact legislation was passed the first time. Notwithstanding the official view or even the official view of neutrality

from the USDA and the administration, there are those in the Department of Agriculture who worked every single day to try to defeat it even though they are told to do otherwise by their bosses.

But they were wrong and the compact has gone on to do just

what we said it would do. So let me just talk about some of the

myths, some of the euthanistic language. Here is number ten: Compacts are designed to bar dairy products from outside the state or

region. Well, anybody can sell into the compact area. In fact, New

York, which is not part of the compact area gets about a quarter

of all the compact’s payments. So it shows that it does not bar anybody.

One of they myths: the compact is more terrifying than the Blair

Witch Project. I have not seen the Blair Witch Project, but I understand it made a lot of money, as do the lobbyists who now use it.

But it adds 50-cents to one dollar to the price of milk. Well, the

only thing more terrifying I guess than the Blair Witch Project is

milk prices in Minnesota and Wisconsin, which the GAO reports

are often much higher than the Northeast, and as they show the

Northeast prices are on the average less than other parts of the

country.

Or they say the compact is a milk tax. And thus it hurts the

School Lunch Program and WIC. Well, in fact, the School Lunch

Program and WIC are exempt from the compact. They are not exempt from the high milk prices in the Midwest and maybe, Mr.

Chairman, we should find out why it is in the Midwest that the

WIC programs are paying so much more than we are. I hope we

are not going back to the kind of price fixing we saw on the WIC

program a few years ago, but it something we can look at.

They say the compact has dramatic effects and impacts upon

price of farmers in other areas, especially in the Upper Midwest.

Well, OMB reports that the compact region which produces only

2.9-percent of the fluid milk in the Nation has little effect on dairy

markets outside its region or national prices and trends. In fact,

once it was put in place, Wisconsin had about a 2-percent increase.

Production is expanded beyond the compact region’s fluid needs,

they say. Well, production in New England is tied to our needs unlike in the Midwest where there is about 85-percent overproduction

and has to go to other needs.

And this, Mr. Collins, I just thought I would mention to you. We

have been told the Secretary of Agriculture opposes the compact.

Could have fooled me. He twice approved the compact and he
36

signed its charter. I do not know if that word has gotten down

throughout out beyond his office and sometimes the reaction of

some—I am not going to name them—but some who go contrary to

what their boss says, they should know that.

The compact helps large dairy farmers more than small ones, we

are told. The average—I do not know what the size of a large farm

is, but the average size in the compact is 80-cows. The higher

prices—they say consumption goes down and children are the biggest losers. Well, milk prices in the compact region are considerably lower than Wisconsin or Minnesota and consumption of milk

has increased in the compact area which should be good news for

every parent.

And despite what some have argued, the Northeast Dairy Compact has not even helped small northeast farmers, we are told.

Well, the Farm Bureau Federation reports significantly below average losses of farms in New England with some compact states reporting actual increases. Just the opposite of the claims that have

been made.

And then last, let me tell you about this. We had—I am sorry,

Mr. Chairman, I am taking more of my time, but I will just close

with this. We had two ice cream socials here last year. International Dairy Foods Association [IDFA] had their social and were

opposed to the compact and showing their usual subtlety, they

were then quoted in the press as saying basically that any milk

from Vermont or ice cream from Vermont ought to have the name

of cow manure. You know it is a kind of, they wanted to make sure

that subtly we got the point. Well, I asked our biggest producer of

milk, Ben and Jerry’s, because I said after all the Ben and Jerry’s

ice cream social had outdrawn IDFA, and asked them if that was

sour grapes. Ben Cohen told me they are always looking for new

names, but he found that Chunky Monkey, Fish Food and Jerry

Garcia probably sells a little bit better. And so I just wanted to get

that on the record.

The CHAIRMAN. I thank the Senator.

Senator LEAHY. Thank you, Mr. Chairman.

[The prepared statement on Senator Leahy can be found in the

appendix on page 135.]

The CHAIRMAN. Senator Santorum.

Senator SANTORUM. Thank you, Mr. Chairman. In your statement, you talked about several things you wanted to review but

you did not review in your testimony and that is the Export Incentive Program. And one of the things I always talked about to my

farmers is, well, there are several things we have to do to improve

your prices and one thing is this battle with exports. And up in my

end of the country we hear a lot about Canada and the problems

we are having there. Can you give us a little bit of a refresher on

how we are doing in the export market and whether the Dairy Export Incentive Program [DEIP] program is being helpful or not, and

what are the prospects of us expanding our markets in the dairy

area?

Mr. COLLINS. I would be happy to, Senator Santorum. On the export side, we are largely not competitive with other countries in the

world. Most of world trade is occupied by the United States, Australia, New Zealand and European Union. Together we account for
37

80-percent or more of trade in each of the major dairy products.

Our trade basically exists because of the dairy export incentive program. We do have some specialty cheeses and products like that,

that we can export without subsidies, but by and large our subsidy

rate under DEIP is roughly 50-percent of the market price which

shows you that our prices are way above the world price. So without DEIP we would not be exporting. So DEIP is very important

to us exporting.

Under the Uruguay Round agreement, the volume and value of

subsidized exports has to decline between 1995 and 2001 with

value coming down 36-percent, volume coming down 21-percent.

We underutilized our maximum permitted export subsidies in 1996

and 1997 and as a result of that, using the flexibility provisions of

the Uruguay Round agreement, we increased our exports the last

couple of years. This past year, 1999–2000, we will probably DEIP

something on the order of 100,000-tons of nonfat dry milk. Under

the terms of the agreement, we can subsidize no more than 68,000-

tons next year, the 2000–2001 year, which is the last year of the

implementation period. So there will be a substantial dropoff in

subsidized exports of nonfat dry, milk which is the principlal DEIP

product, if we are to meet our WTO commitments.

Senator SANTORUM. What do you see? How does that impact the

price? I mean can you give me a———

Mr. COLLINS. I think somewhere in my statement I had indicated

that the total amount of subsidized DEIP exports have about a 30-

cent per hundredweight effect on the price of milk. So we are talking about a one-third drop, something in the order of a 10-cent per

hundredweight drop in the price of milk nationally as a result of

going from where we are this year to where we will have to go next

year.

Senator SANTORUM. You made a comment that we have to DEIP

our products to sell them because we are 50-percent above the market price?

Mr. COLLINS. That is a rough estimate, yes, somewhere in that

neighborhood. I could give you exact figures, but they were quite

high.

Senator SANTORUM. How can we be that uncompetitive in the

world market?

Mr. COLLINS. Well, we have very rigid tariff rate quotas holding

out imports. That helps keep up our price. We have a price support

program and the rest of the world consists of the three countries

that I mentioned of which Australia and New Zealand are very efficient, low cost producers. I might mention that Australia’s production went up 8-percent last year. New Zealand’s production we

think this year will go up something like 10-percent. These are

huge increases when you compare them to our trend growth of 1-

to 2-percent. In addition to that, the world is dominated by the European Union which subsidizes enormously to get into world markets.

Senator SANTORUM. My question is we are not uncompetitive visa-vis production. We are competitive vis-a-vis subsidies. Is that

now———

Mr. COLLINS. Well, I would say studies that compare the cost of

production between New Zealand and Australia with the average
38

in the U.S. would show them to be lower, not true for the European

Union.

Senator SANTORUM. How much lower?

Mr. COLLINS. Several dollars a hundredweight at least. With respect to other countries that have been significant exporters, like

Canada over the last couple of years in cheese and the European

Union, they are heavy subsidizers. So there are sort of two factors

going on. There are some efficient producers in the world and there

are some heavy subsidizers in the world.

If the other competing countries did not subsidize, clearly that

would raise the world price of dairy products closer to ours. And

just because we are a high cost producer relative to say New Zealand does not mean we would not enjoy exports. You know you can

export based on the size of the world market that is out there. A

strong and growing world market would accommodate lowest cost

producers and highest cost producers, as you move up to fill the

needs in the world marketplace. So if we were to ultimately eliminate export subsidies, that would, I think, enormously help our

competitive potential in the world market place, but we are a long

ways from doing that.

So as we stand here today, our exports are pretty much contingent on the Dairy Export Incentive Program. We are talking about

something on a milk equivalent basis for the DEIP program of exporting something like three billion pounds of milk, something in

that range, out of the 160-billion that we produce each year. So our

exports are not very prominent, but nevertheless they are helpful

and they do help support prices.

Senator SANTORUM. But I understand. You recommend getting

rid of the DEIP program as a way to improve our opportunity to

trade?

Mr. COLLINS. Only multilaterally. I would not recommend it unilaterally.

Senator SANTORUM. OK. Thank you.

The CHAIRMAN. Thank you very much. Senator Fitzgerald.

STATEMENT OF HON. PETER G. FITZGERALD, A U.S. SENATOR

FROM ILLINOIS

Senator FITZGERALD. Thank you, Mr. Chairman. Mr. Collins,

thank you for your good testimony before our committee.

Mr. COLLINS. Mr. Fitzgerald.

Senator FITZGERALD. Senator Leahy mentioned or pointed out

that the Women, Infants and Children’s program and the School

Lunch programs are exempt from the compact and he therefore

said that it was not costing the taxpayers money by adding to the

cost for those programs. But it seems to me that there are other

Federal nutrition programs out there such as the Food Stamp program. And somebody who is on food stamps, I would imagine when

they go to the grocery store, they are just using their electronic

benefits card to buy their milk like everybody else. The higher

prices that people in those compact states have to pay at the retail

level for milk would be passed on to participants in the Food

Stamp program. Would that not be correct?

Mr. COLLINS. Absolutely correct, Mr. Fitzgerald.
39

Senator FITZGERALD. So part of that transfer that we were talking about earlier that the Cato Institute cited, money being transferred from consumers in general to the producers in an effort to

make more money for the producers, part of that transfer is occurring from some of the absolute most needy people in our society.

Would that not be correct?

Mr. COLLINS. That is correct. I would also point out that there

have been studies that looked at the extent to which the compact

has offset the higher cost of milk for WIC participants. I would

point out one study by the University of Vermont concluded that

the WIC participants in Boston were fully compensated for the

price increase due to the compact. However, in Hartford, Connecticut they were not. So it depends on where you are and what the

effect is on the retail price of milk and to what extent the compact

commission provides money back to WIC participants to make

them whole. It does not always line up one for one.

Senator FITZGERALD. And in addition to WIC and food stamps,

there are other Federal nutritional programs, I think the Child and

Adult Care Food Program, the Nutrition Program for the Elderly.

My understanding is those programs are not exempted; is that correct?

Mr. COLLINS. That is correct.

Senator FITZGERALD. So we are looking at a transfer from some

very needy people to the producers of the milk in those compact

states. It is also my understanding that our United States Constitution in the commerce clause forbids compacts, essentially trade

barriers, amongst the states unless they are approved by Congress;

is that right?

Mr. COLLINS. I believe that is the case. Not being a lawyer, but

I think that is the case.

Senator FITZGERALD. And so Congress had to come in and approve this compact because really what we are getting into here is

trade barriers amongst the states. I guess my feeling would be

leaving aside, let us say, for example, that everything that Senator

Leahy and the advocates of the compact say is true and that it does

not cost consumers more, but yet somehow the producers do better,

and that nobody comes out the loser here, everybody is a winner.

Let us stipulate for a moment or assume for a moment that, that

is true. I would be concerned about the precedent here because

really what we are allowing here is trade barriers between states

where we are protecting producers within certain states and when

you think of our whole world economy going toward more

globalization, more free trade, here in the United States we are actually setting up balkanizing our country and allowing trade barriers between states. And so I would be very concerned about the

adverse precedent that the dairy compact sets.

And certainly if it were to come to any other part of our economy,

I think you would hear a lot of people up in arms about this. I

think of this as a classic case of what Milton Friedman wrote about

in his book Capitalism and Freedom, where he talked about how

it is easy for someone who is going to benefit from a program or

a subsidy to go and lobby Congress to get that subsidy or that protectionist legislation that is going to make them a whole lot of

money real quick. And the rest of us, the general public, it only
40

costs us a dollar or a couple of dollars a year so we are not impelled

to go to Congress to lobby to fight against this new subsidy program. This seems to me to be a classic case of what Milton Friedman was talking about. Thank you very much.

The CHAIRMAN. Well, thank you very much, Senator. Mr. Collins,

let me just preface this question by saying that at the time that

USDA came forward with its so-called 1–B policy, the reform policies, last year, I studied that as an individual Senator and I wrote

a public letter published in the Congressional Record commending

the Secretary and supporting that idea. I did so simply because I

appreciated that it undoubtedly was going to be controversial.

Members of our committee, however, agreed or disagreed, but not

strongly, and as a result, and I just say for the record, we did not

have a hearing. We did not take legislative action to countermand

what you were doing or to improve upon it.

Essentially we recognized that the farm bill we passed in 1996

advocated that you do just what we had asked you to do. Some of

us felt you should have done more and some maybe less, but nevertheless this was clearly consonant with the law that we had

passed. Now the House of Representatives did take action specifically in opposition to what you had done, but it did not pass two

houses, was not debated by the Senate. And so the point has been

made how could this possibly in a democracy come to pass? It happens in a democracy because some decisions are made when appropriations bills are not passed, when there is a large big casino at

the end of a situation, where people who are around the table have

an opportunity to write law without benefit of this committee or

the Senate or what have you. That is the situation we are examining and one reason why those who disagreed with that procedure

demanded these hearings today which we are giving.

Now I have no prediction of what the Senate will do this year,

even what this committee will do. But I appreciate your laying before us the facts and we may inquire of you for some more as we

have this morning, as well as Mr. Salathe, who has been very helpful to us. Even as we have been talking about this, your testimony

includes lots of other things and I would commend everyone to read

it because it describes monies paid by the Congress or through legislation to dairy farmers, largely because of emergency relief both

last year and a signup period that is proceeding now for additional

payments this year.

These payments are fairly substantial and we have talked—

whether the Cato Institute is right that $400 million is transferred

from the public to dairy farmers, it is very clear that at least two

or $300 million are going to be transferred in these programs. Now,

dairy farmers will say, well, that is only justice because of weather

conditions or other problems that we faced and, indeed, they would

say what about the corn farmers and the soybean people and the

folks in rice and cotton who the Congress at least in total has

awarded after all the payments they finally made and you worked

out the regulations maybe almost $9 billion last year.

Now, in part the rationale for that came from some other statistic that you furnished. Even though these are in agate type, people

were reading carefully last year what net farm income was

throughout the 1990s, the last 10-years, the last 5-years, the last
41

year, and your prediction for this year, very relevant. Now without

your trying to remember off the top of the head any better than

I can, but roughly you have said in your publications that the farm

net income for about a 10-year period is somewhere, as I recall, in

45 to $46 billion range, and that was roughly true for 5-years plus

or minus a billion either side.

But last year you predicted ominously in 1999 that this was

going to dip to maybe 43-billion. Now that was not nine billion underneath the average. It was arguably two or three billion. Congress could have said, all right, we want to make farmers in America whole in the aggregate without picking states or classes or

crops so somehow we will provide two or $3 billion more. But instead we provided nine, dairy farmers as a part of that. Our part

was really very small, you know, leaving aside the economics or the

social justice or movement to consumers. We really got our part of

it and maybe not as much as someone said today, the AMTA payment people, who were out there in other fields.

Now this year preliminarily as I read, you come up with some- thing like $40.5 billion prediction for net farm income, at least

right now. Now you probably will revise that as the year goes on

up or down. I don’t know how market prices will go. For the moment, future prices, hog and cattle prices, other things seem to be

moving in a pretty good trend. You hate to say that for fear that,

that will jeopardize that progress, but it is probably substantial.

But can you give us any idea of how often will you revise the forecast? And I make that request because my guess is that before long

a debate will ensue in the Congress and people will say, well, we

are back to trying to make things fair again and level and Mr. Collins and his associates have said they are going to go here if we

do not do something. Do you have any overall comment about this?

Mr. COLLINS. Yes, a few comments. We try to revise these forecasts every month. We publish price and supply and demand forecasts every month for commodities and then we use those to scale

up and estimate farm income for agriculture as a whole. I would

say that if you look back over last year, those numbers were used

quite a bit to justify the size of the emergency package. One of the

things that we also do is to sort of take that figure apart and look

at crops versus livestock. And that is one of the reasons that I

think a lot of people justified the larger package last year because

the drop in income to principal crop producers was greater than the

drop in farm income to agriculture in its entirety.

As we look out for the 2000–2001 marketing years, we see a

similar development. We expect to have stronger livestock revenues, but we will have weaker crop revenues and so for the moment, we are looking at a year over year decline of something in

the order of $7 billion or so for principal crops. Likewise, milk revenues will come down because we are going to see a several billion

dollar drop in milk revenues, understandably coming off of a record

high milk price in 1998–99.

So these are numbers that can be used, I think, to look at a

benchmark and make some judgment about the appropriate size of

a package. Last year’s package when we go back and look at it for

the 1999–2000 crop year, the $6 billion component of it which was

for major field crops, that brought net cash income for the major
42

field crops, in fact, higher for the 1999 crop than it was for the

1998 crop.

The CHAIRMAN. Yes.

Mr. COLLINS. But it did bring it about where it was for the previous 5-year average, again understanding that, that previous 5-

year average had some very high years in it. So in that sense, you

could argue that (a) it was too high because you moved up above

the previous year’s income or (b) it was about right because you

were at the previous 5-year average. So we will be happy to provide

all of the benchmark data you would want for agriculture as a

whole for crops by themselves on a calendar year, or on a marketing year basis, so we we’ll give you all kinds of numbers from

which you can justify almost anything that you would want to justify for the year 2000. I say that a little bit facetiously, but the

numbers will show a fairly sizable drop because markets are extraordinarily weak, particularly for crops. They are coming back for

livestock, but for dairy, as we have talked about here at this hearing today, they are also extraordinarily weak for dairy. So I think

that can be a guide when you think about what might be done legislatively this year.

The CHAIRMAN. When will the next report come out? Do you have

a———

Mr. COLLINS. Well, we publish our numbers every month in Agricultural Outlook magazine.

The CHAIRMAN. Yes. When will the next issue of that?

Mr. COLLINS. It normally comes out about the third week, third

week of the month so in another couple of weeks here we will have

the February numbers come out.

The CHAIRMAN. But you would at least preliminarily see that the

crop situation is in decline, livestock situation going upward, and

dairy in decline?

Mr. COLLINS. Well, the numbers for net cash farm income are in

my head. For 1999, net cash farm income was about $59 billion.

For the year 2000, our forecast is $49.7 billion which is a 20-percent drop and that would be the lowest level since the 1980s. You

would have to go back to the 1980s. Of course, that projection does

not include any emergency supplemental payment program, but it

does include $17 billion of government payments we would expect

to make in calendar year 2000 even without an emergency supplemental.

The CHAIRMAN. Often comment is made about the lack of a safety net, but, as you say, there are 17-billion which is a fairly sizable

net plus whatever else we may want to talk about at that point.

Mr. COLLINS. At USDA, we say that it is not parsimonious.

The CHAIRMAN. No. Do my colleagues have other questions of the

witness? We thank you as always. We look forward to your testimony and opportunities really to gain information from you at each

juncture of this debate. Thanks for coming.

Mr. COLLINS. Thank you.

The CHAIRMAN. The Chair would like to call now a distinguished

panel that will include Gregg L. Engles, chairman and CEO of

Suiza Foods Corporation, Dallas, Texas; Mike Yoder, President, Indiana Professional Dairy Producers from Middlebury, Indiana;

John Wilson, Corporate Vice President, Marketing and Economic
43

Analysis, Kansas City, Missouri; Dennis Vanderstelt, president of

the Western States Dairy Producers Trade Association from Kuna,

Idaho; Gordon Hoover, a dairy farmer from Gap, Pennsylvania;

Dick Gorder, Wisconsin Farm Bureau Federation Board member;

and Wayne Bok, a dairy producer from Geddes, South Dakota.

Gentlemen, we appreciate your participation in our hearing. As

many of you have listened to portions of the testimony that has

preceded your appearance, we will ask each of you to summarize

your comments in 5-minutes. I will just say for the record that each

of your testimonies will be put in the record in full so you need not

ask permission to do that. That will be automatic for a full record

what you have to say and then we will have questions of members,

a round of 5-minutes and more if more is required. Mr. Engles.

STATEMENT OF GREGG L. ENGLES, CHAIRMAN AND CEO,

SUIZA FOODS CORPORATION, DALLAS, TEXAS

Mr. ENGLES. Thank you very much, Mr. Chairman and members

of the Committee. I am Gregg Engles. I am chairman and the CEO

of Suiza Foods which is the largest fluid dairy processor in the

United States. Let me thank you for the opportunity to testify

about dairy policy from the perspective of a fluid processor. First,

let me make clear that as the number one dairy processor in the

United States, Suiza Foods is absolutely committed to the economic

viability of our nation’s dairy farmers.

Dairy farmers are our partners. They must have a fair and

steady stream of income. Without them and a safe and reliable raw

milk supply they produce, we simply cannot operate our business.

The Dairy Farmers of America, which is the largest dairy cooperative organization in the United States, now owns 34-percent of

Suiza’s fluid dairy operations. America’s dairy farmers, therefore,

now have a very significant and common interest in the growth of

demand in sales for fluid dairy products and share in the processing of profitability of the dairy processing sector and because of

that we have a common interest in strengthening the growth of

fluid dairy sales in the dairy industry generally.

But fluid milk consumption is not increasing. It is decreasing and

has been steadily decreasing for the past three decades. During

that time, per capita consumption of fluid milk has fallen from approximately 250-pounds per year to around 200-pounds per year or

a 20-percent decline. Why is fluid milk consumption declining? Certainly fluid milk faces increasing competition from other beverage

sectors, particularly the soft drink manufacturers whose gigantic

corporate competitors constantly bombard the consumer with marketing, distribution and product innovation investments.

This is clearly one factor driving consolidation in the fluid processing industry.

Suiza Foods and other fluid dairy processors are working very

hard to bring product innovation and marketing to life to reverse

this trend of declining fluid milk consumption, but as an industry

we are constrained by what we believe is an archaic and inequitable milk pricing system that Congress has allowed to continue.

As you all know, our existing Federal milk pricing system was developed in the early 1930s in response to market conditions existing during the depression era.
44

Low milk prices required emergency legislation that created the

first Federal milk marketing orders. Although the milk market

pricing system has been modified periodically, its fundamental purpose has always been to maintain viable economic condition for

dairy farmers which we fundamentally support. Its fundamental

mechanism has always been to tax the consumption of fluid milk

by forcing milk processors to pay higher prices for milk that manufacturers of other dairy products including cheese and butter. This

we do not support.

I would like to introduce into the record a recent editorial by

Dick Groves, who is the editor of the Cheese Reporter, a cheese industry publication. Mr. Groves points out that at inception of the

Federal program, fluid milk sales greatly outweighed cheese sales

and thus the logical place to tax milk usage to support the farm

sector. Because of that tax, however, over the last 60-years, fluid

milk sales have consistently declined while cheese sales which are

subsidized have grown dramatically. Yet the tax is still levied only

on fluid milk sales, now by far the smaller part of total milk usage

in the United States.

Mr. ENGLES. The historic rationale for fluid milk premiums is out

of touch with today’s reality. Fluid milk production and processing

are no longer local in nature. Technological improvements have resulted in milk with a longer shelf life. Improvements in refrigeration and distribution systems and our national highway system

have brought milk freely into all areas of the country. New technologies such as ultrafiltration and reverse osmosis are rapidly

blurring regional production differences even further. Milk now

regularly travels coast to coast.

Notwithstanding these significant changes in the dairy industry,

Congress has been unwilling to move the industry to an unregulated status or materially change the regulatory scheme. Congress

seems content to allow the current system to continue to charge

fluid milk processors higher premiums than those charged to other

dairy processors. As we know from experience in many areas, consumers will avoid paying even hidden taxes reflected in artificially

high prices by choosing substitute goods.

The higher price charged to fluid milk processors increases costs

to consumers and drives down consumption. The declining consumption will, in turn, reduce dairy farmer income unless, of

course, Congress is willing to authorize additional subsidies to support the price. Regional dairy compacts are at their core an amplification and continuation of the traditional approach to dairy support. That is Class I premiums, albeit on a regional basis today.

The Northeast Dairy Compact has only one purpose: to raise the

price of raw milk used for bottling above the prevailing Federal

price. Mind you this increased price applies only to bottled milk,

not milk used in the manufacture of cheese, butter or other dairy

products. As of January 2000, raw milk processed for bottling in

New England Compact states cost $16.94 per hundredweight, while

that used to make cheese cost $10.05. That is a 69-percent premium for identical raw material. This premium raises the price of

fluid milk to consumers. Therefore, is it any wonder that consumers view cheese as a better nutritional value for their dollar, driving growth in cheese sales, while fluid milk sales have declined.
45

If we continue to try to enhance dairy farm income by taxing

fluid milk sales alone, we will ultimately drive the category down

to the point where we have insufficient volume to support farm incomes. Not surprising, at the same time that fluid milk consumption is declining, New England dairy farmers who are receiving

more money for their milk under the compact system have increased production. Milk production in the New England states has

grown far faster as a whole than in the United States since the

compact began. This increased production together with decreased

consumer demand has resulted in excess production. Some of this

excess production has been absorbed in neighboring states, driving

down the prices at which dairy farmers in those states can sell

their products and some has been purchased by the Government as

surplus production.

Understandably, all dairy farmers would like to receive the higher premiums paid in the compact states for their products. What

rational businessperson would not choose a higher price for his

product. If, however, that is a course that you choose and you authorize compacts for other states, dairy farmers in those states will

also increase production. It is human nature. It is good business.

Then on an even larger regional or national scale, the cost of milk

to consumers will increase and consumption will decline. This imbalance of supply and demand is a deadly downward spiral that ultimately must result in you, Congress, getting back in the business

we have struggled as a Nation to put behind us. That is being excess production.

To extricate yourself from such a cash subsidy which in the early

1980s exceeded $2 billion per year, you might then take taxpayer

money, pay dairy farmers to slaughter cows, which we have done

before, which would in turn lower beef prices and bring the cattle

ranchers to your door knocking for subsidies to give them relief

from excess beef supplies. Surely we have learned from the mistakes of the past and must not let history repeat itself.

Unfortunately, the purported benefit of the Northeast Dairy

Company, the protection of the small dairy farmer, has not been

realized. During the first year of the compact, dairy farms in the

New England states declined at a 25-percent faster rate than during the previous 2-year period. Dairy farms in New England and

elsewhere in the country have been exiting the business at a rate

of approximately 5-percent per year. That decline is due according

to the American Farm Bureau Federation not to milk prices but to

the increasing age of farmers, the unwillingness of children to take

over the business of dairy farming, and the attractiveness to farmers of market prices for their land.

Our economy has created enormous opportunities and alternatives for dairy farmers and their families. There are many

among us who believe that this represents progress and is the intended result of a prosperous capitalist economy rather than a case

for continued government intervention.

What the Northeast Dairy Compact has done is benefit a handful

of very large farmers who receive by far the lion’s share of payments from the compact premium. But this marginal benefit has

come at the expense of consumers who have paid $85 million more
46

for milk than they would have paid without the compact and at the

expense of the dairy industry as a whole.

In summary, the dairy industry is complex and so are the issues

surrounding it, but the solution does not have to be complex. I believe that Congress should not expand the dairy compacts to additional states and should allow the Northeast Dairy Compact to sunset on schedule. We need to move to a transparent and simple pricing system for raw milk in which the users of that product compete

in the market place for the product and pay the price that the market will bear.

My vision for the future of the industry is quite clear. I see a vibrant and growing industry. I see technological change and innovation reducing cost to consumers. I see product innovation and marketing new products, attracting more consumers and increasing

their consumption of dairy products. And finally I see Suiza Foods

18,000 hardworking and dedicated employees have a reason to fill

secure about their futures and excited about their industry and the

opportunities to creates for them and their families. We can make

this vision a reality, but we need your help in creating a playing

field that is not constrained by the heavy hand of government regulations.

Like every other successful industry in our country, we need

market forces to drive supply and demand and set prices for the

raw materials we use in our business and we need Congress to

have the wisdom and courage to take a stand and seek market oriented solutions which address the needs of all constituents in our

industry, our dairy farmers, our dairy processors and our consumers. Thank you very much.

[The prepared statement of Mr. Engles can be found in the appendix on page 150.]

The CHAIRMAN. Thank you very much, Mr. Engles. I allowed you

to continue beyond the red light for awhile because it is important

to complete your thoughts, but to the extent that each of you are

able to stay within the 5-minutes or a little bit of leeway, we would

appreciate that. Mike, it is good to have you here today, always a

fount of common sense from Indiana, which I know you will share

with this committee. Mr. Yoder.

STATEMENT OF MIKE YODER, PRESIDENT, INDIANA

PROFESSIONAL DAIRY PRODUCERS, MIDDLEBURY, INDIANA

Mr. YODER. Thank you, Mr. Chairman. By way of introduction,

I would say that my comments today are, as you asked to be, presenting what we view as the status of the dairy industry, but also

my comments represent not just my views but my entire board of

directors, and they have okayed my comments today. Nonetheless,

I am the only one here today to take the heat.

From our view, dairy farming has been one of the United States

agriculture’s bright spots, especially the last 2-years, which have

been great in terms of prices received and because of low feed

prices pretty good profits. We believe that for the most part dairy

farmers are operating from very healthy financial positions and are

well situated to deal with a short period of low prices. Although

some would say that the current prices are disastrous, I guess I

would differ with that point of view.
47

If we examine the current low milk price compared with some actual costs of production, I can demonstrate that the two numbers

are very close together for most dairy farmers. For the year 2000

on my farm, we are projecting that our cost of production will be

in the neighborhood of $13.45 per hundred pounds of milk produced. This correlates well with data from universities that benchmark these types of cost production. They indicate a range for my

dairy farm to be somewhere between 13.20 and 13.60. As near as

I can determine, our price for milk that we will receive for January’s milk will be approximately 12.50 to 12.75 per hundredweight.

In addition to that mailbox price, we will add on average another

dollar per hundredweight through the sale of surplus dairy cattle.

So although the gross dollar income that we expect to receive in

January will be between 13.50 and 14.50, I have here that while

it is not as much fun as the $18 we got last year, it is still a far

cry from disaster for our farm and I think for most farms.

The last 2-years, the industry has experienced a significant volatility in prices which is something I think we are not accustomed

to managing in the dairy industry. I do believe, however, that dairy

farmers can learn to manage a more volatile market with a few

provisions. First of all, I think confidence in the futures market

that has recently been developed needs to be restored. It is our perception that last year, some of the volatile, the dramatic swings in

price were the result of some inaccurate reporting of stocks. And

I think that we need to somehow improve that reporting of dairy

inventories.

I think expansion of the Dairy Options Pilot Program would be

helpful as well. I know that in my particular case, we are going to

take advantage of that program this winter. Perhaps some of the

volatility has already been taken out or has been taken care of

with the new Federal orders structure although I really do not

know because nobody has really received a milk check from this

new structure yet and so I think it is a little too early maybe to

make that judgment.

Also, we are a little concerned about the rumor of changing the

nature of the support price to one that is tied to a cost of production. We are very much opposed to anything like that. In Indiana,

dairy farmers believe that a support price more closely reflects a

very low safety net. Closely related to dairy prices is the issue of

dairy imports. Over the last year, we have seen significant amount

of imports, an increase in imports, a number of these imports are

used for cheese production. And a number of these imports are imported that are not classified in such a way that they are subject

to any import quotas. So we are concerned that the United States

has become the sponge of choice when there is a need to soak up

surplus dairy products produced elsewhere in the world.

During times of excess production in the U.S., we do not believe

it makes sense for the United States government to be purchasing

surplus dairy products, domestic dairy products, especially cheese,

that are manufactured using foreign-produced surplus dairy components. This amounts to using our tax dollars to help solve other

countries’ dairy surplus problems.

I would close with just a comment on dairy compacts. In the

state of Indiana, we took a look at that last year. We had a com-
48

mittee that represented dairy farmers from across the state. We

did not like what we saw. We felt that if the dairy compacts were

allowed to expand, that the dairy industry in Indiana would be—

that would be a detriment to our industry. Our conclusion was we

would like to see the dairy compacts die or, at least, at the very

least, contained to where they are now in the Northeast. Thank

you.

[The prepared statement of Mr. Yoder can be found in the appendix on page 159.]

The CHAIRMAN. Thank you very much for your testimony. Mr.

Wilson.

STATEMENT OF JOHN WILSON, CORPORATE VICE PRESIDENT,

MARKETING AND ECONOMIC ANALYSIS, DAIRY FARMERS OF

AMERICA, KANSAS CITY, MISSOURI

Mr. WILSON. Thank you and good morning, Chairman Lugar and

committee members. My name is John Wilson. I am corporate vice

president of Marketing and Economic Analysis at Dairy Farmers of

America. I am speaking on behalf of the 24,200-dairy farmers who

own our cooperative. DFA is a dairy cooperative that is owned

strictly by dairy farm families. Our purpose is to market all the

milk produced everyday by our members at a fair return. DFA’s

owners operate dairy farmers in 45-states and will produce about

21-percent of the U.S. milk supplied during the year 2000.

DFA is structured to assure dairy farmers control the organization. To ensure that the cooperative serves its local members, DFA

maintains a grass-roots structure made up of seven geographic

areas. Each area’s marketing strategies and policy development is

set up and controlled by an area council made up of dairy farmer

members who are elected by the area’s farmers. Each area council

elects representatives to the corporate board which oversees the

policy development and direction of DFA. To ensure even more

grass-roots participation, each area council has district leadership,

delegate and resolution structures that allow for many voices to

contribute to the direction of their cooperative.

On behalf the members of DFA, I want to express my appreciation for the action Congress took to correct the Federal order final

rule. As you recall and as has been mentioned earlier today, USDA

did attempt to lower dairy farm income by lowering Class I differentials that processors are required to pay dairy farmers. This

action was reversed by Congress with the passage of the Consolidated Appropriations Act of 2000. Congress sent a clear message

that it was not their intent to lower farm income when it called on

USDA to reform Federal orders.

DFA strongly supports Federal orders for three basic reasons.

One, Federal orders establish minimum farm prices. They assure

consumers of a steady supply of fresh milk and they provide for orderly marketing. An unregulated milk market would be extremely

disorderly with investor owned processing plants taking advantage

of dairy farmers during times of excess supplies. Federal orders

cannot completely solve the problem, but they do play a major role

in equalizing the imbalance of bargaining power between producers

and purchasers of milk. For these reasons, DFA strongly supports

Federal orders.
49

The economic environment in which today’s dairy farmer must

operate is a tough one. Price volatility is the name of the game.

Within the last 2-years, the Class III price has been as high as

$17.34 and as low as $9.63 back in December of 1999. The last

time the Class III price was that low was July of 1978 which is

over 21-years ago. So obviously dairy farmers are not very happy

about current price levels.

Cheese and nonfat dry milk is currently trading at or very near

the price support level. Without our dairy price support program,

it is likely that cheese and nonfat dry milk would fall significantly

to lower levels. Some would say we should let our dairy prices fall

to world levels and thus become competitive with the world trade.

Currently the world price for milk used to produce butter and

nonfat dry milk is calculated to be $7.03. The comparable price for

milk used to produce cheese is $6.68. I cannot imagine the impact

on our commercial dairy industry if our prices were allowed to go

that low. The safety net provided by our dairy price support program is real. We strongly advocate its indefinite continuation.

DFA and others will be asking Secretary Glickman to modify the

make allowance used in the price support calculation to equal the

effect of make allowance in the Federal order prices. Today if you

calculate the new Federal order Class III price using the commodity prices established under the price support program, the resulting price is $9.74 per hundredweight, not the 9.90 that Congress

has mandated. It would be only fair that Secretary Glickman make

the appropriate adjustments to the price support make allowance

to reflect the intent of Congress which is to floor the price of milk

to dairy farmers at $9.90.

The Dairy Export Incentive Program is a very important tool for

the dairy industry. Without this benefit, our dairy farmers cannot

afford to export their product in the heavily subsidized world trade.

If we expect our dairy farmers to be players in the world dairy

trade, we must continue to maximize the use of the Dairy Export

Incentive Program.

Another issue of concern involving world trade deals with cheese

standards of identity. We understand the National Cheese Institute

may petition the United States Food and Drug Administration to

allow the use of imported milk protein in the manufacture of domestic cheese. Like other dairy commodities, the world case in

price is well below our price due to foreign subsidies. As a matter

of fact, the world price is so low, there is essentially no case in produced in the United States. The quantity of imported foreign milk

protein would directly displace milk produced by the U.S. dairy

farmer. This would be a tremendous slap in the face of the farmer

if FDA approves the cheese processor’s request.

Governmental intervention is important to assure dairy farmers

get a fair and equitable price for their product. However, the Government cannot provide dairy farmers with everything they need.

They need market security. They want to control their own destinies. They are fearful they will be swallowed up like the poultry

farmer who has become a piecemeal worker. They look at their

neighbors who used to raise hogs and no longer have the ability to

compete with the vertically integrated corporations which control
50

the pork industry today. They see the beef industry controlled by

a handful of buyers.

These fears have caused dairy farmers to create our cooperative

called Dairy Farmers of America. Our cooperative is the farmers’

answer to a quickly consolidating industry that threatens the livelihood of dairy producers and their future as independent business

people. As we look around other segments of agriculture, we see

significant vertical integration from the processor back toward the

farmer. Dairy farmers use DFA to vertically integrate from the

farm toward the consumer. This gives them market security and

perhaps a bigger share of the consumer’s dollar.

We believe the United States needs a secure domestic food supply and the best source for that food is from the independent business people that we call farmers. We are doing what we can to perpetuate the farming tradition that has made this country the best

place to live in the world. On behalf of our over 24,200-dairy farmer members of DFA, I thank you for your time.

[The prepared statement of Mr. Wilson can be found in the appendix on page 164.]

The CHAIRMAN. Well, thank you for coming, Mr. Wilson, and for

that testimony. Mr. Vanderstelt.

STATEMENT OF DENNIS VANDERSTELT, WESTERN STATES

DAIRY PRODUCERS TRADE ASSOCIATION, KUNA, IDAHO

Mr. VANDERSTELT. Mr. Chairman and members of the Committee, thank you for this opportunity to appear before you today to

discuss dairy policy with you. My name is Dennis Vanderstelt and

I operate a dairy in Kuna, Idaho, 20-miles south of Boise. I appear

before you today on behalf of the Western States Dairy Producers

Trade Association and the Idaho Dairymen’s Association.

Western States is an organization of ten western dairy producer

organizations which came together in May of 1996 for the purpose

of identifying mutual problems and finding common solutions. Our

membership which represents approximately 35-percent of U.S.

milk production including all three dairy producer groups in California—Western United Dairymen, Milk Producers Council and

California Dairy Campaign—and then dairy producers of New Mexico, Idaho Dairymen’s Association, Oregon Dairy Farmers Association, Texas Association of Dairymen, Utah Dairymen’s Association,

and Washington State Dairy Federation. In addition, we have been

working with United Dairymen of Arizona. We actively promote a

competitive, market driven and price discovery system for pricing

milk.

I also represent the Idaho Dairymen’s Association which is at

trade organization that represents all 932-dairymen in the state of

Idaho. The industry in Idaho has grown in the double digits for the

last 5-years and will continue this pace if the atmosphere continues

to be positive for the dairy industry. Cheese is the main use of milk

in Idaho, accounting for approximately 90-percent of utilization.

We need to ask why do we need to have dairy policy? The nature

of our product determines that we should have an orderly marketing system. The shelf life of most dairy products is short because

of our product is perishable. We would also be in trouble if there

were not the mechanism for uniform testing and pricing of the com-
51

ponents of milk. There also is the need for price transparency in

our industry. Producers need to be assured that they are getting

the same basic price as everyone else and processors need the assurance they are paying the same price as their competitors.

Three things have made our industry successful in the past: the

Federal milk marketing orders, the coop system, and the increase

of milk production per cow, which has doubled since 1970.

Diary looks at some of the other agricultural commodities and is

thankful that we are not vertically integrated, but the main reason

that the dairy policy and the Federal order system needs to be

maintained is to assure an adequate supply of milk for the consumer. You can go into any supermarket and most convenience

stores and get your supply of milk at a reasonable price. The price,

by the way, is usually below soft drinks, juices and bottled water,

our competition in the marketplace. Market forces are driving the

price for milk on the farm. We are truly in a supply and demand

market. With only 1-percent overproduction, we see prices that fall

dramatically.

At the last meeting of the Western States several policy positions

were adopted. First, we are in favor of national programs, not regional programs. Second, we believe that price stabilization such as

the support program needs to stay in place. Third, we believe that

the market access program such as the Dairy Export Incentive Programs need to remain. Fourth, we are opposed to direct payments

to producers.

What policies do we want? We need the Federal order system to

continue but would like some corrections in the Class III and IV

formulas. This should happen in the next several months. The Federal order system does not create surplus milk, nor discourage privately owned cheese companies from locating in an area. Idaho is

proof of this. Order 135 was established in the early 1980s. Major

cheese companies 10-years later did a major expansion in Idaho.

They could have located in Montana but did not because it does not

have a Federal order. However, they did come to Idaho instead.

There should also be a mechanism to stabilize our market. The

price support program now at 9.80 should be left in place. The cost

of this program is very small to the taxpayers. In fact, the GAO

scored it at zero cost when Congress extended the program until

2001. Most of the time it is far below the price of milk, but in times

such as these it helps stabilize the market. Without the price support system, the volatility in the marketplace would be even greater.

There are also needs to be a way that the industry can access

the world markets at prices lower than our domestic prices. DEIP

has helped enhance our markets. We would like it to remain in

place. In fact, if the direct government payment of 125-million was

added to the DEIP, it would at the present bonus price of $690 per

metric ton of cheese just about use up the surplus of cheese in the

market. The DEIP program also helps with the marketing of dry

milk powder which is used in most areas as a balancing product.

We have our work cut out for us.

What policies do we not want? Direct payments to producers that

are unfair and ineffectual in helping producers are a waste of

money. Put the money where it will enhance our market such as
52

DEIP program. Under the present distribution, a certain Midwestern state produced 14.5-percent of the milk last year, but received 22-percent of the $220 million Market Loss Assistance Program payments. Is this fair or is this suggesting that the western

dairymen are a different class of dairymen?

In Idaho, virtually all of our dairies are family owned and operated. Some are large; some are small. But this is America.

The last issue is trade. Let me ask you is there greater danger

to opening our markets than there is to expanding exports? All you

have to do is look at some of the other ag products in our country

and you will have to say emphatically yes.

Should the dairy industry export more? It has to be viewed as

an additional market. However, it is a market that says we can

only sell at an amount that is less than our domestic price. We still

have reservations about fairness in trade and are unwilling to increase our production just to become exporters. We are not willing

to export at a loss. The third world countries would like to develop

their own agriculture. The question is how do we compete without

lowering our domestic price below the cost of production? It is our

belief that if our companies are given a chance to develop foreign

markets, our industry can find ways to meet the lower prices demanded but only if the world is truly a market price and not a

dump price from subsidized product.

If some of the major countries like China, Russia, India and all

of Indonesia decide to import rather than develop their own dairy

industry, then U.S. dairy producers need to be ready to fill those

markets. Once again, leave the DEIP program and as the opportunities present themselves, we can supply the product.

The other side of this equation is imports. This is important. Do

not trade away our domestic dairy industry for some high tech considerations. Do not allow cheap imports to ruin our industry. If in

the trade negotiations the imports of dairy are trade for something

else, then the domestic industry will have to shrink. The economic

benefits derived from the dairy industry will shrink and rural

America will suffer again. We have seen this happen in the sheep

industry. Do not do it to the dairy. This is not positive for our country. If we can restrict imports to the current levels, then our industry will survive and will grow.

In closing, just let me say that without these dairy policies, I

probably would not be here. The dairy industry would be a fraction

of what it is now and we would be importing far greater amounts

of dairy products. Without government policy, we would have far

fewer farmers and far greater imports in all areas of agriculture.

Yet U.S. consumers spend less on food as a percentage of their income than any country in the world. This is not an accident, but

the result of many years of strong government policies that have

maintained a healthy and efficient agriculture that is the envy of

the world. Thanks again for letting us share with you.

[The prepared statement of Mr. Vanderstelt can be found in the

appendix on page 170.]

The CHAIRMAN. Well, thank you very much for coming, Sir. We

appreciate your testimony. Mr. Hoover.
53

STATEMENT OF GORDON HOOVER, DAIRY PRODUCER, GAP,

PENNSYLVANIA

Mr. HOOVER. Thank you, Mr. Chairman. In school, I failed more

tests and questions because I failed to listen to the instructions. So

I hope to be done before that red light comes on. Good morning.

My name is Gordon Hoover. I am from Lancaster County, Pennsylvania. I am a dairy farmer. My family and I milk 120-cows. I serve

on the board of directors of Land of Lakes, the second largest dairy

cooperative in the country, and I am here today representing National Milk Producers Federation.

First of all, I would like to say that we believe that USDA’s final

rule has complied with the congressional directive in the farm bill.

Moreover, we believe that USDA has established a solid framework

for the future of the Federal order system, one that preserves the

elements of the existing system that historically has served consumers, processors, and producers, and one that also makes significant changes to reflect the realities of the marketplace in the future. It will take time to assess all the impacts of these changes

and we are hopeful that we can allow this system to function without any further tinkering.

Three other dairy policy issues I would like to mention are continuation of the Dairy Price Support Program, proposed changes to

the U.S. cheese standards, and continuation of the DEIP program.

We believe that the Dairy Price Support Program needs to be in

place to act as a safety net for dairy producers, especially in light

of the catastrophic farm prices such as were experienced by the

pork producers in recent times.

We feel that the current support level of 9.90 per hundredweight

will accomplish this while not encouraging any production increases. We urge this committee to endorse the 2-year extension of

the Dairy Price Support Program as outlined by Secretary Glickman in the administration’s proposed farm plan for this year.

Another threat to our dairy economy at the present time is a proposed change to the U.S. cheese standards that would allow the use

of dried milk protein concentrate in the production of cheese. Due

to insufficient quotas and tariffs, this could displace billions of

pounds of U.S. produced milk with highly subsidized foreign imports causing depressed farm prices.

Lastly, we encourage the continuation of the DEIP program. National Milk certainly supports all efforts to reduce international

dairy subsidies since they grossly distort the world market and depress world prices. However, the DEIP program allows the U.S.

dairy to compete in a limited way with the much more extensive

support subsidy practices of some of our export competitors.

Finally, Mr. Chairman, I would like to make two observations as

to how we in the producer community are preparing and looking

at the future dairy policies. First of all, a larger percentage of dairy

producers than ever before, about 84-percent now, mark their milk

through farmer owned cooperatives. I believe by working together

within our coops, we can hope to balance the power and the marketplace of multi-national corporate dairy produced processors and

retailers. The marketing power of the giant conglomerates of the

world needs a counterbalance in the form of strong healthy dairy

cooperatives owned by farmers for the benefit of farmers.
54

Second, National Milk Producers has taken the lead in sponsoring a new initiative, the Dairy Producer Conclave, to refocus the

energies of the dairy producers and find areas of agreement within

our community. We have arranged five regional grass-root sessions

this spring to receive input on issues of importance to the industry

such as animal health, environment, economic policy, product

standards, trade and food safety. After the regional sessions, our

steering committee of national dairy leaders will consider the input

we have received and attempt to build a consensus on issues for

the future.

With that, I would like to thank you for the opportunity to testify

today and I would be glad to answer any questions.

[The prepared statement of Mr. Hoover can be found in the appendix on page 174.]

The CHAIRMAN. Thank you very much, Mr. Hoover. Mr. Gorder.

STATEMENT OF RICHARD GORDER, WISCONSIN FARM BUREAU FEDERATION BOARD MEMBER, MINERAL POINT, WISCONSIN

Mr. GORDER. Thank you, Mr. Chairman, members of the Committee, for the opportunity to appear and to testify before you

today. I am Richard Gorder, a dairy farmer from Mineral Point,

Wisconsin. I am by today’s standards a small dairy farmer and

when I say small, I mean by operation size, not necessarily stature,

farming 200-acres and milking 50-cows. I am also a board member

of the Wisconsin Farm Bureau Federation.

I am like thousands of dairy farmers in Wisconsin who are faced

with the decision of modernizing, expanding my dairy operation, or

exiting the business in the next few years. I started dairy farming

in 1979, rented land and facilities until 1988 when I bought my

current farm. In 1979, I was one of over 46,000-dairy farmers in

the state of Wisconsin. Today, a little over 20-years later, less than

23,000-farmers remain. Wisconsin continues to lose 3- to 4-dairy

farmers a day, up to 1,500-per year. Wisconsin loses more dairy

farmers in 1-year than most states have in total.

As I decide on how to update my dairy operation, issues such as

land base, facilities, technology, and financing are all issues I must

consider. One factor that should not be part of my planning process

is how the Federal dairy policy will impact my business. Mr. Chairman, I am not a dairy policy expert and if most are honest, few

are. After years of debate, today’s dairy policy continues to be

plagued by regional bias and politics. In 1996, Congress ordered

Secretary Glickman and the USDA to reform and to modernize the

depression era Federal milk marketing order system. Farmers

across the Midwest finally held out hope that the antiquated milk

pricing system would be scrapped and a new marketing order system would take into account today’s technologies and transportation advances.

When the USDA reform hearings reached Wisconsin, over 500-

dairy farmers attended, more than all of the other hearings combined. This is important, Mr. Chairman, as marketing order reform

has become more than just a business issue. It has become an emotional issue across the Midwest. Farmers have become apathetic

and cynical as to whether reform would prevail over politics,
55

whether government had the ability to bring equity and fairness to

the industry. Last spring, the USDA unveiled its long-awaited

order reforms. We in Wisconsin were not overjoyed by the modest

reforms but realized that they were a small yet positive move towards a more market oriented pricing structure.

Throughout the previous year, the USDA heard opposition from

southern and eastern states to the intended proposal. So the USDA

diluted its original modest reform to what eventually became the

final rule. In the fall of 1999, farmers and coops across the country

voted on the reform package and by an overwhelming vote, accepted the final rule. At that time we were to see implementation of

the final rule that would consolidate the number of marketing orders and would bring modest changes to the old Class I differentials that price milk using Eau Claire, Wisconsin as a price basing

point. We would also see the sunsetting of the price fixing scheme

called the Northeast Dairy Compact. However, in November of this

past year, regional politics prevailed.

Members of Congress took it upon themselves to overthrow the

USDA’s final rule that had been voted on by farmers and their

coops and instead imposed their own reform that was little different than the system that Congress had originally ordered to be

changed. In doing this, Congress totally disregarded farmers’ rights

when they mandated the new marketing order rules without allowing farmers their rights to vote on these reforms as stipulated by

USDA’s own rules.

Mr. Chairman, the question is now where do we go from here?

First, I hope that you and the Committee have the resolve to help

the dairy industry into the 21st century with an inclusive comprehensive policy that knows no regional barriers; to understand

and accept that milk will be produced where it can be most economically produced and where there is the infrastructure that can

service, process and deliver the product; and most importantly to

create a policy that will allow a dairy farmer to profit because of

their ability, not because of where they live.

To achieve these goals, I believe that we need to have a policy

that has a single nationwide Class I pricing structure, known as

national pooling, and uniform rules that regulate the manufacturing industry or uniform make allowances. Only then will we be

able to move beyond the regional price distortions and the temptation of politicians to manipulate the system. If this cannot be accomplished, I think Congress should consider total deregulation, a

position that has been endorsed by the membership of the Wisconsin Farm Bureau Federation.

Members of the Committee, please let this hearing be the beginning to meaningful change. Mr. Chairman, in all due respect, I

trust that this hearing is genuine and not just held as a gesture

to appease the Senators from the Upper Midwest. Mr. Chairman,

there are many challenges that need to be addressed that can help

all farmers across the country. The need for Congress to continue

to work on developing trade dialogue that fosters free, fair and

open trade; the need to continue to examine tax reform issues that

would include risk management strategies; and a need to address

environmental regulatory issues that threaten every farmer today.
56

Mr. Chairman, Members of the Committee, thank you for the opportunity to come before you today.

[The prepared statement of Mr. Gorder can be found in the appendix on page 182.]

The CHAIRMAN. Thank you very much for your testimony. Mr.

Bok.

STATEMENT OF WAYNE BOK, DAIRY PRODUCER, GEDDES,

SOUTH DAKOTA

Mr. BOK. I too want to thank you, Chairman Lugar, and other

members of this committee for allowing me to participate in this

hearing. I am Wayne Bok of Geddes, South Dakota. I own and operate a dairy farm in south central South Dakota as well as serving

as president of the Associated Milk Producers, Incorporated

[AMPI]. AMPI is a Midwest dairy cooperative representing 6,500-

members in seven Midwest states.

Before driving to the airport yesterday morning, I helped milk

my cows and while I am gone my sons will milk our 80-herd of Holsteins. Statistics define my Midwest dairy as average. I define our

dairy as the sum of all I have worked for the past 34-years. When

I began dairying, I milked 20-cows using what is now considered

antiquated equipment, but though milk prices fluctuated, there

was always a strong support price. And as a Midwest dairy farmer,

I was milking in America’s dairyland, marketing through our

hometown coop.

I would not call my early years of milking the good old days, but

it is important for you to know where we have been in this industry before discussing the future. Today I milk 80-cows and that is

not enough to support two sons and their families. To add value to

my milk, I am marketing through a dairy cooperative which moves

dairy products up the market chain.

If the next generation of my family wants to milk for another 30-

years, we must invest in our family business. Before we invest in

state-of-the-art dairy facilities and technology, we need state-of-theart dairy policy under which I can operate a multi-million dollar

business. You cannot operate a 21st century dairy with depression

era dairy policy.

U.S. dairy policy must catch up with the dairy industry. The

scope and size of today’s dairy farms and cooperatives illustrate my

point. We are moving from regionally based dairying to the national and international scene. Today I am competing with dairy

farms on both U.S. borders for cheese, for nonfat milk and for butter markets. In coming years, I may be competing with dairy farmers on both sides of the ocean. We face an environment of accumulated change accelerated and caused by economic globalization,

market volatility and intense competition. We need to leave regional mind-sets and move to a national approach for dairying,

marketing and policy.

The dairy policies passed by Congress last fall merely added another building block to dairy’s growing domestic barriers. Efforts to

bring rational reform to dairy policies failed as regions of this country that benefit from the status quo continue to block those reforms. Regionally based dairy policies such as Federal milk marketing orders and dairy compacts are destructive.
57

How can I compete internationally when I am not allowed to

compete domestically? In a country where California cheese can

end up in a Minnesota cheese sauce plant or Iowa fluid milk in a

Florida milk carton, it makes no economic sense to build trade

fences for milk such as we have seen through regional dairy compacts. Is this not the very reason that our forefathers wanted a

unified national economy?

As congressional leaders, you can tear down these regional walls

with nationally oriented dairy policies. When developing a policy

ask yourself does this policy hinge on regional bias? And if the answer is yes, then discard that idea.

Allow me to offer three ideas that work together to yield a program that helps every dairy farmer no matter where he milks

cows. First we need to maintain the dairy price support system and

for that to be successful, we need to protect our domestic milk markets. And we also, I think, need to manage our country’s milk supply. We all know policy debates are driven by economic backdrop.

With mounting milk surpluses and subsequent low prices, our industry is quickly joining other agricultural commodities facing depressed prices. We need to think outside of that dairy policy box.

Mr. Chairman and other members of the Committee, dairying

has gotten to be a big business. Since 1990, the size of the average

dairy herd is up about 75-percent. Dairy farms are changing. Dairy

cooperatives are changing. Markets are expanding and dairy policy

must adjust to this new environment. If individual family farms

commit hundreds of thousands, even millions of dollars, to an onthe-farm business, you need to adopt national dairy policies which

support these efforts.

It is time to move beyond regional discriminatory dairy policies

that divide our nation’s farmers and to work toward national policies that work for the Nation as a whole. Thank you.

[The prepared statement of Mr. Bok can be found in the appendix on page 186.]

The CHAIRMAN. Well, thank you very much, Mr. Bok. You mentioned in your testimony a point that others have likewise touched

upon, and that is if you are going to proceed in the dairy business

for another generation or two, you suggested you would need to

make more investments and you already outlined the fact that you

have a lot of money in your business now and this has become

greater over the last 10-years. For this investment to be rational,

I am just curious for many of you, as dairy farmers or as those who

represent them, what kind of return on capital do you anticipate

from that investment? Has anyone made a calculation as to the desirability of investing in an increased dairy situation as opposed to

buying United States government 30-year bonds or high tech stocks

or various other ways in which some people are making money?

What is your calculation, Mr. Bok?

Mr. BOK. The average return on my investment in my dairy, if

I go back and average possibly the last 5-years, I am looking at a

5-percent return.

The CHAIRMAN. Five-percent?

Mr. BOK. Yes. When I compare that to one of my sons who has

already left the farm and has purchased a small business, he is

very disappointed if he is not yielding 30-percent.
58

The CHAIRMAN. 30. He was making 30-percent on the dairy business?

Mr. BOK. No, no, no. That is after he left the dairy

business———

The CHAIRMAN. I see. Yes.

Mr. BOK.—and went into———

The CHAIRMAN. I see.

Mr. BOK. But our farm is yielding about 5-percent.

The CHAIRMAN. Does anyone else have bookkeeping that would

yield any—yes, Mr. Yoder.

Mr. YODER. Last year, we received a little closer to 18-percent return on our capital, but, of course, that was record high years.

Some of my research indicates that dairy farmers can sustain higher returns on their investment, but they tend to be the larger dairy

operations, 500-cows and above. Especially if you get to the 1,000-

or 1,200-cow dairy operations, there are some very fine returns at

that level. So the smaller farms, 50-, 60- or 80-cows do suffer from

a smaller return on investment.

The CHAIRMAN. Well, how small? I mean can you give any idea

of how do the 1,000-head do as opposed to the 30?

Mr. YODER. I do not have those figures right on top of my head.

The CHAIRMAN. Are they out there anywhere? Has someone down

research?

Mr. YODER. Well, you know, you indicated before that when you

use statistics, they tend to be averages and I think in my testimony

I indicated that some of the cost of productions that I found with

dairy herds that are under 80-cows tended to be up closer to 15 or

$16 per hundredweight. Now I know of farms that are less than

that, but on the average, and this was from Cornell University and

I think it included about 200 actual farms, their average cost of

production was somewhat high.

The CHAIRMAN. Right. So that would mean that their return on

capital was low.

Mr. YODER. Low. I do not know what the range would be.

The CHAIRMAN. But I am still trying to get some benchmark. In

other words, this is not the only hearing in which this is a relevant

question. Again and again, people are talking about modernizing

and staying in the business and what have you. Now this implies

that there is a gut reaction to what kind of return on capital or it

does not matter. In other words, you have a lifestyle to which you

become accustomed and regardless of the return you continue doing

it because that seems preferable to doing something else, but then

the question is whether public policy should support this or not.

Now, thus far public policy has supported it.

In other words, this question is not often raised as to whether

anybody is making money in this field. Now you have testified that

you had a good year and you made 18-percent on capital. Was this

because you are a highly leveraged operation? In other words, do

you have a lot of borrowed money as opposed to equity? Or is that

a factor in this situation?

Mr. YODER. I think it might be a factor. In our situation, we are

much more conservative in how we borrow money. Actually Farm

Credit Services requires me to be somewhat conservative. I think

they prefer it that way. I do not know. Maybe there is other mem-
59

bers of the panel here. We tend to measure—I do know that some

people would use a benchmark of gross profit on cash revenues and

indicate good dairies can achieve 20- to 25-percent. Now I know

that there are dairymen on this panel that are really raising their

eyebrows about that and doubt that, but it can be done. We have

done it on occasion.

The CHAIRMAN. That is their gross margin as opposed to once

again return on———

Mr. YODER. Right. And, you know, Senator, that maybe it is just

a characteristic of the United States, but I think this is probably

the only place in the world where a farmer can lose money 20-years

in a row and still be in business.

The CHAIRMAN. I see. Another possibility. Anybody else have a

thought about this business, return on capital? Is it a good business to be in? Is it something that—obviously all of you are in it.

Mr. GORDER. I would only interject, Mr. Chairman, that I think

that you would find that the numbers vary as many as there are

farmers. There are just so many circumstances that get weighed

into that. I think very few farmers actually sit down and have an

actual calculation as to what their return on investment is. There

is just so many more factors that are put in place here. And in my

modernization plans, believe it or not I am not really looking at my

return on investment as much as realizing that if I do not, I am

simply going to have to exit the business and that might be a

choice.

The CHAIRMAN. And so that probably, as you say quite honestly,

that is determinative as opposed to a calculation of other investments you might make or other returns?

Mr. GORDER. Correct. But I mean I also understand what the interest rates are. So as the interest rates have started to move up,

I get considerably more cautious and I think that is the general

trend of consumers across the country

The CHAIRMAN. Because you have to earn more than the interest

rate.

Mr. GORDER. Correct.

The CHAIRMAN. Or the capital you are going to borrow?

Mr. GORDER. Right.

Mr. VANDERSTELT. Chairman Lugar, in Idaho, rather than put a

number on what the return is, I do know that Bank of America

right now is offering 85-percent financing on a new large dairy.

And that would suggest there is a fair amount of profitability in

it.

The CHAIRMAN. Yes, Mr. Engles, do you have———

Mr. ENGLES. Well, I just think as an interesting counterpoint

that returns to our company, which is a large dairy processor on

invested capital last year was slightly less than ten percent. So the

pressure on this industry in terms of margins extends really

throughout the chain———

The CHAIRMAN. Very competitive industry.

Mr. ENGLES.—from the farm through the processing side of the

business, and partly that is driven by the fact that at least in our

segment of the industry, it is contracting, and that is a difficult environment in which to operate. So we are interested in policies that

can start allowing the industry, I think, as you have heard many
60

of the people here say, to drive growth because that solves a lot of

problems in the business.

The CHAIRMAN. Let me ask in the area of exports and imports

which many of you have touched upon, earlier we heard the testimony from Keith Collins, an economist at USDA, that costs of production in New Zealand and Australia were significantly lower on

average than they are in the United States, significantly lower,

said several dollars per hundredweight.

Now, on the other hand, the EU, the European subsidies, were

extremely substantial. So you have it with dairy as well as with

other products in agriculture a dumping from time to time and our

national policy is to try to blow the whistle on this. The future of

this is sort of a mixed bag. As Keith Collins said, on the one hand,

you have dumping by the Europeans, but here you have the New

Zealanders who have done away with all agricultural subsidies, decided as an ag policy, their national destiny is being very competitive. And one way to be very competitive is to have the Government out of it altogether. People simply reduce costs and they become competitive.

And the policies that some of you are advocating are, on the one

hand, watch the imports that are coming, particularly into the

cheese situation, because that may undermine us. On the other

hand, we are not really quite ready to compete worldwide given the

fact that there are others that do a whole lot better. Ultimately, my

guess is if we progress in the agricultural round with WTO to progressively lower export and import barriers, why our competitive

situation in the world may improve vis-a-vis the Europeans, not

necessarily with regard to others, and maybe they are a smaller

factor. Maybe as Keith Collins was suggesting, the overall world

market is big enough to pick up even all of our production which

may not be the most competitive. So that is an interesting idea.

But in any event, this is in play and it is an important part of

it. Now you have all suggested the continuation of DEIP, even acceleration of that. I think Collins pointed out, out of 160-billion, 3-

billion might be affected in terms of these export subsidies. So it

is a fairly small issue, but nevertheless one that probably others

are going to take a look at in the world. What are you doing? What

kind of direct export subsidies are you involved in? We point to the

Europeans as the worst offender.

But let us say we got all that chopped back in the due course

of time, how competitive is our industry likely to become? Is it possible without the investment we were just talking about in the first

question for it to be more competitive to begin with, to actually

lower costs, or are we at a point where the costs that we have are

fairly stable, and we just have to accept the fact that even if we

are not going to win the gold medal in the world olympics of this

situation, why we at least might be competitive with some. Anybody have any idea about the future of that competitive situation?

Mr. HOOVER. Mr. Chairman.

The CHAIRMAN. Yes.

Mr. HOOVER. I think one factor and you kind of alluded to it is,

and Mr. Collins alluded to it, in other parts of the country such as

New Zealand and Australia, their production practices are different. They use grazing so there is a less input cost there.
61

The CHAIRMAN. Yeah.

Mr. HOOVER. In the United States, we have the ability to supply

as much milk. You increase the price and we will supply you as

much milk as you want in a minute’s notice, whereas in those

countries, in order to capture more of the world’s market, they are

going to have to start to implement more higher cost production

practices than we are already at. So for them to capture much

more of the world market than they already have is going to bring

them up to a playing field that is more equal with our competitive

prices.

The CHAIRMAN. Is there any possibility, leaving aside the export

market, and that is what we look to in many crops that we talk

about in the Committee, for increasing demand in the United

States? I think Keith Collins testified there had been an increase

in production of about 1-percent annually for the last 10-years.

Certainly there are a lot of advertisements—some of you gentlemen

are responsible for these—trying to encourage people to drink more

milk. It is healthy for them, but this has not moved the market in

a dynamic fashion. It is what might be called otherwise sort of a

mature market which the extent of it is fairly well known plus or

minus some increases in population in our country. But is there

any hope out there in the industry that people will drink more

milk, that the demand side of this equation in the United States

might change? Yes, Mr. Engles.

Mr. ENGLES. Well, I think, in fact, there is some hope there although clearly the political winds are blowing somewhat in a different direction today based on some of the things that I heard this

morning, but I think that what you find is that, first of all, we have

growing demand for cheese in the United States. There has been

a significantly growing demand for cheese. One of the reasons I

think that, that is the case is that Federal policy has, in effect, subsidized the price of milk that goes into the making of cheese and

that has allowed the manufacturers of cheese to invest against

their business and brands and market their product quite effectively and they have done a very good job of that.

In the fluid milk industry, we have been on the other side of that

equation. We are the side of the milk shed that subsidizes because

that is where the Class I premium is charged and that is an uphill

battle that we have had to face. The fluid milk industry is, however, consolidating pretty quickly and people have talked about

that extensively in the political context. But one of the things that

is driving that consolidation is the need to invest in the business

in a proprietary way that develops brands, innovates in the product, and markets those products to the consumers. And you are

seeing the larger fluid milk processors because they have greater

collective resource being able to invest in product innovation.

Dean Foods, one of the large fluid milk processors has been very

innovative on the packaging side of the business end, and you see

small and flavored milk sizes being driven by virtue of packaging

innovations. Our company has recently introduced three new milk

products that are fortified with nutritional benefits for children, active women and elderly people in the northeastern marketplace

and we are spending very heavily to promote those and develop
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them as brands and we are seeing increased consumption of fluid

milk products by virtue of that.

But it takes that sort of investment in innovation and spending

in a very crowded consumer marketplace to get people’s attention,

and if we are not able to do that as an industry, I think you will

see continuing declines in the consumption of fluid milk. If we are

able to invest back against this category, both collectively as an industry and as proprietary companies, I think we do have the

chance to turn it around and get this side of the category growing.

The CHAIRMAN. But you are suggesting you are doing this really

by differentiating the product, advertising a specific attribute to

your milk.

Mr. ENGLES. Absolutely. You have to differentiate the product

and you have to market it to people who perceive a benefit to that

differentiated product.

The CHAIRMAN. Because milk as milk is not going to have more

than 1-percent, but if you have La Suiza milk or some product you

have, conceivably you might do better than the 1-percent growth;

is that it?

Mr. ENGLES. Well, that is certainly our hope and we are investing a significant amount of money to try and establish the proposition. I think generic advertising has some benefit when it comes

to disabusing the public of the notion that milk is somehow bad for

you and I think that Milk PEP and those sorts of things have been

very effective in that regard. But in terms of building that emotional bond with consumers, I think generic advertising has a hard

time being effective.

The CHAIRMAN. Yes, Mr. Yoder.

Mr. YODER. I would just add to that, that I just recently read a

statistic on cheese that if we look at American cheese consumption,

we are only at the midpoint of what Europeans consume. So if the

American appetite for cheese would be somewhat similar to European, I think there is reason to be optimistic in that area as well

as continued cheese growth.

You also asked a question about our competitiveness and I think

there was a good point made that maybe we assume that New Zealand will continue to produce at that level and perhaps their cost

of production will increase especially if countries like the United

States would insist upon the same quality that goes into their production as far as sanitation techniques that we are required to

produce milk under here in the United States. I am not convinced

that milk produced in other countries is produced under the same

sanitation requirements that I am required to.

Also, as far as environmental regulations, which have been asked

or talked about, I would suggest that I have invested substantially

more to protect the environment from manure spills or just from

a nutrient management standpoint than perhaps my counterparts

in New Zealand. So those are issues that affect competitiveness of

American dairy product. If we do not have any more unreasonable

regulations, I guess, I think perhaps we can—I am optimistic that

we can be competitive in time.

The CHAIRMAN. Now Mr. Engles touched upon consolidation in a

part of his remarks, but let me just carry this in a little different

direction. As many of you have commented, this is an area our
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committee has been looking at. We had a hearing on concentration

just last week and we are not unique because people are organizing

in the pork industry and this has brought attention. We found this

happened to a greater extent in cattle and some of you have suggested even further in poultry.

But I think Mr. Hoover and Mr. Wilson both commented how

coops have been an effective bargaining situation for producers and

that has been suggested. We heard testimony last week, in the

pork industry to an extent which clearly has not occurred there

thus far. To what extent is there a reasonably level playing field

in terms of small producers and people who are buying from you?

How would you describe the market at this point? Is more extensive coop organization required? Are the coops the right size and

location to do the job? Or does anyone have a comment about the

bargaining power in America? Mr. Wilson.

Mr. WILSON. I would try that one. We are a large cooperative.

However, we are still a voluntary organization and so just because

we today have a large group of dairy farmers together does not

mean that we necessarily are able to just establish the price. And

we sell a lot of milk to Suiza in partnership with Mr. Engles here,

but we still bargin with them with an arm’s length. We still bargain every month on the price of milk. We do not tell him what it

is going to be. It is a two-way street. We do have more bargaining

ability than dairy farmers individually certainly, but there is still

an option of dairy farmers going out, jumping outside their cooperative, because really when we bargained for higher prices on Class

I, we are really differentiating between different uses of milk, and

saying, yes, we believe Class I milk is more valuable than Class III

milk. Well, you cannot get that spread very wide because you have

different utilizations of different milk purchasers in the market.

The higher utilization guy, the more you spread that price, the

more advantage he will have competitively.

And so the cooperative, even though we may be large, there are

still limits on how much price differentiation we can do, and consequently a limit on equalization of that bargaining power. We still

are dealing with the fundamentals of the market that milk is produced everyday and the demand and the supply rarely match up.

The balancing piece of that market, that milk market, is I think

unlike any other agricultural commodity because it is perishable,

it is bulky to move, and the fact that the supply and demand do

not match up very well.

The CHAIRMAN. Well, it is interesting, though, you and Mr.

Engles, not the two of you, negotiating this month by month, but

your associates do this sort of thing. And you represent 24,000-

farms, as I understand, which if 111,000 is what we were dealing

with in Keith Collins statistics, that is almost one out of four. It

is a pretty big cooperative.

Mr. ENGLES. It is a big cooperative, and I think just to somewhat

amplify on what John said, but also to give you a somewhat different point of view, the whole notion of, first of all, concentration

between on the buy side and on the sell side is one that needs to

be understood here, and the second thing what is the nature of negotiation with respect to price in the dairy business today?
64

First of all, DFA is a much larger organization than we are and

we are the largest fluid processor. We represent somewhere on the

order of 20-percent of all fluid milk in the U.S., but fluid milk is

somewhere around 30-percent of total milk utilization in the U.S.

DFA, on the other hand, represents 25-percent of all milk produced, whether it goes to fluid uses, cheese, or whatever. So they

are an enormous organization that represents, I think, the supply

side extremely well in terms of price negotiation.

The other thing that is really important in this context is to understand that, by and large, we do not negotiate the price in this

industry today. The Federal Government, USDA, tells us what the

price is, minimum price for classes of milk, and to the extent there

is any negotiation with respect to the price is how much more than

the minimum am I or other users of fluid milk going to pay? So

the fear of the users of milk taking advantage of producers of milk

in terms of long supply is, I would say, virtually eliminated by virtue of the Federal regulatory scheme.

On the other hand, when milk is short, you can be certain that

premiums go up substantially as to do class prices. So it is a very

interesting dynamic today in milk pricing. Negotiation with respect

to price is very limited and you have powerful players on both sides

of the equation. So I think concern about balance in this area is

unwarranted.

The CHAIRMAN. Let me ask a question of the panel. We were discussing in this committee, in fact, we will have a markup sometime

in the next month on risk management. Some of you have touched

upon this. Mr. Yoder, you mentioned the forward contracting, the

pilot options program. This has not really been available in the industry. It is something that I have been a strong advocate of and

supported by many members of the Committee who believe that

these instruments ought to be available to dairy farmers. Many

since the pilots have come into play have not availed themselves

of it because it is complex, for the same reason corn farmers, bean

farmers find it difficult to figure out how to handle puts options or

the forward contracting process.

But nevertheless, many farm managers who do this are doing

better than those who do not. Sort of hope for the Lord will provide

as opposed to becoming more sophisticated marketers. What has

been your experience, Mr. Yoder? Are you just getting into this

business of forward contracting or how does it help you as a dairy

farmer?

Mr. YODER. Well, actually I am a little red-faced because as a

good dairy manager, I should have contracted last year but did not.

My experience in talking with other dairymen, there is a lot of

skepticism in using the futures market. As I indicated, last year’s

violent price swings, that were to some degree due to some inaccurate reporting of stocks, I think sort of built, I mean increased

that skepticism. My particular coop, which is foremost, does offer

a forward contracting which is a little more straightforward and a

little easier to understand. I guess I should have checked with

them to just see how many dairymen did take advantage of that

last year.

My suspicion is, is that with time that will be utilized more than

just using a hedge or purchasing an option. We are going to use
65

the option, the Dairy Options Pilot Program, this year mainly because I would just like to learn a little more about what the connection is between the futures price and my mailbox price. And

that has been the primary reason that I have not utilized those.

We have utilized the futures market and options hedging for grain

sales in the past but just have not taken those skills and transferred it to the dairy.

Mr. GORDER. Mr. Chairman.

The CHAIRMAN. Yes.

Mr. GORDER. I, in fact, have used the—even on my small-scale

farm—have used the futures. I am not allowed to forward contract

because of the discrepancies that regulate between a proprietary

plant and a cooperative. Cooperative can forward contract. As we

are proprietaries, we are not allowed to. I think that is supposed

to at least change a little bit or at least under some trials, but I

have gone into the marketplace, or into CME, and purchased contracts for this last fall. And I did quite well. I will be honest with

you. When I purchased my put contracts in end of June when the

prices started to escalating and I really could not see a good rhyme

or reason for the reason that the prices were going to the degree

they were, I thought, you know, this is the time when you lock in

some prices.

One of the big problems is that, you know, you have to simply

look at it as an insurance policy and the idea is that you really do

not want to collect on insurance policy. You know it is nice to get

your premiums back, but you cannot look at in that respect. Believe me when the prices were where they were in July, I would

have liked to had my $2,000 back, but as I let them mature in October and November, I did pretty well. I not only got my money

back, but I think you need to continue. I think that your dairy option program is so spotty that it really does not do much of any

good, and I need to do one other aspect of this and I need to bring

this in. And that brings it back to the Northeast Dairy Compact.

Ask the people in the Northeast have many of those went out

and bought put contracts. When someone is guaranteed a floor,

what incentive is there for them to go out and use risk management strategies? None. Thank you.

The CHAIRMAN. Well, there would probably be less. Yes, Mr.

Engles.

Mr. ENGLES. Well, markets work when they are large and they

are trusted and they are liquid. And the market in dairy futures

is not that today. And I frankly have a hard time seeing how it is

going to get there until you permit Class I buyers of milk to participate in the forward contracting arena. It is 30-percent of the market. It is that most immediate part of the market, and today from

the most recent legislation, lower class utilizers of milk are allowed

to forward contract, but Class I users are not. So if you are getting

a blended milk check that has Class I utilization in it, and you can

only forward contract on the basis of lower classes of milk, which

obviously pull that average down, you will find it almost impossible

for that forward contract to meet your expectations in terms of

price. So for these markets to be fully developed and used, they

have to be open.

The CHAIRMAN. Yeah.
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Mr. ENGLES. And I think that we can say as a fluid processor,

we would be active participants in those markets if we were able

to do so because certainty is important to us and our customers

and volatility is a very damaging thing for our business as well.

The CHAIRMAN. Well, and a lot of discussion has gone on today

about the volatility of price, and we all know tracing December,

January, February prices, then through July and so forth, if we

have this hearing in January and February, it is always a pretty

dismal time. You know better to have a dairy hearing in the summer when the situation has changed. My own view, and I always

hesitate to get into anecdotal personal circumstance in these

things, but, you know, our USDA economist, Keith Collins, has testified, for instance, that the corn price for the coming year, given

the overhang of supply and general conditions thus far, might very

well be somewhere in the range of $1.90 to 2.10 a bushel. This is

for all prices the whole season, which is not very high. The LDP is about $1.96 and so that sort of sets the floor for the

corn farmer, but sort of balancing off of that. Now the week before

last, in checking with my elevator there, Beech Grove, just outside

of Indianapolis, I found even given the basis situation and so forth

that I could get $2.45 for corn. So I sold some. Now for those who

are not in the farming game, they said you do not even have that

corn planted yet, quite apart from harvested. How do you know

that you are even going to have something to sell? And that is always the problem of forward pricing, but if you have a crop insurance policy to cover 65-percent of your crop or 75 or whatever else

we are reaching for now in that situation, why you know that you

have got something to sell. So there is sort of a twin situation. And 2.45 is different from $1.96 or 2.10 or whatever is going to

happen. Now, why does not everybody in America go out and sell

corn at 2.45? In some cases, the basis is different in other parts of

the country, but my point is that, just as Mr. Gorder is pointing

out, you notice there are fluctuations. It is a volatile market, sort

of things change. Now to the extent that we can get a more active

forward contracting market, and your point is well taken with regard to the larger players and more of the situation involved in it,

we have more possibilities.

But we also have also possibility for people to fail more, too. You

know what if you are not a sophisticated person up to date on the

futures markets, puts options, or you just think this is ‘‘Las Vegas

West,’’ or something of this sort, you have got a problem. And the

whole dilemma of this committee trying to help agricultural America through our extensions or through professional groups, through

coops, anybody, sort of get into the ball game is imperative even

as we try to keep these floors, safety nets, various other situations,

that are important. Yes, Mr. Wilson.

Mr. WILSON. I would just like to add a little bit. We support at

DFA the concept of forward contracting. We have a program within

our cooperative. Roughly 3-percent of our membership participates,

which is not a big participation rate, but that is getting more interest as time goes along. But I think we need to be very careful that

we do not rely on forward contracting and futures markets as the

savior of the dairy industry from the producer side, that hogs and

cattle and grains have had futures markets for a long time, and
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they are probably worse off today than the dairy farmer on average. And so while it is a tool, I think we need to be very careful

not to rely on that tool solely and that we still need Federal orders

and price supports and all these other issues more importantly

than we do a futures market.

The CHAIRMAN. Yes, Mr. Vanderstelt.

Mr. VANDERSTELT. And if I might add to that, Senator Lugar,

you know, my banker knows I am a good dairyman, but he does

not know if I am a good gambler. And we did the milk futures

through the fall, summer-fall, and we do a lot of grain futures, and

we do what you are suggesting, but when you are a larger financed

operation, you do get asked that question. OK, that banker—he

knows the numbers, too, and he looks at them. And he expects certain performance. He would—like I say, he knows I am a good

dairyman and when we did the milk futures this summer, it is

really difficult because what if they do not work out and how I am

going to explain this? And so there is that mental thing to it.

And I do not know how far we are going to see dairymen pursue

the futures. There are a lot of them playing with it, lot of them did

quite well actually this last summer and late fall, actually November–December. Several of my neighbors were pretty happy through

Christmas actually. But there is that drawback that can this get

me in trouble? But I do like having them available.

The CHAIRMAN. Well, I think your point is well taken. I would

not want to get anybody into difficulty. And I was just saying that

probably my banker would be happier than I made the sale at 2.45

than I was waiting for the LDP to clear it away at $1.96 later in

the season. I would think that was a healthy move to sort of wicket

it in. Now the other side of this is the crop insurance, you know,

so the banker knows that I have got something to sell, that I am

not out there selling something that is not going to be produced.

Then he really would be worried.

I think this whole area in dairy in terms of risk management is

something that the Committee and the Congress needs to work

with the industry more on so that there are the same elements

that are available maybe for some other points of agriculture. And

there may be more available than I know about and this is why

I am trying to elicit some advice or comment from each of you as

experts today because I suspect we are going to have dairy programs of one form or another. All these may go up and down. Congresses come and go and sort of public sentiment. But to the extent

that farmers are better prepared really, whatever these markets

are, to meet the volatility that we are talking about, why then

probably we are better off.

Well, I appreciate very much your patience. This has been a

hearing now going on close to 4-hours and you have lasted through

all of it and we are grateful to you for your testimony. As you have

other ideas, why please furnish them to the Committee. We will

keep the record open for a moment or more than that, for a day

or two, so that Senators who were not able to attend who may have

questions of any of you might be able to submit those and if you

can respond to that. Thank you again for coming and the hearing

is adjourned.

[Whereupon, at 12:40 p.m., the Committee was adjourned.]

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DOCUMENTS SUBMITTED FOR THE RECORD

FEBRUARY 8, 2000
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FEDERAL DAIRY POLICY

WEDNESDAY, FEBRUARY 9, 2000

U.S. SENATE, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY, Washington, DC.

The Committee met, pursuant to notice, at 9:07 a.m., in room

328A, Russell Senate Office Building, Hon. Richard G. Lugar,

(Chairman of the Committee), presiding.

Present or submitting a statement: Senators Lugar, Santorum,

Fitzgerald, Grassley, Grams (ex officio), Harkin, Leahy, Conrad,

Daschle, and Lincoln.

OPENING STATEMENT OF HON. RICHARD G. LUGAR, A U.S.

SENATOR FROM INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

The CHAIRMAN. This hearing of the Senate Agriculture Committee is called to order.

We appreciated all of the witnesses in our hearing yesterday. A

number of statements were made by Senators preliminary to the

hearing and during the hearing, which proceeded for about 4-hours,

as you will recall. I have no idea or prediction of the duration of

this hearing today, but it will be equally thorough in questioning

the witnesses and trying to gain information.

The question has been asked, at least of the Chair—so let me try

to express this informally—as to what will follow after the hearings. And I will consult, obviously, with our distinguished ranking

member, Senator Harkin of Iowa. But I suspect that we will try at

least some straw votes of members of the Committee as to their

disposition.

Among issues that might be discussed are whether members

favor the so-called Policy 1A or 1B with regard to dairy, one policy

being a policy suggested—in fact, more than suggested—by the

USDA last year and countermanded really by action of the Congress at the end of the session to go to the status quo or the socalled Policy 1B.

So having heard—and we will hear a lot more today—about both

of these policies, we will ask whether members have a disposition

to confirm, change course, or are so divided that no consensus appears to be possible.

Likewise, with regard to the compact issue, there are ways that

we could proceed there. One would be to authorize more compacts,

to confirm the status quo, that is, the New England situation, or

to wind up the status quo, namely, the New England Dairy Compact. But that is clearly an issue that is before the Committee and
212

that is suggested by these hearings and the friendly clash of personalities, States, and so forth that we heard yesterday.

There may be other constructive policies that arise quite apart

from disposition of the status quo of the past and what have you,

and some of these were suggested yesterday by constructive dairymen who are pointing out sophisticated ways in which people are

trying to make a living in this business and could be assisted by

the Congress, leaving aside these age-old quarrels. So a lot of us

are much interested in that testimony. Hopefully we will have

some more today.

But in lieu of an opening statement, I thought I would go into

this monologue to try to at least bring everybody up to speed that

there was a thought expressed here and there that the hearing yesterday and today were simply a gesture by this committee to alleviate the panic that ensued when the distinguished Democratic Leader and our Republican Leader were trying to get the Congress

stopped last November. We found that very difficult given the number of people that wanted to discuss dairy, and we are prepared to

do so for several more days.

So as a part of that situation, I was asked to come to the floor,

make a statement that Senator Kohl in particular and other Senators from Wisconsin and Minnesota could hear and confirm and

commend. And so these hearings we are holding promptly as a result of that, as a pledge to that.

But some have suggested, having done that, that is the end of

the affair. Not necessarily. It is if the members of this committee

want it to be, and although I stated yesterday candidly my own

preferences—and I think they are known—they are not determinative.

So having said that, let me turn to the distinguished Democratic

Leader who was here at 9 o’clock, let the record show, for this important hearing. Tom?

STATEMENT OF HON. TOM DASCHLE, A U.S. SENATOR FROM

SOUTH DAKOTA

Senator DASCHLE. Well, Mr. Chairman, thank you for your leadership and for following up with the commitment that you made

last year. I well remember those days and remember what a vital

role you played in bringing the session to a successful completion.

These hearings are valuable, and as you say, your position or my

position may not be determinative, but your position carries a lot

of weight, and we are interested in pursuing the matter, as you indicated, and I think the manner with which you have outlined the

way the Committee will address this issue is a very constructive

one and one that I think we should all endorse.

I did not have the good fortunate to hear the hearing yesterday,

but I also commend you for your endurance if it lasted 4-hours.

I am one who believes—and it is probably no surprise for any of

us in my region of the country—that the system is outdated, it is

archaic, and we do need to address the complex array of pricing

mechanisms that we have based upon a system that was created

generations ago. I am one who believes that it is time for a national system and that we can’t intervene in the marketplace unnecessarily and in many cases unfairly.
213

I think the time has come for us to create that national framework that doesn’t benefit one region or the other, that doesn’t benefit larger producers at the expense of the small. I am very hopeful

that these hearings, as constructive as they are, could lead, as you

have indicated, perhaps to a third way, a way that would allow for

compromise and a way that would accommodate the concerns of

those in the Northeast and the South, but also recognize the unfairness of the status quo.

So I certainly pledge to work with you, and no one works in a

more bipartisan and conciliatory manner than the Chairman does,

and I look forward to a constructive way with which to resolve

these matters, hopefully this year.

But, again, I thank you for the hearings.

The prepared statement of Senator Daschle can be found in the

appendix on page 272.]

The CHAIRMAN. Well, thank you for those comments. I really appreciate that because, as we found yesterday, this is not a partisan

issue. It became much more sectional or State by State. So those

are the more difficult issues to find consensus, to find majorities.

We have three panels today: the first, administration witnesses,

and then two panels, one that will review dairy pricing, and the

third, do we have a need for a Federal dairy policy at all.

I will ask that in the instance of the administration witnesses—

and they are Mr. Kenneth C. Clayton, Associate Administrator of

the Agricultural Marketing Service of USDA, accompanied by Mr.

Richard McKee, Deputy Administrator for Dairy Programs of the

Agricultural Marketing Service—that you give a summary of your

comments in

Ten-minutes or less, as the case may be, and we follow the procedure of 5-minutes for each Senator. If there are Senators who wish

to be heard again, we will have another round with regard to each

of the panels.

With the other panels, I am going to ask, since there is a large

number of witnesses—and we are grateful that each has come,

some from a long distance—that each has 5-minutes to summarize

the comments.

Let me just make the statement in advance that all of the statements will be published in the record in full, so it won’t be necessary for you to ask permission for that to happen. That will occur

because we really want a very full record of prepared statements

as well as the questions and answers.

So at this point I will ask you to proceed, Mr. Clayton. We are

very pleased that you and Mr. McKee have come to initiate our second hearing.

STATEMENT OF KENNETH G. CLAYTON, ASSOCIATE ADMINISTRATOR, AGRICULTURAL MARKETING SERVICE, U.S. DEPARTMENT OF AGRICULTURE; ACCOMPANIED BY RICHARD

M. MCKEE, DEPUTY ADMINISTRATOR FOR DAIRY PROGRAMS, AGRICULTURAL MARKETING SERVICE, U.S. DEPARTMENT OF AGRICULTURE, WASHINGTON, DC.

Mr. CLAYTON. Well, thank you very much, Mr. Chairman, and

good morning. It is indeed a pleasure for us to appear before you
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today. We certainly appreciate your invitation to participate in today’s hearing.

Of course, yesterday Dr. Keith Collins, USDA’s chief economist,

testified and provide testimony describing the overall situation and

outlook for the U.S. dairy sector and our dairy farmers. Dr. Collins

also briefly touched on the role of the Federal Order Program within the larger constellation of dairy policy as well as some of the

other actions which have been taken to support dairy farmers’ incomes.

Today what I would like to do is to address the Federal Milk

Marketing Order Program in a bit more detail. My remarks will

briefly describe that program, steps we have taken to implement

the 1996 farm bill mandate, and to briefly touch on some of the anticipated effects of Federal Order Program changes on producers

and consumers of dairy products.

Let me start then with the Federal Milk Marketing Order Program and perhaps just a bit of perspective on that program. Basically, the Federal Order Program is intended to promote the orderly marketing of what clearly is a highly perishable product,

namely, milk. The Federal Order Program I think does so by helping to prevent marketplace behavior that might otherwise erode

the price of milk at the farm gate and ultimately drive producers

out of business.

The significance of this protection, of course, depends on the relative bargaining positions of dairy farmers and those to whom they

sell their milk, the number and size of processors who are selling

milk or bidding for producers’ milk, the market strength of cooperatives that are selling farmers’ milk, and other factors come into

play, I think, when assessing the respective bargaining positions of

dairy farmers and processors.

Of course, under Federal orders, the proceeds from the sales of

farmers’ milk are pooled within a market area with an average

price or value being returned to producers. The prices at which

processors must account to that pool are based, of course, on the

end value uses of milk. To allow pooling to work, a set of classified

prices are established under the Federal Order Program. It is important, I think, to note that these are minimum prices that processors must pay for milk corresponding to its value in several endproduct categories. It certainly is the case that from time to time,

and depending on markets, we see premiums that are paid beyond

these minimums.

Class I milk, as you heard yesterday and as you already know,

is the milk which basically goes in the bottle. It is fluid milk. It

earns the highest minimum price basically for a variety of supply

and demand characteristics that I think tend to make fluid milk

more valuable in the marketplace.

Class II products have somewhat lower minimum prices. Class II

products are the so-called soft dairy products. They are manufactured, but still have a fairly high degree of perishability, things

like ice cream, yogurt, and the like.

And then, of course, we have got Class III and Class IV manufactured dairy products, things like butter, dry milk products, and

cheese, which tend to have the lowest minimum prices under the

Federal order structure.
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Importantly, I think, these products tend to be traded in a national market, and because they are more easily stored than fluid

milk or soft dairy products, they serve really as the residual claimant for milk under the Federal Order Program, residual claimant

for milk that is not going to be used in Class I or Class II products.

Basically it is these manufactured products or the prices of these

manufactured products then which provide the basis upon which

these differentials are added to arrive at prices for Class I and

Class II products.

As already noted, producers selling milk under a Federal order

receive a uniform or weighted average price, called the blend price,

that reflects all the uses of milk in a given market area. Thus,

under orders, all producers in that order area benefit from the

higher price on milk that is marketed for fluid consumption. At the

same time, all producers share in the lower prices for milk that is

diverted to manufactured products.

Under this arrangement, equity is preserved with producers not

needing to engage in behavior that may be contrary to their interests, such as bidding the price of their milk down to its manufacturing value, even though it may be used for fluid milk consumption. In the same vein, under Federal order pricing, handlers are

not in a position to play producers off against each other and drive

that price down. And as I noted earlier, the important caveat there,

I think, is ultimately the importance of all this does hinge certainly

on the respective bargaining power of farmers and those to whom

they sell their milk.

Let me turn now quickly to the process that we undertook to

meet the congressional mandate, the 1996 farm bill mandate. As

you well know, Congress first directed the Department to reduce

the number of milk marketing order areas—in essence, to redraw

the geographic boundaries to reflect the larger marketing areas in

which milk is now sold, distributed, and consumed. And, second, I

think clearly Congress directed the Department to consider

changes to the pricing structure which is utilized under the Federal

Order Program. Both the system of classified prices was examined

as well as relative levels of Class I prices within and between marketing order areas.

The Department’s final decision, which was issued in March

1999, detailed the changes that the Department thought appropriate to the Federal milk order program. Basically, the program

provided for 11 consolidated milk order areas, down from 31. It established a nationally coordinated Class I price structure that provided greater efficiencies in milk assembly and distribution, also

established new methods for pricing milk that is used for manufacturing purposes, and made minor changes to the classification of

milk provisions, as well as standardized a variety of provisions and

definitions and terms that over the years had become somewhat

dissimilar across orders, and this was an opportunity to true all

that up.

In August 1999, referenda were conducted to determine producer

approval of the revised Federal milk orders. Dairy farmers approved the 11 orders and a final rule to consolidate and revise the

orders was issued on August 23, 1999, with the revised orders to
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become effective October 1, in compliance with legislative mandates, certainly.

A bit of history intervened, and by November 29th, the Consolidated Appropriations Act of 2000 was signed, which, of course, required that both the revised orders become effective on January 1,

2000, and also that those orders utilize the so-called Option 1A

Class I differentials. The Act further directed the Secretary to establish a temporary forward contracting pilot program and to hold

a hearing on Class III and Class IV milk pricing formulas. The Department does expect to issue a notice soon on the pilot program

for forward contracting, and on the just past January 31st , the Department put out a notice inviting proposals to be considered at a

hearing, which we would hope to hold late April, early May on the

Class III and Class IV pricing issue.

Finally, of course, on January 1 of this year, the final rule was

implemented, and the new order program began.

With that bit of chronology, let me quickly then turn to the expected impacts of these changes on dairy farmers, and on consumers in particular. More specifically, as requested, I will focus on the

differences between the Department’s final decision and milk orders with the so-called Option 1A Class I price differentials. And

in the interest of time, I will just cite a few of the summary impacts contained in my written testimony.

For dairy farmers, the all-milk price across all Federal orders is

expected to average less than 6-cents per hundredweight or about

0.4 of 1 percent higher under Option 1A compared to USDA’s final

decision, between 5-and 6-cents per hundredweight. Annual gross

receipts, the total rack-up of receipts to producers across all Federal orders, are expected to average on the order of $107.7 million,

or about 0.6 of 1-percent higher, with the Option 1A differentials

than would have been the case in the Department’s final decision.

In considering the impacts of milk order changes on consumers,

we have assumed that all changes in fluid processor milk costs and

wholesale manufactured dairy product costs are passed through immediately to the retail level without any changes in processor retail

or wholesale retail margins. Those margins in the real world will

move. Some of them are percentage-based, but for purposes of analysis, we have assumed an immediate and complete pass-through.

Accordingly, consumer expenditures on fluid milk products in all

Federal market order areas combined are estimated to average

$116.8 million per year higher under the Option 1A differentials

than under the Department’s final decision. This is an increase of

about 1.5-percent, given average annual consumer expenditures of

$7.6 billion on fluid milk products in Federal market order areas.

Average annual consumer expenditures on manufactured dairy

products—the numbers I just cited were for fluid milk, the impact

in terms of manufactured dairy products across all Federal market

order areas—are estimated to decrease by about $9.1 million per

year under the 1A differentials as compared to the Department’s

final decision. To put that in perspective, annual expenditures on

manufactured dairy products at the consumer level total about $9.3

billion, so this decrease of $9.1 million in the cost of increased costs

to manufactured products means for consumers about a 0.1-percent
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decrease in terms of prices paid for things like cheese and cottage

cheese and yogurt and so forth.

Mr. Chairman, that concludes my statement. My colleague and

I will be happy to answer any questions that you or the Committee

might have. Thank you.

[The prepared statement of Mr. Clayton, can be found in the appendix on page 279]

The CHAIRMAN. Thank you very much, Mr. Clayton.

Let me ask you, first of all, about the referenda that were conducted last August. These were conducted by USDA, and were the

voters dairy producers in each of the 11-districts? Or how were the

votes arranged? And were there majorities in each of the 11-districts, if that was the demarcation line?

Mr. CLAYTON. Well, first, yes, the way that the vote actually

works is order by order. So in order for the 11 orders to pass, that

vote had to be a two-thirds super majority vote.

The CHAIRMAN. Two-thirds majority in each of the 11-districts.

Mr. CLAYTON. That is correct.

The CHAIRMAN. How much participation was there by dairy producers in that referendum? Was this actively advertised and most

voted?

Mr. CLAYTON. Well, as to the advertising part, I can certainly

speak to that. The Department itself took great pain to try to

spread the word far and wide as to what was being voted on. Our

market administrators, who were located, of course, outside Washington and throughout the country, have newsletters, have many,

many meetings with producer groups, will go meet with co-ops or

whoever it might be who is having a meeting. So a lot of effort was

taken to advise producers as to what was at stake here.

The voting process under the Agricultural Marketing Agreement

Act of 1937 that this program operates under, does provide for

block voting by cooperatives. Therefore, depending on how a cooperative would choose to determine the sentiment of its producer

members, that would have something to do with the role that each

individual producer played.

There were some cases where milk pooled under an order was

not associated with a cooperative. In those cases, individual ballots

were provided.

The CHAIRMAN. That is interesting. The cooperatives voted and

a few individuals.

Mr. CLAYTON. That is correct.

The CHAIRMAN. Essentially.

Mr. CLAYTON. Yes.

The CHAIRMAN. But, in any case, well over a two-thirds majority

in each of the 11 situations.

Mr. CLAYTON. Yes, Sir.

The CHAIRMAN. You know, I thought this was the case, but I

wanted to just simply in your own words obtain the case, because

at least superficially it appeared that USDA’s compliance with our

farm bill of 1996 was accepted and supported by producers. Not everybody was pleased by this result because, as you pointed out,

chronologically, by the time the Congress was concluding our activities on November 29th or thereabouts, what had been approved

apparently by a two-thirds majority in 11 districts was abruptly
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disapproved, and we went back to something close to the status

quo.

Describe from your standpoint, why was there opposition to what

you had done? And how could this have been resolved? Or perhaps

I am asking you to look into the vagaries of congressional activity

as to what we might have done or might not have done. But something that appeared to be moving in this direction with this kind

of approval, obviously it didn’t happen. What is your analysis of

where the opposition is, where the argument is?

Mr. CLAYTON. I probably would start, Mr. Chairman, by indicating I will not venture into the arena of suggesting what the Congress ought to think about on this. But having said that, certainly,

as you point out, the votes that were taken were overwhelmingly

in support.

I would have to note, in fairness, that the alternative to supporting it was elimination of the orders. So, clearly, by virtue of the

record as it unfolded, as you point out, there were people who voted

in favor but not necessarily were enthused about some of the content, at least.

Clearly, there is also, I think, as you pointed out in your opening

remarks, there are great differences of view as to what the most

appropriate pricing structure for dairy ought to be.

The CHAIRMAN. More particularly, it appeared, as I visited with

dairymen around the country at that time, some said, well, we are

going to lose a lot in this. And other said, well, we are going to gain

modestly. But there were winners and losers. When you went from

the 31 to the 11, despite the fact that the conglomerate majorities

in each of the 11, within this there were some subgroups who said

under the 31 we did better. So, presumably, they contacted their

local Members of the House or their Senators and said, you know,

you have got to sort of stick up for us, leaving aside whatever

USDA was doing in these referenda. And in a democracy all these

factors are brokered in.

But, in any event, as you know, I publicly commended USDA for

work that you had done because it was consonant with what we

had done in our farm bill. The dairy thing was the very last thing

decided in the Congress.

But, for the moment, why, we are back to square one. And prior

to Senator Lincoln and Senator Conrad coming in, in my dialogue

with my colleague, Senator Daschle, I indicated that at some point

in the near future we will ask committee members what their own

views are with regard to 1A and 1B or some other, 1C or D or so

forth, as to how we proceed. But that is why I wanted to elucidate

these thoughts from yourself.

Now, you are making the comment, after all is said and done,

however, and you have got down to 11-marketing-orders and simplified this thing, essentially you believe—well, stated another way,

the action that Congress took to adopt the 1A, the status quo, resulted in about $107 million more revenue for dairymen and about

$116 million more expense for consumers. That is sort of the nature of it, the 1-percent shift in terms of the volume of what is

being done. Is that a fair characterization of the impact?

Mr. CLAYTON. Yes, I think it is, Mr. Chairman, and as you point

out, obviously the money to be provided to dairy producers has to
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come from somewhere, and we are talking about basically the marketing of a product to consumers. Clearly, that money————

The CHAIRMAN. I would have to trace back, but it seemed to me

Keith Collins yesterday intimated he had done some computations

of all of this and has come to conclusion that dairymen would have

been, say, $100 million better off with USDA’s policy. It is hard to

tell, I suspect. The markets fluctuate rapidly. You have to stipulate

certain things happening.

Mr. CLAYTON. And the overall size of the market clearly is such that—not to minimize the importance of $100 million one way or

the other, certainly that is a lot of money————

The CHAIRMAN. You are talking about a $9 billion market or

something of that sort.

Let me turn to my colleagues, and we will try to have just 5-

minute rounds of questioning. Senator Daschle, do you have a

question?

Senator DASCHLE. Thank you, Mr. Chairman.

Mr. Clayton, you said in your opening comments that you had

done an analysis of the impact that the 1A differential had on

dairy farmers and consumers in various regions of the country. Did

you do a similar study with regard to 1B and the administration

proposal? And if so, could you share with us that study and the results?

Mr. CLAYTON. Yes, Sir. In fact, the final regulatory impact analysis, which was published at the same time as we published the Secretary’s final decision, does include all of that analysis.

Senator DASCHLE. Could you just summarize it for us for the

purposes of the hearing this morning, just briefly?

Mr. CLAYTON. Sure. From the standpoint of producers and receipts to producers over the 5-year period that was a part of the

analysis, clearly the Option 1A was going to result in the highest

level of receipts, relatively speaking. The final decision I guess

would be next in line, and the Option 1B would have been the

lower of the three alternatives which were examined in that impact

analysis.

Clearly, the impact for consumers flips around and works just in

the reverse. But answering that question is a little dangerous without getting into some of the detail, which I don’t think we have

time to do here this morning, but certainly one does need then also

to look at implications in terms of fluid milk consumption—or let

me step back, in terms of overall production levels of farm milk,

of impacts in terms of fluid milk consumption, impacts in terms of

the manufactured market. And those vary some across those three

as well.

Senator DASCHLE. Well, I guess I still don’t know if I have as

clear an understanding of the difference by region. Could you

elaborate more specifically with regard to regional impact and contrast the two based upon your analysis?

Mr. CLAYTON. Let me ask Mr. McKee, who dealt in some greater

detail with the numbers—maybe he can help us with that. I don’t

want to be evasive here at all, but there are a lot of data.

Mr. MCKEE. There is an extreme amount of data available, and

we did do it by regions. We selected 36-points, basically, and analyzed the impact of Option 1A, Option 1B, and the final decision.
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We looked at each of these major primary population points, and

as you can imagine, in about half of those areas you had income

increases generated, in about half of those areas you had income

decreases. And those depended largely upon the types of milk that

are produced and consumed in those areas and largely, if you look

at the map, there were winners and losers, as the Chairman indicated earlier. They are certainly outlined. If you have specific regions, we can certainly provide that detail, but————

Senator DASCHLE. Well, let’s just take arbitrarily the Midwest region and the Northeast region. No particular reason why. I

just————

[Laughter.]

Mr. MCKEE. Under the Option 1B, there would have been a decrease in the Northeast area, on a 6-year average on price per gallon of milk, of around 6- to 9-cents on average over the 6-years. In

the upper Midwest, you would have had an increase of 2- to 3-

cents.

Senator DASCHLE. In the interest of time, for the record if you

could provide us with it, I would appreciate a summary of your

analysis of the impact that the two plans have had. I mean, we can

work through the minutia of the data as well, but it would be helpful—the data itself isn’t as useful as your analysis of the data, and

I think if you could give it to us in summary form within a few

days, that would be very helpful. I would like to see that. I am not

sure that we can fully understand the numbers, but you can and

you can articulate them in a way that would give us a far better

appreciation of a good comparison between the plans. And I would

like that, and I am sure some of my colleagues would as well.

Mr. CLAYTON. Mr. Daschle, if I could, just for clarity, are we talking Option 1B or the Department’s final decision?

Senator DASCHLE. Well, actually, it would be nice if you could do

all three: Option 1B, the final decision, and Option 1A, I mean,

three columns, winners and losers. Just what is the analysis?

I think as we try to figure out what is the fairest way to proceed,

I think it would be very helpful to know what the impact of these

proposals are. And to be honest with you, I don’t think that has

ever been very clearly articulated yet. And I think you could do us

a real service by providing that information in a way that goes beyond the data of that report.

Thank you, Mr. Chairman.

The CHAIRMAN. I would just underline Senator Daschle’s

thought. I tried to touch upon this, but, you know, literally, when

you move from 31 to 11, this is what we asked you to do to rationalize it. But as you pointed out, you have got 36-populations that

half won, half lost. And so as a result, even though the Committee,

the Congress said reduce these, when it came down to the particulars, with 18-losers, they all weighed in, and there is not much in

it. It is hard to get consensus with 18 pulling one way and 18 the

other. But it is probably best, just for the sake of accuracy, to know

how much.

Now, if these are de minimis changes, why, we might reason

with our colleagues, now, come on, you know, 1-or 2-cents one way

or another, given the variety of prices for dairy, for Class I milk
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or anything else, there is not much in it, and in the best interest,

we might rationalize this thing.

On the other hand, if we see huge changes—when I visited with

the Texas dairymen, for example, they saw a big change there in

how they may have overestimated their problem, but they didn’t

think so. So as a result, they were dug in, and there were others

like this.

But it would be helpful for us all of us to analyze this data because I think it is material.

Senator Grassley, I will pass on you for a moment. Your turn will

come right after Senator Conrad. You may question for 5-minutes.

Senator Conrad, would you proceed with your questions?

STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM

NORTH DAKOTA

Senator CONRAD. Thank you, Mr. Chairman, and I thank the

witnesses as well.

First of all, I think the basic system under which we are operating here is really pretty hard to defend. It is pretty hard to defend

a system that started in the 1930s based on presumptions that are

no longer the case.

At the time this was all devised, the Midwest was the only surplus area, and that is just no longer the case. And yet this whole

plan is predicated on a fact that is no longer a fact. And we don’t

seem to be able to reform this system, even given the best efforts

of Congress and the best efforts of USDA.

First of all, I want to commend you for making the attempt, but

I think Congress has really failed to meet its obligation and its responsibility. This is now an unfair system. It is absolutely unfair

to our region of the country, and the results have been absolutely

devastating. We have seen in the last decade our dairy farmers cut

in half. Actually, it is even more dramatic than that, because that

doesn’t capture the most recent losses, which are very sharp.

So we have a system that is unfair, and you came up—we had

three basic options before us: 1A, 1B, and the final decision, which

is somewhere in between. I would be very interested to know—my

understanding is that in the referenda the people indicated they

preferred Option 1B. Is that the case?

Mr. CLAYTON. No. They were presented with the final decision,

up or down.

Senator CONRAD. And they supported the final decision.

Mr. CLAYTON. That is correct.

Senator CONRAD. And the final decision is between 1A and 1B.

Mr. CLAYTON. It is probably—yes. It is sort of built off of 1B, but

with some higher prices.

Senator CONRAD. You said, as I heard you in response to Senator

Daschle, that 1A—this is how I heard you; correct me if I am

wrong—that 1A would have given the highest level of receipts. Is

that your————

Mr. CLAYTON. Between the three options, yes.

Senator CONRAD. But that doesn’t measure, obviously, regional

differences?

Mr. CLAYTON. No. I was just speaking nationally.
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Senator CONRAD. And how much of a difference is there in overall receipts between the three, between 1A, 1B—which was the

original Department recommendation, was it not? Option 1B was

the original Department recommendation?

You have to answer yes or no because nods of the head will not

be captured in the record.

Mr. CLAYTON. Oh, I am sorry. I thought you were going to continue. That is all.

Senator CONRAD. Option 1B was the original Department recommendation, was it not?

Mr. CLAYTON. That is correct. Yes, 1B was the initial proposal by

the Department.

Senator CONRAD. And those who are the advocates for the status

quo, the anti-reform group—I like that.

[Laughter.]

Senator CONRAD. I have been watching this Presidential campaign.

The anti-reform group, they wanted to stick with what is that is

based in the 1930s. Isn’t that correct?

Mr. CLAYTON. I will not join in your characterization, if that is

okay.

Senator CONRAD. And the final decision is somewhere in between. Can you tell us the level of receipts between the three?

Mr. CLAYTON. Yes, Sir. Option 1B would have resulted in around $129 million less than what we would have projected if the existing

system had continued. Option 1A————

Senator CONRAD. $129 million less in overall receipts.

Mr. CLAYTON. That is correct.

Senator CONRAD. Overall receipts to dairy producers.

Mr. CLAYTON. Cash receipts to dairy farmers.

Senator CONRAD. Cash receipts—okay. That is good.

Mr. CLAYTON. For dairy farmers who are marketing milk

through the Federal Order Program.

Senator CONRAD. Right.

Mr. CLAYTON. Obviously, there are dairy farmers outside————

Senator CONRAD. OK. I think it is just very important to define

these things for the record and for those who are listening. OK.

Mr. CLAYTON. Option 1A, if we would like to take that one next,

we estimate will result in cash receipts of $104.9 million more than

if the existing system had continued.

Senator CONRAD. OK.

Mr. CLAYTON. And the final decision would have resulted in $2.8

million less cash receipts to producers.

Senator CONRAD. So, in terms of this one question, the final decision really is right between the two.

Mr. CLAYTON. As it turns out, and, again, that is all relative to

the kind of baseline of the world continuing as though we had done

none of this.

Senator CONRAD. Now, as somebody who has been deeply involved in this process, how would you characterize the numbers of

dairy farmers around the country? What is happening to the number of dairy farmers, active dairy producers?

Mr. CLAYTON. It has been declining.

Senator CONRAD. And declining sharply?
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Mr. CLAYTON. Yes. I would not sit here and profess to be an expert on those numbers, but my reading of them would be that the

decline has been significant.

Senator CONRAD. And can you tell us what kind of a price would

a dairy farmer in the upper Midwest get versus what a dairy farmer in the Northeast would get? And let’s put in the South.

Senator LINCOLN. Thank you.

Senator CONRAD. I don’t know how you divide up the South.

By the way, I have already filed a lawsuit on behalf of Senator

Lincoln against the Committee, and I am hoping that it gets resolved quickly.

[Laughter.]

Mr. CLAYTON. Well, I would be happy to provide sort of detailed

information on that. I do have some examples of the difference in

the all-milk price under the final decision compared to 1A.

Senator CONRAD. If you could get that to me and other members

of the Committee—my time has run out.

Mr. CLAYTON. Sure.

Senator CONRAD. I would appreciate that.

Mr. CLAYTON. It might be easier just to provide more complete

information, yes.

The CHAIRMAN. I thought it was very interesting. You have a

$100 million loss one way, a $100 million gain the other, but your

final decision was $2.8 million out of $9 billion—in other words, de

minimis. So that was what we were arguing.

Senator Grassley.

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR

FROM IOWA

Senator GRASSLEY. I am not going to take much of my time because I came to hear the producers and I want to move on. But I

think I share the frustration just expressed by Senator Conrad and

would associate myself with it, and add to it that we have the ironic situation, for instance, in my State—and I will bet it even applies to—if it is in northwest Iowa, it applies to parts of Minnesota

and South Dakota, and maybe even North Dakota—where actually

some times in the year you can have a milk shortage. And so we

have instances in which processors, in some cases even our Iowa

Department of Economic Development, are trying to entice people

to come to our State from even California to produce milk so that

we have got a supply. And it all stems from an outdated marketing

order situation that was worried about surpluses in the Midwest.

But because of the lowest prices there, we have got a situation

where now we have potential unemployment in milk processing,

dairy processing.

It is an example that if Government still has a legitimate role—

at least as far as a safety net is concerned, they do have a legitimate role. But it is a perfect example if something isn’t working,

it has got to be fixed. This isn’t one of these things you look at and

say, you know, it is working.

So I associate myself with those remarks and just urge whatever

can be done to be done to correct this situation where Government

has proven that it isn’t better than the marketplace.
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Now, in this particular instance, if you are going to have a safety

net for farmers, you are going to have to have some Government

involvement. But it has got to be something that betters the situation and not worsens the situation.

The CHAIRMAN. Thank you very much, Senator.

Senator Lincoln.

STATEMENT ON HON. BLANCHE L. LINCOLN, A U.S. SENATOR

FROM ARKANSAS

Senator LINCOLN. Thank you, Mr. Chairman, and thank you

again for holding these important hearings.

I had hoped, as Senator Grassley, to be able to be here with the

producers when they testify, but I am going to have to testify at

another committee, and hopefully my entrance there will be a little

more graceful in the second committee.

The Arkansas dairy industry plays a tremendous role in our State’s agricultural economy, and it generates more than $270 million of economic activity every year for our State. Most people don’t

think of Arkansas as a dairy State, but we do have quite a few

dairy farmers there. Unfortunately, Arkansas dairy farmers, like

dairy farmers from all other areas, are struggling with volatile and

low prices.

In the past 10-years, nearly 40-percent of our Arkansas dairy

farmers have gone out of business. There are nearly 500-farmers

left out of a number of well over 900 just 10-years ago. Recognizing

those concerns, our Arkansas General Assembly approved the

Southern Dairy Compact in 1997.

I am pleased to know that John Scarlett will be testifying in the

next panel, and I appreciate his representation of the Southern

dairy farmers. One of the comments that he makes in his testimony—and I just would like to highlight that—is that the program,

whatever the program is, is only as good as the quality of the information it gathers. We have talked about shortages and other

things, the importance of how we gather that information, and certainly making sure that we do it correctly and in a timely fashion

is going to be very important.

I would like to ask this panel, seeing what has happened to dairy

farmers in Arkansas over these past 10-years without a compact,

what do we stand to see in the future? How long do you see Southern dairy farmers existing without a compact? You are here for

your professional, and background in terms of these issues. What

do you think?

Mr. CLAYTON. Well, that crystal ball is a difficult one to deal

with.

Senator LINCOLN. Sure.

Mr. CLAYTON. Clearly, as you point out, dairy producers in lots

of parts of the country are under financial pressure. Clearly, one

of the driving issues, as the Chairman has indicated, is what we

as a Government will choose to do to intervene on their behalf.

Every intervention has implications which cut in a number of different directions, and probably not my place to try to attach significance to the importance of those impacts, be it on producers or on

consumers. That is something that the public debate ought to sort

out.
225

Clearly, there is a lot of change going on: fewer farms, as has

been pointed out already, to some extent larger farms, larger farms

in parts of the country where we haven’t seen that before. To some

extent, producers have to do what is necessary to be efficient, and

I don’t intend that as an indictment of anybody. But, clearly, at the

end of the day we do operate in a market economy, and one has

to operate efficiently to do that.

I realize I haven’t answered your question, but————

Senator LINCOLN. I was just getting ready to say, that is almost

the same as a nod of the head. Completely unrecorded.

Mr. CLAYTON. I am not going to, obviously, take a position this

morning in terms of the appropriateness————

Senator LINCOLN. So you have no opinion as to—whether or not

Southern dairy farmers exist can without a compact?

Mr. CLAYTON. Well, they have existed. I would guess that they

can. But under what circumstances? We do not know, what the future will bring. We do know that there are going to be a lot of pressures there.

Senator LINCOLN. Well, I would just highlight Mr. Scarlett’s testimony, and he points out, the very basics of transportation cost

and what is involved in the South, where probably half the U.S.

dairy farmers reside. When we run into those shortages that were

mentioned earlier, the cost of transportation and what is involved

and being able to make sure that there is a supply of milk. And

let me tell you, I am pretty big consumer. I have got twin boys that

are 31⁄2, and we go through at least 4-gallons of milk a week.

So it is important, in areas, like the Mississippi Delta and the

Southern part of our country, to have that supply and have it in

a cost-effective way for consumers.

I will just highlight that, and I will tell the Chairman once again

how much I appreciate his involvement in this issue, and certainly

having the Committee to focus on it. Thank you, gentlemen. And

I do appreciate the second panel, although I won’t be able to stay.

The CHAIRMAN. Thank you very much, Senator Lincoln.

If there are no more questions, I think we will proceed to the second panel. But I want to thank both you, Mr. Clayton, and Mr.

McKee for your testimony. Please furnish the Committee the information requested by Senators because you can tell from the intense

interest on the figures that this is a subject that we are going to

be into, and we really want to have the data to make sound decisions.

[The information referred to can be found in the appendix on

page 287.]

Mr. CLAYTON. Yes, Sir. We will get that back to you.

The CHAIRMAN. Thank you very much.

The Chair would like to call now a panel composed of: Mr. Arthur S. Jaeger, Assistant Director of the Consumer Federation of

America; Mr. Mark Furth, General Manager, Associated Milk Producers, Incorporated, in Minnesota; James Vanblarcom, a dairy

farmer from Pennsylvania; Mr. James Tillison, Alliance of Western

Milk Producers, from Sacramento, California; Mr. Larry Jensen,

Senior Vice President of Supply, Distribution and Business Development of Leprino Foods, Colorado; and Mr. Dennis Meyer, member of the Board of Directors of Family Dairies, in Iowa.
226

Gentlemen, we thank you all for assembling here with us this

morning. As perhaps you heard at the initial part of the hearing,

we would ask that each one of you summarize your comments in

5-minutes. The green, the yellow, and the red lights are an indicator of how you are doing in this respect. And if you would do that,

that would be helpful because then we will have another 5-minutes

per Senator a round of questions of you following your testimony.

I will ask you to testify in the order that I introduced you, and

that would be, first of all, Mr. Jaeger. Would you offer your testimony?

STATEMENT OF ARTHUR S. JAEGER, ASSISTANT DIRECTOR,

CONSUMER FEDERATION OF AMERICA, WASHINGTON, DC.

Mr. JAEGER. Thank you very much, Mr. Chairman. I am pleased

to be here this morning, and I am very pleased the Committee

chose to hold these hearings. I think they are important hearings,

and I think they were very instructive yesterday and so far this

morning.

Last year’s dairy controversies over the Northeast Compact and

market order reform were most often portrayed and they were portrayed this morning as regional battles, New England versus the

upper Midwest, the upper Midwest versus the rest of the Nation.

I want to make the point that they were also consumer battles. My

organization, the Consumer Federation of America, fought in favor

of market order reform, the USDA’s plan, and against compacts.

We were joined in opposing compacts by both Consumers

Union—I think that is probably the Nation’s best-known consumer

organization—and the Center on Budget and Policy Priorities, a respected research organization that focuses on low-income issues.

Now, why are these programs problems for consumers? It is pretty simple. As a number of witnesses have pointed out, they raise

retail prices to consumers. There was a lot said yesterday about

prices in the New England versus the upper Midwest. I brought

along a couple of charts which point out what the Northeast Compact did. This is milk prices in Vermont, and where my colleague

is pointing—that is, June 1997—that is where the compact kicks

in, and you will see a big increase in prices there. You will see

prices, after the compact kicks in, stay pretty much at the $2.75

per gallon level.

This, by the way, is the same GAO report that Senator Leahy

likes to cite.

Now, in the next chart, we have New Haven, and you will see

essentially the same thing. It is not quite as dramatic. And there

the prices tend to stay up at the $2.70 level after the compact kicks

in.

In the next chart we have Chicago. That is getting out towards

the upper Midwest, and you will see there is no compact in Chicago, and so the price bounces around. It does not go up in June

1997, and you will see prices in Chicago peak out at about $2.65.

And then the final chart is Milwaukee, and there, again, the

prices bounce around, but, again, they peak out at about $2.65.

It is that problem in New England that concerns my organization, and we don’t want to see the same thing happen in the Middle Atlantic States and in the Southern States.
227

It is interesting. A recent study commissioned by the Northeast

Compact’s own governing body basically reached the same conclusion, that there were dramatic increases in milk prices when the

compact kicked in, and that it has continued to cost consumers a

substantial amount of money in the 21⁄2 years—well, that study

only looked at the first year, but in that first year, it continued to

cost consumers a substantial amount of money.

In terms of Option 1A, you heard estimates this morning, that Option 1A is costing consumers about $116 million more for milk

this year. That is why we opposed Option 1A.

These price increases hit low-income consumers the hardest.

That is because low-income families spend more of their income on

dairy products. These higher milk prices cause a decrease in milk

consumption. Again, there was some dispute over that yesterday,

but Keith Collins, the chief economist at the Agriculture Department, certainly ought to know, and he said the Northeast Compact

is decreasing milk consumption in New England. A slight decline

in milk consumption, and that is what you are seeing. It may seem

trivial, but the public health effects here may not be trivial. Milk,

of course, as we all know, is an excellent source of calcium, yet

something like three out of four of us don’t get enough of it. Raising the price of milk will just make it that much harder to turn

that situation around. And, of course, anytime you increase the

price of milk, you do increase the cost of Federal nutrition programs.

I think we heard the USDA witnesses say this yesterday. Last

summer USDA said Option 1A would increase the cost of the four

major nutrition programs nearly $10 million per year. It is true

that the Northeast Compact, to its credit, has acted to insulate

WIC and the School Lunch Program, but there is not a lot it can

do about food stamps. Estimates are that the compact is costing

food stamp recipients nearly $10 million in lost purchasing power.

Supporters of the compact and Option 1A say they are needed to

shore up struggling dairy farmers. My organization includes small

dairy farm organizations and is very concerned about the decline

in the number of small farms in this country. But we think compacts and Option 1A are not an efficient way to address this problem.

Why not? First, not all dairy farms—again, as we heard yesterday—in this country are struggling. Keith Collins mentioned that

the basic Federal price for milk recently tumbled, but it tumbled

from record-high levels. He also said that feed prices have been

very low. He said about 2.5-percent of dairy farms are financially

vulnerable right now, and that is about half the percentage for all

farms nationwide. So compared to all farms, dairy farms are actually doing better.

Now, next, who are the farms that are struggling? They tend to

be the small farms. Since 1982, three out of four dairies going out

of business in the Eastern United States had less than 50-cows. Of

course, when you change the farm level price of milk under either

Option 1A or under compacts, you increase income on a per-gallon

basis; that goes to all farmers. That means those with the most

production get the most benefit. It gives the largest subsidies to

those who least need the help. Some of these dairy farms have net
228

worths of more than a million dollars. At the same time, the smallest farms, the ones that tend to need the help, get very little.

What if you ran the Food Stamp Program on the same basis—

the more you earn, the more food stamps you would get? That

doesn’t make for an effective assistance program, and likewise, we

think raising milk prices across the board for all farmers is not an

efficient way to assist those farmers who are in trouble.

Now, what is the solution? Yes, there are farmers in trouble. My

organization is worried about them. We think Congress would be

better off to enact a permanent, targeted assistance package for

those small dairy farmers who need help to survive. We think there

is a value in keeping those farmers on the land. And Congress has

started down this road with the emergency assistance packages it

approved in the last 2-years. These programs don’t just cover the

Northeast. They cover the South, where there are problems. They

cover the upper Midwest, where there are problems. They cover

any region where dairy farmers are struggling.

These programs are capped in an attempt, at least, to target the

benefits on the small-and medium-size producers who should need

the help, and they do not increase prices to consumers. They do,

of course—this approach does involve Government cost, but at least

if this approach is done right, at least taxpayers know they are providing help to the small farmers who need the help, not to farmers

who are doing fine.

I had a number of other points in my statement, but I will cut

it off right there. I see my time is up.

[The prepared statement of Mr. Jaeger can be found in the appendix on page 288.]

The CHAIRMAN. Thank you very much, Mr. Jaeger.

It is a pleasure to have Senator Grams with us again today. He

is a regular at the dairy hearings, and I am grateful that is so. But

you have a witness that you would like to introduce, Senator.

STATEMENT OF HON. ROD GRAMS, A U.S. SENATOR FROM

MINNESOTA

Senator GRAMS. Thank you very much, Mr. Chairman and members of the Committee. Thank you for giving me a distinct privilege

this morning to be here to introduce to you Mr. Mark Furth, who

is the chief executive officer and general manager of Associated

Milk Producers, Incorporated, or AMPI, and it is a 5,000-member

dairy cooperative based in New Ulm, Minnesota.

Now, AMPI annually markets 5-billion pounds of milk for dairy

producers from Minnesota, Wisconsin, Iowa, Nebraska, Missouri,

South Dakota, and North Dakota, and it operates 13-manufacturing plants.

Now, Mark has been with AMPI for 30-years, beginning as an accountant, and he became general manager in 1990. Mark has also

previously served on the Board of Directors for the National Milk

Producers Federation and also for the Minnesota Dairy Leaders

Roundtable.

I appreciate his willingness to come to Washington today to highlight what we view as the fundamental unfairness of our Nation’s

dairy pricing system and to propose alternatives to the existing

structure.
229

Now, Mark has endured the same frustrations that I have in

Minnesota, with family farmers being forced out of business due to

a system that helps producers in other regions of the country gain

a competitive advantage over them.

Again, I want to thank you for the opportunity to be here this

morning to introduce Mr. Furth and know that his suggestions will

be useful for the work of this committee and for the Senate.

Thank you very much, Mr. Chairman.

[The prepared statement of Senator Grams can be found in the

appendix on page 373.]

The CHAIRMAN. Thank you for coming, Senator Grams.

Senator GRAMS. You are quite welcome.

The CHAIRMAN. Mr. Furth, you are recognized.

STATEMENT OF MARK FURTH, GENERAL MANAGER AND

CHIEF EXECUTIVE OFFICER, ASSOCIATED MILK PRODUCERS, INCORPORATED, NEW ULM, MINNESOTA

Mr. FURTH. Thank you, Mr. Chairman. Thank you, Senator

Grams.

These 30-years that I have spent working for dairy farmers as

part of this cooperative called Associated Milk Producers, most of

that time has been spent in one way or another with milk marketing and milk pricing. And whatever little bit of expertise that I

have gained in those 30-years, that is what I hope to be able to

share with you this morning.

In those 30-years, I have seen a lot of changes in milk marketing

and milk pricing. Three changes that I think have been significant

and that should bear on policy into the next decades:

One is that cooperatives have become the major marketing vehicle for most United States dairy farmers. Almost all United States

milk today is marketed by dairy cooperatives. That is a significant

change from 30-years ago. It has increased dramatically, continues

to increase.

Second, 30-years ago, bottled milk, fluid milk, which you are

hearing so much about this last couple days, was the major usage

of milk by far and away. Today it is not. Cheese has become the

major usage of milk in this United States, a significant change.

Lastly, marketing has become very national. When I joined this

business some years ago, markets were very local. They are no

longer. Almost all dairy products are marketed on a very national

basis today.

In that same period of time, something that hasn’t changed is

that the two significant Federal dairy programs continue to exist

almost exactly like they did 50-years ago: price supports and the

dairy price support program. Now, to have that kind of longevity,

they must either be very, very good programs or very, very outdated. Hopefully that is something that this committee will look at

in the coming sessions.

Although these 2 programs are both over 50-years old, they have

in the last 15- or 20-years taken a very different direction. Starting

in the early 1980s, the national safety net for dairy farmers

through the price support program has been significantly lowered.

At the very same time, the support level offered to dairy farmers

through things like Federal milk marketing orders has actually in-
230

creased. While we have lowered the safety net for most of the Nation, we have raised it for isolated areas. Fluid Class I prices have

actually increased, giving price relief to farmers with higher Class

I utilization and the benefit of Federal price control.

To make this discrimination worse, reliable economic studies by

the likes of USDA and Food and Agricultural Policy Research Institute [FAPRI] show that the relatively higher supports for some actually lower the price for the other dairy producers not so affected.

Dairy is a national market today, with supply/demand setting the

price and balancing the market for almost all products. Class I

fluid use is a rapidly shrinking part of total U.S. milk production

and an increasingly ineffective and unfair vehicle for supporting

prices for U.S. dairy farmers.

Meanwhile, the United States is a very attractive market for the

rest of the world. Without the import tariff rate quota system that

we have, we would be a magnet for any surplus production anyplace in the world. If U.S. trade policy lowers import restrictions,

as is contemplated by many, without first leveling the playing field

here in this United States, those regions without the safety net of

higher Class I prices and/or compacts will be sacrificed. I trust you

will not let that happen.

We need a national dairy pricing system and a national dairy

policy without regional distortions. I believe recently legislated

Federal order changes and the Northeast Compact extension have

further distorted our U.S. pricing system. How can Congress in

good conscience consider international policy until it first ensures

a fair domestic pricing system for U.S. dairy farmers?

As you consider another farm bill, I propose the elimination of

Federal orders and compacts as poor policy that helps some farmers at the expense of others. I propose a strengthened national

price support program for all dairy farmers in this Nation.

An effective national pricing system should include the pooling of

all benefits and costs across the entire Nation and a two-tier pricing mechanism that provides disincentive for farmers to increase

production into the face of a price-depressing surplus, similar to

that existing today.

I hope this committee can reclaim jurisdiction over these issues.

Your decisions will have a huge influence on the health of our industry for decades to come. Please ensure that dairy is a strong,

healthy, and prosperous part of American agriculture. Give us a

national policy, not a patchwork of regional manipulations.

When the ever famous Titanic set to sea, there was great confidence that new technology and new markets were unbeatable.

The Titanic was so unsinkable that it provided life boats for less

than half the passengers. You know the rest of the story.

As dairy sets to sea in a world market, it would be overconfident

of us to eliminate price supports ad import quotas. The remaining

safety net of Federal orders and compacts would save far too few

dairy farmers.

Not only would we be short of life boats, but have preassigned

seating besides.

Regional dairy policies must go. Our great industry and our great

Nation deserve better.
231

Chairman Lugar and committee members, I thank you very

much for the opportunity to testify this morning. The dairy farmers

of AMPI have great confidence in this committee’s ability to help

craft dairy policy into the next century.

Thank you very much.

[The prepared statement of Mr. Furth can be found in the appendix on page 296.]

The CHAIRMAN. Thank you. I appreciate your testimony.

I have a note. Do you want to make a short comment?

Senator CONRAD. Could I just make a quick comment? The Budget Committee is convening at 10:30.

The CHAIRMAN. Very well.

Senator GRASSLEY. Is it 10:00 or 10:30?

Senator CONRAD. They moved it to 10:30.

Senator GRASSLEY. OK.

The CHAIRMAN. That would affect you also.

Senator GRASSLEY. Yes.

Senator CONRAD. And I appreciate very much this accommodation. I appreciate my colleagues. I agree with everything Mr. Furth

just said. As I examine what we have been talking about this

morning, Option 1A, Option 1B, the final order, it strikes me that

all of those are basically rearranging the deck chairs on the Titanic. We have got a policy that is a failed and flawed policy, and

we have got to go back to first principles and rewrite the dairy policy for this country. If we do not, we are going to see a massive

elimination of dairy producers in this country, and we will regret

very much sometime in the future looking back on a failure to act.

I just hope that people were listening as Mr. Furth testified because I think he hit on precisely what needs to be done.

Mr. Chairman, thank you very much.

The CHAIRMAN. Thank you, Senator Conrad.

Senator Grassley, and then Senator Fitzgerald. I know each one

of you needs to make comments at this point, and————

Senator GRASSLEY. I am going to wait until my constituent is

done testifying.

The CHAIRMAN. Very well. Senator Fitzgerald?

STATEMENT OF HON. PETER G. FITZGERALD, A U.S. SENATOR

FROM ILLINOIS

Senator Fitzgerald, if I may, I just wanted to make a comment

before Mr. Clayton left the room. Is Mr. Clayton here? Thank you.

I am sorry I wasn’t here earlier.

I just wanted to mention the milk forward pricing pilot program

that we established last year prior to our adjournment, and I was

just hoping that we would be able to follow the congressional mandate and make the program effective by March 1st and publish

broad guidelines as soon as possible in order to give dairy producers and processors the necessary details of the program. And, hopefully it would have a regulatory structure that makes it workable

and not inoperable, and I would just appreciate it if you could let

the Secretary and others know at USDA the importance of the milk

forward pricing pilot program. I think it is very important to our

dairy industry in this country. I think it would be a good step that

would help a lot of people. And so I hope we can move forward with
232

that. And I appreciate your taking that concern back to the Secretary.

Thank you.

The CHAIRMAN. Thank you, Senator Fitzgerald, and I would just

second the Senator’s comment. This is a very important program

for our committee. You understand that. And we are really eager

to know how the details are being formulated and what progress

you are making. It is not a solution to the problem, but it is another tool that is important for the marketing for dairymen.

All right. Now, pardon me, Mr. Vanblarcom, for interrupting

your train of thought, but we are back to the panel again, and we

are pleased to have your testimony. Would you please proceed?

STATEMENT OF JAMES VANBLARCOM, COLUMBIA CROSS

ROADS, PENNSYLVANIA

Mr. VANBLARCOM. Thank you very much. Good morning. My

name is Jim Vanblarcom. I am a dairy producer from northeast

Pennsylvania, Bradford County. My family and I manage a 100-

cow dairy that we have owned and operated since 1974. I am also

very actively involved in off-farm agricultural activities. I am the

president of the Bradford/Sullivan County Farm Bureau, also serve

on the Pennsylvania Farm Bureau’s Dairy Policy Committee. I

want to thank the Committee for providing the opportunity for me

to give a brief perspective on how national dairy policy affects myself and other Pennsylvania dairy producers.

The economic impact of the Pennsylvania dairy industry is huge.

Total milk produced in the State amounted to $1.73 billion. We are

the fourth leading producing State in the Nation. While Pennsylvania’s dairy industry continues to maintain a slow rate of growth in

total milk production through greater producer efficiencies, our

dairy farm numbers, cow numbers, and total market share of the

Nation’s production continues to shrink. In fact, about 30-percent

of the State’s dairy farmers have gone out of business in the last

10-years. At the same time, Pennsylvania dairymen have increased

milk production by about 20-percent.

Milk price volatility has made maintaining an economically viable operation a real challenge. Price swings of 30- to 40-percent in

1-month has not become uncommon. I challenge anyone to run a

business with this level of volatility that dairy producers have experienced in the past.

My brother farms next door with 120-cow dairy. We share equipment and labor during planting and harvesting seasons. In this cooperative effort, we both save money. We are both hard-working,

experienced, knowledgeable dairy producers. My brother and I

ranked third and fourth in milk production in Bradford County,

which is the third largest milk producing county in the State. Even

with our best management practices, if we had stakeholders, they

would look at our present dairy operations as a poor investment

due to the lack of financial performance.

I have three children, all of which have varying degrees of interest in agriculture. Under present conditions, I would understand

them not choosing a career in agriculture because they have seen

the ups and downs and experienced it personally.
233

Dairymen in the upper Midwest and the Northeast are slowly

losing their ability to compete. Milk production is shifting to the

West. Chart 1 shows that the percentage of milk produced in the

Southwest, West, and California has more than doubled since 1970

to 1997.

The trends of westward and larger dairies would be all well and

good if our only need is cheap milk. However, numerous consumer

concerns come to mind. There are environmental issues created by

very large dairies and future competition for water in the Western

areas; also, most important, the lack of producers in proximity to

the high population centers of the North and the Northeast. Over

25-percent of the United States population lives within a three-or

four-truck-hour drive of Pennsylvania and New York dairy farmers.

Just imagine how today’s diesel fuel prices would affect a cost of

California and Western milk in the city of New York.

What dairy policy changes can be made to address the current

challenges I as well as other producers face? First let me say thank

you as a producer for your action that was taken by Congress last

year to address producer concerns on Federal milk marketing order

reforms. With positive action on Option 1A Class I pricing differentials and the extension of milk price supports for another year at

the current level, combined with component pricing that allows the

higher of Class III or IV to be used as a Class I mover, we have

avoided an even more disastrous scenario on producer prices than

we are already experiencing.

I believe a regional approach to pricing milk is the best method

to help stabilize producer prices and address producer price needs

affected by local marketing conditions. If properly administered, we

now know dairy compact pricing can bring benefits to producers, at

little, if any, cost to consumers, with no impact on national marketing conditions. I believe the future national dairy policy should

allow for expansion of dairy compacts.

I would like to finish up quickly with—there are two other tools

that we would really like to have. The Dairy Export Incentive Program should be fully funded to help maintain our presence in an

international marketplace, a revenue insurance program for dairy

producers similar to that as provided for other crops. And my most

important message: I love dairy farming, the way of life it creates,

and with your help, I would like to someday retire and help my

children take over the farm.

Thank you.

[The prepared statement of Mr. Vanblarcom can be found in the

appendix on page. 298.]

The CHAIRMAN. Thank you very much, Mr. Vanblarcom, for your

testimony.

We are honored that Congressman Sherwood is with us, and he

has a word for the previous witness.

Mr. SHERWOOD. Well, thank you, Chairman Lugar. I would have

liked to have been here a little earlier and said this before Mr.

Vanblarcom testified, but he is one of the most respected dairy

farmers, he and his brother, in Bradford County, and they run a

very heads-up, modern, efficient operation, and they are well regarded in the community.
234

And I wanted to say that so that everyone would understand it

is easy to come and complain about market forces, but what you

have heard from Jim Vanblarcom is from a forward thinking, modern agriculturalist. And I think what he mentioned to you is that

if we don’t pay attention, we will soon have all the milk for the

whole country produced on factory farms, and it will lead to the

type of scenarios like we saw in North Carolina where we all saw

all the hogs floating in the river. Well, when you get these huge

amounts of animals in confined spaces, it is a different landscape

than we have been used to. And I would like to urge you to think

about if that is what we really want in the future.

Thank you very much, Chairman.

The CHAIRMAN. Thank you very much for coming to our hearing.

We are honored to have you. We appreciate your comments about

your constituent, and we appreciate that, too, having heard the testimony.

Mr. Tillison.

STATEMENT OF JAMES TILLISON, ALLIANCE OF WESTERN

MILK PRODUCERS, SACRAMENTO, CALIFORNIA

Mr. TILLISON. Chairman Lugar, members of the Committee, I am

Jim Tillison, executive vice president and CEO of the Alliance of

Western Milk Producers, an association that represents the interests of dairy cooperatives in California and the milk producers who

own them. We appreciate being given this opportunity to talk with

you about the dairy price support program, international trade, and

to provide a brief description of the California pricing system.

Few Government programs have been as effective as the dairy

price support program. It removes excess milk from the marketplace in the form of butter, nonfat powder, and cheddar cheese.

When demand is up, these products are released back into the marketplace. In this way, the program assures consumers that milk

and dairy products will be available by assuring dairy farmers of

a market of last resort.

In 1996, milk producers reluctantly agreed to phasing out the

dairy price support program. At that time it was believed that the

General Agreement on Trade and Tariffs would present additional

opportunities for dairy exports. Unfortunately, that has just not

been the case.

It has been estimated by cooperative dairy economists that the

average producer milk price would drop from $1.50 to $1.75 per

100-pounds of milk should the support program end. The total cost

to dairy farmers nationwide would be approximately $2.7 billion.

We were successful in gaining an extension through this year and

are hopeful that Congress will keep the program in place through

the full term of the 1996 farm bill, at least at the current level of

$9.90.

The alliance believes that the dairy price support program is far

superior to producer income supplemental payments. The support

program is market-oriented and much less costly than the supplemental income program. In the past 2-years, Congress has approved $325 million in emergency income relief to milk producers,

with a maximum payment to a producer of $5,000. USDA estimates

the cost of extending the support program at $300 million in total
235

for 2001 and 2002. The net effect on producer income would be over

$2 billion.

The alliance member cooperatives believe that the U.S. dairy industry came out on the very short end of the stick in the GATT

negotiations. The United States’ ability to subsidize exports has

been dramatically reduced while the European Union is able to

continue to subsidize hundreds, even thousands of times the quantity of dairy products that the U.S. is allowed to subsidize. An excellent example is the ‘‘Other’’ dairy product category—products

like ice cream—where the European Union will be able to subsidize

a billion pounds of product while the U.S. is limited to just 70,000-

pounds.

Free trade appears to be a one-way street running toward the

United States.

I have the privilege of serving on USDA’s Animal Agriculture

Trade Advisory Committee. Most of what we hear at the meetings

is how our various trading partners are not living up to their trade

agreements with us. That is why the alliance will work for a continuation of the support program and the Dairy Export Incentive

Program until world markets are truly free but, more importantly,

truly fair. That means the complete elimination of Governmentsanctioned activities like the EU’s export subsidies and New Zealand’s state trading enterprise monopoly. Until that time, significant limitations should be put on all dairy product imports from

countries that employ these and other trade-distorting activities.

The implementation of Federal order reform brings milk pricing

in California and in the Federal order system much closer together.

While differences still exist, the basic concept is now the same.

Like California, Federal orders now use product-based pricing.

As a result, prices will track much more closely than they previously did between the two systems. For the past 17-months, the

average difference in the cheese milk price between California and

the Federal order reform system would have been just 3-cents per

hundredweight of milk. The so-called California advantage is no

more.

If USDA is going to continue to use the National Agricultural

Statistics Service [NASS] price series, it should have the authority

to audit all plants reporting product prices, and reporting by all

plants should be mandatory. It should also have the authority to

require the reporting of manufacturing costs and to audit plants to

verify that these costs are accurate. This is what is done in the

California system.

In summary, the alliance urges the extension of the support program and the extension and perhaps expansion of the Dairy Export

Incentive Program [DEIP] program. In addition, this committee

should take an active role in the upcoming round of trade negotiations. Your involvement will ensure that agriculture’s interests are

not subjugated to the trade interests of other industries or other

purposes. The ability to produce food is a form of security that no

country should risk. That is why this committee, as well as the

House Committee on Agriculture, must assure their constituents

they represent that trade will be fair, not just free.

Thank you for this opportunity, and I will be happy to answer

any questions you will have.
236

[The prepared statement of Mr. Tillison can be found in the appendix on page 306.]

The CHAIRMAN. Well, thank you very much, Mr. Tillison. Let me

just assure you on the last point, the Committee is extremely vigorous pushing our trade negotiators to the ultimate. We are disappointed in their results thus far, but, nevertheless, we will continue to visit with them right in this room because it is of the essence, and I think we all understand that.

Mr. Jensen, would you give your testimony?

STATEMENT OF LARRY J. JENSEN, SENIOR VICE PRESIDENT

OF SUPPLY, DISTRIBUTION AND BUSINESS DEVELOPMENT,

LEPRINO FOODS, DENVER, COLORADO

Mr. JENSEN. Mr. Chairman and members of the Committee,

thank you for the opportunity to appear before you today. I am

Larry Jensen, senior vice president of Leprino Foods. I also serve

as secretary and treasurer of the International Dairy Foods Association [IDFA] and chairman of the National Cheese Institute, one

of the constituent organizations of IDFA.

Leprino Foods is a family-owned company that has grown from

making small batches of ricotta and mozzarella cheese for local delivery to the world’s largest producer of mozzarella cheese today.

We operate eight manufacturing facilities that receive milk regulated by the Federal Milk Marketing Order system and two manufacturing facilities that are regulated under the California State

order.

Federal dairy policy is complex and has far-reaching impacts on

the structure and competitiveness of the U.S. dairy industry. While

we do not advocate total deregulation, we believe it is critical that

Federal dairy policy evolve to be less intrusive on dairy markets

and the industry. Federal dairy policy should allow natural regional and scale efficiencies to develop and manifest themselves in

the marketplace. This means allowing milk production to flourish

in highly efficient regions and facilitating a conversion to more efficient methods in traditional production regions. It is critical that

greater efficiencies develop throughout the industry in the years to

come so that trade barriers are not needed to protect our domestic

markets.

One of the most complex aspects of Federal dairy policy is the

Federal Milk Market Order system. The Federal order system is a

potent tool in that by setting minimum milk prices to be paid by

proprietary processors, it can greatly influence industry structure.

As a result of the FAIR Act of 1996, USDA attempted to make several significant strides forward in their first effort to reform Federal milk pricing policy in the context of the new global market realities brought on by the WTO.

These advances included replacing the antiquated Class III milk

pricing system, so-called Basic formula price [BFP], with a broader

price measure tied directly to the national finished product value

of cheese. Additionally, for the first time, all milk in major manufacturing markets will be priced on the components upon which

cheese-making value is derived: protein, fat, and other solids.

Unfortunately, the Federal Milk Marketing Order reforms became highly controversial last year and led to several provisions in
237

the omnibus budget bill that overturned significant portions of the

reforms. While the final provisions did not directly overturn

USDA’s Class III price formula, there was much discussion regarding one aspect of the formula used to calculate the Class III milk

price, the so-called make allowance.

The make allowance is one of many factors used in the Class III

price formula, all of which combine to establish a minimum price

level for milk based on the raw milk value of both cheese and

whey. It is important to understand that the make allowance is not

a payment to cheese makers, and its use in the Class III formulate

in no way guarantees cheese maker profitability. The only function

in the make allowance is to translate a finished product value of

milk into the raw milk equivalent value for use in setting a minimum price that proprietary processors must pay under Federal orders.

We believe that the debate in Congress last year over the make

allowance in the Class III price formula was largely based on erroneous preliminary estimates of the price impact of the new formula. Current USDA data shows that for the most recent 16-

months ended in December of 1999, the only period during which

actual data was collected to calculate both the old BFP and the

new Class III price, the new minimum prices actually would have

resulted in a slightly higher milk price.

While we are appreciative that Congress did not legislate over

USDA’s Class III decision, we are concerned with what we perceive

to have been strong sympathy for increasing the market intrusiveness of the milk pricing system.

Today we have in place a Federal Milk Marketing Order system

that is complex, still intrusive on the market, and highly subject

to the tugs and pulls of the legislative process. The dairy price support program was extended for this year, and USDA just last week

announced their support for extending it through 2002. One of the

last decisions of Congress last year was to extend the Northeast

Interstate Dairy Compact that provides a protected market for a

small group of farmers to the detriment of other farmers and consumers. All of these changes combine to put the dairy industry further behind our global competition.

Mr. Chairman and members of the Committee, the U.S. cheese

industry is now the largest user of farm milk and is experiencing

strong growth in market demand year after year. We have a great

opportunity to grow markets domestically and earn a great share

of international markets if we keep our focus on the market and

make sure that our policies pave the way rather than impede our

progress. As you debate Federal dairy policy, we urge you to continue to adopt those policies that will allow the industry to flourish

in the long term.

Thank you for the opportunity to appear here today.

[The prepared statement of Mr. Jensen can be found in the appendix on page 312.]

The CHAIRMAN. Well, thank you very much for that testimony,

Mr. Jensen.

Mr. Meyer, before I call upon you, let me say that you are doubly

blessed to have both of your Senators on hand, and I want to recognize the distinguished ranking member, first of all, because I think
238

he wants to make a comment. And maybe he will also make a comment about you in the process.

[Laughter.]

STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM

IOWA, RANKING MEMBER, COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

Senator HARKIN. Thank you very much, Mr. Chairman. I am

pleased, along with my colleague Senator Grassley, to introduce

Dennis Meyer who is with Family Dairies USA. He is—a good, capable Iowa dairy farmer, with a good family from near Dubuque.

They have a great family, three sons. He owns 144-acres. He rents

an additional 240-acres. He has a herd of 92-Holstein cows, is active in his church, active in his community.

Again, when I think of Dennis Meyer and his family and the

kind of dairy farmers that we have in that area of Iowa, it just

seems to me that is what we are talking about. How are we going

to preserve opportunities and enable these family farmers and family dairy farmers to remain in business, not only in Iowa but in

Wisconsin and other parts of the country? I don’t mean to be parochial about the Midwest.

That is one of the reasons why I hope we are here and having

these hearings: how we are going to keep Dennis and his family

and thousands of them in Illinois and Wisconsin and other places

in business. So I am delighted he is here.

[The prepared statement of Senator Harkin can be found in the

appendix on page 278.]

The CHAIRMAN. Senator Grassley?

Senator GRASSLEY. Well, you know, a person only has one biography, so there is not much I————

[Laughter.]

Senator GRASSLEY. At least that is true of Iowans.

[Laughter.]

Senator GRASSLEY. So I won’t add anything, but obviously I am

glad you are here. When you are done testifying, I am going to go

to the Budget Committee meeting.

The CHAIRMAN. At least, Mr. Meyer, you have not been accused

of reinventing yourself. You have just one life, and it has been a

good one, and we are grateful to have you here today. Please proceed.

STATEMENT OF DENNIS MEYER, MEMBER, BOARD OF

DIRECTORS, FAMILY DAIRIES, USA, BERNARD, IOWA

Mr. MEYER. Thank you, Chairman Lugar. Thank you, Senator

Harkin, for your kind comments.

Good day and thank you, Chairman Lugar and members of the

Committee, for this opportunity to share our members’ concerns on

dairy policy. As Senator Harkin said, I am Dennis Meyer. I am a

dairy producer from Dubuque County, Iowa, in America’s traditional ‘‘Dairy Heartland.’’ My wife Darlene and I and 3-sons far

384-acres and milk 92-Holsteins.

Family Dairies USA is a grassroots organization representing

over 6,000 small- and medium-size dairy farm families in nine Midwestern States.
239

The ultimate goal of this cooperative has been a single, national

milk marketing order that treats all producers equitably. During

the recent Federal order reform process, we sought basic reforms

that bring needed equity and simplicity and move us toward our

ultimate goal. These reforms included much flatter Class I differentials, broad order consolidation that raises Midwest Class I utilization much closer to the national average, a competitive Grade A–

B pricing system recognizing the full competitive value of farm

milk, and the inclusion of California in the Federal order system.

Though Secretary Glickman’s reform package made only a modest step toward our overall reform goals, we nevertheless believed

it was an important step toward a better system. Therefore, we are

deeply disappointed that Congress interfered in the reform process

by blocking the modest reforms in Secretary Glickman’s final rule.

Now that Congress has derailed those modest reforms, we urge

Senate and House leaders to work with us to bring needed equity

and simplicity through other means.

We are strongly opposed to regional dairy compacts. Compacts

are contrary to our goal of a uniform national dairy policy that

treats all dairy producers equitably regardless of where they live

or where their milk is marketed. These unfair milk pricing cartels

erect new trade barriers to the movement of raw milk among regions of the country. Like the Eau Claire-based Class I differentials, compacts legalize the principle that it is okay to maintain

pricing rules that discriminate against many producers in some regions.

Since July of 1997, the Northeast Compact has fixed the regional

price of fluid milk in the New England States. Since the compact

was to be a transitional step between the outdated Federal milk

regulation and Federal milk order reform mandated by the 1996

farm bill, Congress scheduled it to sunset in April of 1999.

Unfortunately, the opponents of dairy reform inserted provisions

in the fiscal year 1999 appropriations bill that delayed the sunset

of the Northeast Compact until October 1st of 1999, as part of a

broader effort to delay and obstruct the reform process. And again

at the end of last year, through the fiscal year 2000 appropriations

bill, we saw the Northeast Compact renewed for 2 more years,

through yet another backroom political deal.

The extension of the Northeast Compact has emboldened other

States to pursue these regional dairy compacts in search of a quick,

easy answer to the complicated problems of dairy policy. Many

States have enacted or are considering legislation allowing them to

join the Northeast Compact or form a Southern Dairy Compact. If

Congress were to authorize the expansion of the Northeast Compact or a Southern Company, what was to be a temporary crutch

in the New England States will engulf over half of the States and

seriously endanger for the Federal order system.

A 1999 University of Missouri study shows that a majority of

producers in the Nation would be harmed by the combined effects

of regional compacts in the Northeast, Mid-Atlantic, and Southeastern States. Producers in every region outside of the Northeast,

Mid-Atlantic, and Southeast stand to lose between 17- and 21-cents

per hundredweight of milk, according to the study.
240

Congress should not approve agricultural policies that so clearly

provide benefits to the producers of one region at the direct expense of the consumers of that region and producers elsewhere. Instead, there should be an effort to create a more rational and uniform national dairy policy. The Secretary of Agriculture should

have the flexibility and authority to maintain a sound and cohesive

national milk pricing policy, without the regional fragmentation

caused by compacts.

Congress would be making a big mistake to further expand or extend the Northeast Compact or authority any new dairy compacts.

Compacts are inconsistent with the broader Federal milk marketing order reform process laid out in the 1996 farm bill.

If we allow regionally biased policies such as compacts and high

Class I differentials to control dairy policy, we will never move beyond the divisions that have plagued this industry. Let’s work together to find a national solution to our national concerns.

Thank you very much for letting me air my opinion.

[The prepared statement of Mr. Meyer can be found in the appendix on page 317.]

The CHAIRMAN. Thank you very much, Mr. Meyer.

We will ask Senators now to observe a 5-minute limit on the first

round of questions to these witnesses.

Let me ask, first of all, we have had some statistics furnished to

the Committee in response to my request and others as to how

profitable the dairy business is. And these are fragmentary statistics, but Texas dairy farms, at least in the material presented by

Texas A&M, representative farms—and they differentiate this by

large and mid-size and small, with small farms being 80-cows—

were showing a rate of return of roughly 20-percent on invested

capital, which appears to me to be a pretty high figure.

We had yesterday a dairy farmer from South Dakota, as I recall,

who said over the years he had gotten about 5-percent on invested

capital. We had an Indiana farmer who had a good year and got

19-percent, but admitted that was an abnormal situation.

Some statistics from Cornell University, presumably of New York

dairy farmers, indicate a 7-percent return on assets. That is a different situation depending upon the debt and the leveraging, at

least, of the capital that is involved there.

But the comment was made earlier, I think by Mr. Jaeger, that,

by and large, these dairy farm results of return on invested capital

appear to be substantially higher than what the Committee has

seen in terms of return on, say, corn farms or soybean farms or cotton or rice farms. Admittedly, it is very hard in these discussions

to pin this down. When I asked yesterday to the dairy farmers who

wanted to modernize what return you expect on your capital, the

most common answer was, well, we really haven’t got into that.

The question is we either modernize or we leave. But the comparison of how you might invest the money somewhere else was not a

large consideration in this, although ultimately it may need to become.

I just want some feel from any of you, Mr. Meyer, for instance,

and Mr. Vanblarcom, you are dairy farmers out there now attempting to make a living on this sort of thing. Does return on capital

ever enter into your picture? Or is this such a traditional thing
241

your family does that you just continue on doing it sort of hoping

that the income will be sufficient? Would you make a comment, Mr.

Meyer?

Mr. MEYER. Yes, return on investment does enter a lot. I am a

highly leveraged dairy producer. I am, I guess, relatively started in

the business. I have been doing it for all my life, but actually buying my farm and doing some building and so forth has been relatively in the last several years. So I am highly leveraged dairy

farmer, and, yes, it does enter into it. When I go to my banker and

do my projection for the upcoming year, it definitely enters into it.

It is also a tradition to me—I am a farmer. I have been a farmer.

My father farms. I have got a brother that is a dairy producer. But

it most definitely does, and I guess one statement I like to make

is I am certain that none of you people would like to have half of

your income taken away, you know, from you, and that is exactly

what has happened to us in the last several months. And we don’t

know when that is going to change. And yet my input costs continue to rise. Right now, yes, feed costs are low, and I am in a situation where I produce a lot of my own feed. But my other—all my

other expenses continue to, at best, stay at level or increase. And

how do you—I know one person made the comment before that you

must become more efficient. There is only a certain degree of efficiency that you can, you know, maintain.

We have an outstanding market in our country to sell fluid milk,

to sell processed cheese, and so forth, and we need to work on that

to try to better that market so that we as producers can stay in

the business.

The CHAIRMAN. Mr. Vanblarcom, do you have a comment on this

issue?

Mr. VANBLARCOM. Yes. My return on the dollar, I couldn’t give

you that exact figure right today for this previous year, but I can

give you some figures that I looked up recently concerning the return and the net growth or net gain in value for a farm across

Pennsylvania. The Pennsylvania Farm Bureau has a farm management service that keeps accurate records on a large number of

dairy farms, and over the last 3-years, their net worth went up by

9-percent, but their net—or their total debt load went up by 10-percent.

The CHAIRMAN. Senator Harkin, do you have questions of the

witness?

Senator HARKIN. Thank you, Mr. Chairman. I am sorry I wasn’t

here for all the testimony. I had read it, though, so I am familiar

with what you had testified to and had in your written testimony.

I just wanted to ask Mr. Furth with AMPI, in your written testimony you basically advocate doing away with the compacts and the

marketing orders and provide a stronger income support for all

farmers. That is your basic position. And you also in your written

testimony mentioned a 2-tier pricing program.

Now, some of us had advocated that 15-years ago, and I am just

wondering: Is that still valid today or not? How would that work?

Mr. FURTH. Well, my vision of how two-tier pricing would work

for dairy is an extension of the price support program and one that

would set a better level of support for an adequate supply of milk,

a lower level of support for milk that is potentially surplus.
242

Senator HARKIN. And that would be a relatively good level of

support at the first level. Is that what you are saying?

Mr. FURTH. A lower level of support for that marginal amount of

milk that is potentially surplus.

What dairy farmers, as most of agriculture, I suppose, is prone

to do is that when prices get lousy, they are lousy because there

is too much production. What does the average farmer do to react

to that? Produce more. It is the only thing they can do to control

the problem.

And so when less production is needed, they actually produce

more, and that is what I meant in my testimony by————

Senator HARKIN. Because of all the fixed costs and everything

like that.

Mr. FURTH. Sure.

Senator HARKIN. Farmers understand.

Mr. FURTH. Precisely. So I think that we need a price support

program long term that provides some disincentive for that. When

somebody like USDA is projecting a surplus in the coming year and

we are already at a surplus, why provide any incentive—why not

provide a disincentive to further expansion? I am not talking about

quotas. I am not talking about telling each farmer what they can

produce. I am talking about providing some financial disincentive

to expanding into the face of a surplus. This could operate only at

times when we were expecting a surplus. It could be phased back

in and out based on those kind of projections. It is only on the margin. We are only dealing with a couple percent of milk production.

I am just saying that when a dairy farmer is getting ready to

double his herd next spring, he ought to pencil into those considerations the fact that maybe that milk is going to be produced for a

world market price of 8-bucks. And maybe he would hold off on his

expansion for 6-months or a year.

Nothing to do with size. I am not talking about big farmers,

small farmers. I am talking all farmers.

Senator HARKIN. I want to come back again to Dennis from Iowa.

Now, you know as well as I do up in your area we have half as

many dairy farmers as we did 20-years ago.

Mr. MEYER. That is right.

Senator HARKIN. A lot of them have gone out of business, and

some of the smaller ones that were maybe milking a dozen or so

cows, they are gone. You have got 92. That is a pretty good size.

A lot of people say to me, well, Senator Harkin, you are just oldfashioned, you are living in the past. These dairy farmers are going

to go out of business. We are going to have these big dairy operations and milk a lot of cows, like we do with pork and poultry

now.

I guess I don’t have a real pointed question for you, Dennis, on

that. But, you know, when you think about Dubuque County and

your area there where you are from, and Jackson County and those

nearby areas, I mean, you have good feed supplies, you have reasonable input costs, the same way in Illinois across the river from

you, in Senator Fitzgerald’s area.

What I am probing here is just to see how you feel about the future and whether you think there is a place for the size of oper-
243

ation that you have and to be able to continue that family farm

size of dairy operation.

Mr. MEYER. Well, one comment that I would like to share with

you is my veterinarian in my small community of Cascade—there

are four veterinarians in that veterinary clinic. He made the comment to me, he said, If it wasn’t for you dairy producers, we could

shut the doors. I mean, Cascade was a very, very large hog-producing area with a lot of very efficient, very good hog producers. They

are no longer in business.

I like to do my business locally at my Cascade—my little town

of Cascade. I can go to Wal-Mart in Dubuque—nothing against

Wal-Mart. But I can go to Wal-Mart in Dubuque or some place like

that and maybe buy things cheaper. But I like to service the people

that I go to church with, that my kids are in basketball with, or

whatever. I enjoy doing my business locally. As these small and

medium producers exit the business, those businesses begin to also

exit the business.

We had 4-feed stores, four feed businesses in Cascade. We now

have 1. We had two veterinary clinics. We now have 1. We had 3

implement dealers. We now have one.

Consequently, from a producer’s standpoint or from the other

side of the situation, a consumer of machinery, feed, and so forth,

that eliminates my ability for shopping around. You have one price.

You have one implement dealer to go to, and that is it. They quote

you a price and that is what you have to live with.

So, yes, I certainly think that not only is there a place for them,

but I think it not only is important for the small-and medium-size

dairy producer, hog producer, or whatever, but it is also very important for urban America. These small towns will dry up and go

away if we don’t help with the proper marketing programs that we

are talking about to keep us in business so that we can, you know,

in turn keep the small communities in business.

Senator HARKIN. I share that. Thank you.

Mr. MEYER. Thank you.

Senator HARKIN. Thank you, Mr. Chairman.

The CHAIRMAN. Senator Santorum?

Senator SANTORUM. I would yield to Senator Fitzgerald.

The CHAIRMAN. Very well. Senator Fitzgerald?

Senator FITZGERALD. Thank you, Mr. Chairman. And I would

like to thank all the panelists for making their presentations today,

and I want to compliment our two dairy farmers here from the different parts of the country, Mr. Meyer from Iowa and Mr.

Vanblarcom from Pennsylvania. And I guess I have a question for

you, Mr. Vanblarcom.

I have no doubt that what you testified to is correct, that you

would probably be a little bit better off if you were in, if Pennsylvania were in that Northeast Dairy Compact. I think you are generally correct on that. But at the same time, I have no doubt in

my mind that Mr. Meyer would be a little bit worse off if that

Dairy Compact were expanded. And, in fact, you would probably be

better off at the expense of folks like Mr. Meyer in Iowa and in my

State of Illinois and Wisconsin and the like.

And I guess my question would be: Why should Congress come

in and prefer you to Mr. Meyer? You are both good people. You are
244

both hard-working farmers. You are the backbone of our country.

But why should we pick you as a winner and him as a loser?

Mr. VANBLARCOM. That is tough.

Senator HARKIN. That is a tough one.

Mr. VANBLARCOM. Land O’Lakes has saw fit to support the compact situation, and also, when you asked should the Government

pick one person over another, at present, under the present situation, the Far West is being picked over the Middle West, Northwest—or North and Northeast. So it is taking place right now. And

it is not going to be easy to find an equitable program, but as Mr.

Meyer says, he is watching out for his interest, I am watching out

for my interest.

We all care about the dairy industry as a whole. My concern is

the Northeast consumer. If we lose our Northeast dairymen—and

a lot of my area, the only thing we can grow profitably is forage.

We harvest the win and the rain and the sun and put it through

a cow, and we produce a product that the consumer can use readily. And it needs to be local.

My concern is not just myself, but it is the consumer also.

Senator FITZGERALD. Well, let me just say that I think that on

other farm programs where we have one commodity that Congress

wants to help, say, all soybean farmers or corn growers, there is

a lot of support in Congress to do that, and we normally step up

to the plate.

I think the reason these compacts are so divisive around Congress is because really we are being asked to prefer farmers in a

certain region of the country, dairy farmers in a certain region of

the country, over the others. And I guess I am real uncomfortable

doing that, and obviously, my farmers are being hurt in Illinois,

and so I am going to fight that.

But on a broader policy issue, we are one country, and balkanizing farmers by regions and breaking up their interests over these

compacts is just not a good idea. If we started these compacts in

corn farming or soybean growing or any other area, I think it

would just be a horrible precedent. And I hate to see this kind of

balkanization of the country and Congress being asked to pick out

some winners by region. I think that is why compacts between

States were looked with skepticism upon by our Founding Fathers,

and they required congressional approval. They didn’t allow States

to enter compacts unless Congress approved it. And this is really

the only one that I am aware of that allows trade barriers between

States.

So I would hope that you and other dairy farmers would think

about what the effect of these compacts is on farmers in other parts

of the country that are not in the compact. If we put everybody in

the compact, then the compact wouldn’t be any good. The reason

it is good for the Northeast is because they are benefiting at the

expense of the ones who are left out of the compact.

But, with that, thank you all very much for appearing before us

today.

The CHAIRMAN. Thank you, Senator.

Senator Santorum.
245

STATEMENT OF HON. RICK SANTORUM, A U.S. SENATOR FROM

PENNSYLVANIA

Senator SANTORUM. Well, I guess to comment on Senator

Fitzgerald’s comments about the Northeast Dairy Compact, there

are many of us in the northeastern part of the country who believe

that we have had balkanization of agriculture for a long time. In

fact, we just saw it during this drought assistance—I mean, excuse

me, this emergency assistance for America’s farmers. We went

through the worst drought in 100 years in my State and in the

Northeast and the Mid-Atlantic States. We passed an emergency

supplemental for—something akin to an emergency supplemental

for agriculture for $7.4 billion, of which $7 billion basically went to

people who had produced too much and were having bumper crops.

So we gave them $7 billion, and we gave $400 million to folks who

didn’t produce anything because of the drought.

Now, to me, I don’t know about, you know, the average American

out there, but, you know, those of us who have been sitting up in

the Northeast doing our agriculture, not asking the Government for

a handout, also sort of look at the balkanization saying, you know,

we have been dumping a lot of our money into the Midwest and

Southeast and all these program crops for decades, and we haven’t

asked for much of anything.

We are now at a point where agriculture in the Northeast is

being threatened by a variety of factors, and we are coming forward and saying, hey, you know, it is our turn, we would like a

little bit of help up our way.

Again, $7 billion goes to basically farmers in the Southeast and

Midwest, upper Midwest, double AMTA payments. Less than 20-

percent of my farmers get AMTA payments, and that is not true

in Iowa. It is not true in many other areas across the country.

Again, the reason we rushed out there is because we had low

prices. My folks would love to have just had a problem with low

prices. They had low prices and nothing to sell. And we got nothing. My folks are showing up at the Farm Service Agency [FSA] office and getting 30-cents on the dollar for their drought relief. And

we have folks up in other areas of the country getting double

AMTA payments plus bumper crops.

Then you wonder why my folks come here and wonder, hey, how

about us this time? We have been doing this for decades. Decades

we have been dumping money. And farm programs have been written on this committee and other committees to benefit those who

come to this committee and, arguably, fight for their people. God

bless you. You went out here and did a good job, and folks in that

area of the country did well.

But, you know, northeastern agriculture is important, too, and I

think we have every right to come forward and say, you know, well,

we are hurting. When you were hurting, we came and supported

you, and now we are going through a very difficult time in our area

of the country. And we want some support too. And whether it is

with dairy—and I understand the problems with dairy. Mr.

Vanblarcom and I have—I have been up to northeastern Pennsylvania and Bradford County and other areas to talk to farmers up

there, and it is very difficult up there in the northeastern part of
246

my State. And there are a lot of dairy farmers hurting bad, even

worse than in other areas of my State.

As many of you know, I have had some concerns about the

Northeast Dairy Compact because I find myself out here, as you

just heard, not favoring the kind of agriculture policy that we have

dictated about preferring one region over the other. And I think we

have done that, and we may be in the process of doing that again

when it comes to crop insurance. But we are going to work against

that, too.

I hesitate to sort of say, well, since you guys have done it, we

need to do some of it, too. I would rather have it to where we support folks who are out there doing a good job and not prefer one

region over the other. So far we have not done that in this Congress. We have not done that in previous Congresses. And so I object a little bit to my friend from Illinois saying, well, it is—picking

out one program and saying we are balkanizing and ignoring 99-

other programs when we have done the very same thing to benefit

his farmers.

And so I would just—Mr. Vanblarcom, you didn’t say that, but

I thought I would answer the question for you. And if you would

like to expound on that at all, feel free to do so.

Thank you.

The CHAIRMAN. Well, thank you very much to Senator Santorum.

We have been joined by Senator Leahy. Do you have questions

for the witnesses?

Senator LEAHY. Like he said.

[Laughter.]

Senator LEAHY. I would just reiterate what I said yesterday. In

the areas where we have used the compact, consumers are paying

less for their milk. It was interesting to note that in a couple of

the States that are speaking so much against the compact, saying,

of course, that they are only interested in the consumer, in their

States consumers pay more for milk.

I was impressed with lobbyists who get paid hundreds upon hundreds upon hundreds of thousands of dollars who come up here in

their very nice automobiles to say that they only influence for fellow dairy farmers. Well, dairy farmers in Vermont or Pennsylvania

don’t make this kind of money. They work very, very hard—harder

than most people do. All they want is a fair return. The compact

does it. And it doesn’t cost the taxpayers anything. This is the most

important thing. We are always asked in this committee to give

huge amounts of money for corn farmers, for soybean farmers, for

wheat farmers, for this type of producer or that type of producer.

We are asking the Northeast, let’s just run a program ourselves

that won’t cost the taxpayers anything.

By God, you would think that we had suggested the ending of all

farming in America. Every one of these interests that rely on huge

Government subsidies come in to attack the program, it gets

nulled. No taxpayers’ money.

I think it is a bad mistake. I am not suggesting it is the testimony of anybody here, but I am just saying it as a general statement. Group after group, region after region that rely upon billions

of dollars of Government subsidies are opposed to a program that

farmers have set up that has no Government subsidy. For the life
247

of me, I think that it expands parochialism and hypocrisy beyond

any level I have seen in 25-years here, and I have seen some levels.

So, anyway, that is just my thought, and I would suggest it is

not balkanization. If some of these areas are so concerned about

the Dairy Compact would show the same kind of initiative and the

same kind of intelligence and the same kind of effort that the

Northeast did, then do their own. And tell the taxpayers we will

get out of their pocket and just do it ourselves.

Thank you. Thank you, Mr. Chairman.

The CHAIRMAN. Well, thank you very much, Senator Leahy.

I just would comment, I am sure the witnesses can observe as

Senators to testify that we have some disagreements of our own.

And some of the echoes from your advocacy are heard here and

even repeated in your presence. But we appreciate the rich variety

of thoughts which you have brought in your oral testimony today

and in your prepared papers. And we will take these seriously.

They have been made part of the record, and we thank you very

much for coming.

The CHAIRMAN. I would like to now call an additional panel to

be composed of: Clark Hinsdale, president of the Vermont Farm

Bureau, on behalf of the American Farm Bureau Federation; John

Neal Scarlett, South East Dairy Farmers Association of Tennessee;

John Frydenlund, director of the Center for International Food and

Agriculture Policy of the Council for Citizens Against Government

Waste; Will Hughes, Wisconsin Federation of Cooperatives; Gene

Paul, past president of the National Farmers Organization of Minnesota, and Bill Brey, president of the Wisconsin Farmers Union

on behalf of the National Farmers Union.

[Pause.]

The CHAIRMAN. May we have order again in the hearing room so

that we can all hear the witnesses clearly?

Before Mr. Hinsdale is recognized, I want to recognize Senator

Leahy.

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR

FROM VERMONT

Senator LEAHY. Thank you, Mr. Chairman. I came down and, as

you know, I am in another hearing, but I wanted to introduce

Clark Hinsdale. He is a friend of mine and my family, has been for

years. He is also president of the Vermont Farm Bureau. In fact,

he is testifying before this committee on behalf of the American

Farm Bureau Federation, a very significant testimony. And he

hails from a multi-generation Vermont farm family. He runs a diversified dairy farm, and he has done a lot in Vermont. He has

been president of the Vermont Farm Bureau for 7 years, and, in

fact, after he became president, you saw a great revitalization in

the Vermont Farm Bureau, a great expansion, and one that became

very involved in a bipartisan fashion in our State. So he is chairman of that. He is chairman of the board of the Farm Family Insurance, a member of the board at Yankee Farm Credit, as well as

what he does on his farm.

I will put my whole statement in the record, but I would suggest

that if we listen to people like Clark Hinsdale, I think we can find

a solution out of here. He has had to bring a lot of differing people,
248

differing parties together to make it work, and he has done that,

and thank you for having him here.

The CHAIRMAN. Thank you very much, Senator Leahy.

Let me just comment personally, in recognition of what you have

said, that 4-years ago when I was running for a different office

than the one I am now involved in, I visited with Senator Leahy

and the Vermont Legislature and, likewise, the Farm Bureau leaders and dairymen in Vermont, and Mr. Hinsdale was a leader then.

He has become an even more prominent leader on behalf of the

Farm Bureau of his State subsequently. It is good to have you

again in the Committee room, and please proceed with your testimony.

STATEMENT OF CLARK W. HINSDALE, III, PRESIDENT, VERMONT FARM BUREAU, INC., ON BEHALF OF THE AMERICAN

FARM BUREAU FEDERATION, RICHMOND, VERMONT

Mr. HINSDALE. Thank you, Mr. Chairman. My name is Clark

Hinsdale, as has been already said, and I am fortunate here to be

presenting testimony on behalf of the American Farm Bureau Federation concerning national dairy policy. Our membership does include the majority of our Nation’s farmers, and we seek to promote

their interests in all regions of this country.

My message to you is, first and foremost, one of profound gratitude for what you have already done for us in the extension of the

price support program, Option 1A, and many other things that

have been mentioned here today, not the least of which is the extension of the Northeast Compact. These efforts have provided

some measure of income stability and a greater measure of hope

to our Nation’s dairy farmers.

I want to personally thank you, Mr. Chairman, for visiting dairy

farms in Vermont. You have not only entered our barns and our

kitchens, but our hearts as well. Together with your predecessor,

who has dairy literacy in his job description, we believe you can

tackle some of the great issues of the day, from opening up world

markets to ending our use of food, medicine, and land mines as

weapons against innocent people who find themselves citizens of

hostile regimes.

I might come back to our Northeast Dairy Compact. At a time

when so much attention is focused on the need to improve agricultural risk management tools and to create an effective counter-cyclical safety net for farmers to facilitate our transition to a more

market-oriented agriculture, the genius and efficiency of the compact should be apparent. Simply put, the compact extracts revenue

from the marketplace, not the Government, operates only when

prices are low, and doubly depends on the good will of consumers,

both through their economic and political decisions.

In January, the voting delegates of the American Farm Bureau

Federation reaffirmed their support for compacts by saying, ‘‘We

support State and regional initiatives, or compacts, which are consistent with our overall goals of Federal market order reform and

a market-oriented dairy program.’’

New language was also added to our dairy policy, stating, ‘‘We

support modifications in the Federal marketing order that will enhance the price of milk received by producers, including, but not
249

limited to, Option 1A price differentials for Class I milk, adjusting

USDA formula for make-allowances on Class III milk, and regional

dairy compacts.’’

With a track record of returning an estimated $40 million to

dairy farmers both within and outside the compact region, the

bushel is off the light. Twenty-five States have passed legislation

authorizing regional compacts. We support legislation that would

extend the current Northeast Dairy Compact to include Maryland,

New York, New Jersey, Delaware, and Pennsylvania. The Farm

Bureau supports the authorization of a Southeast Dairy Compact,

extending westward to include Missouri, Oklahoma, Kansas, and

the rising star of the Lone Star State of Texas. We encourage you

to continue to allow producers and the industry to work together

through such efforts as the Northeast and Southeast Dairy Compacts to stabilize producer income.

We appreciate the opportunity to visit with you on American

Farm Bureau’s perspective on dairy policy. We truly appreciate the

progress that has been achieved and look forward to continuing to

work with you toward agricultural policies that provide nourishment for the world, opportunity for our farmers, and security for

our country.

I might also add that it is—in our problem-solving role in the

Farm Bureau, it is of great value and benefit for me to be able to

join you in hearing the very diverse testimony as we seek to find

opportunities to guarantee in this country that our farmers have

an opportunity to succeed.

Thank you.

[The prepared statement of Mr. Hinsdale can be found in the appendix on page 323.]

The CHAIRMAN. Thank you very much, Mr. Hinsdale.

Mr. Scarlett?

STATEMENT OF JOHN NEAL SCARLETT, ON BEHALF OF THE

SOUTH EAST DAIRY FARMERS ASSOCIATION NEW MARKET,

TENNESSEE

Mr. SCARLETT. Thank you, Mr. Chairman.

First, let me say I am glad to see that you all are going to enter

the testimony into the record because, as slow as I talk, I might

not get all mine in.

I would also like to thank the other members of the Agriculture

Committee for holding these hearings and giving a dairy farmer

from east Tennessee the chance to come up here and be heard.

My family and I run a 200-plus-cow dairy which was started by

my grandfather in 1930. We market our milk as independent producers through an organization called Piedmont Milk Sales, a marketing organization which has about 260-producers in 5 Southern

States.

I would like to begin my testimony by thanking the Members of

the Senate who made sure that the flawed attempt to redo the Federal order regulatory system last year was corrected. I am all for

making the system work better, and I think that is what Congress

did. There are a couple more changes to make, but those will work

their way through the regulatory process at USDA this year.
250

My purpose this morning is to let you know how important the

Federal Milk Marketing Program is to the dairy industry in my

part of the country. The main purpose of the Federal Order Program is to provide an orderly flow of fresh milk for the consumer.

And in the Southeast, that is a real challenge in some months.

As most of you are aware, the Southeastern United States is a

rapidly growing population center. That rapid growth makes it

more difficult to have adequate supplies. But the added transportation cost of moving milk from areas of the country where there

is more than enough to drink makes it more cost-efficient to maintain a healthy local supply of milk.

For instance, hauling milk from northeastern Wisconsin to east Tennessee adds $3.39 a hundredweight, which means that adds 29-

cents a gallon, much more than the 4-cents a gallon they were talking about a while ago being added. And hauling from upstate New

York adds 27-cents a gallon. Now, those are not figures that we

just pulled out of the air. I called Piedmont before I left, and that

is what they gave me when they had to have extra milk besides

our local supply. The two charts attached to my testimony bear

those out to other destinations in the South.

I want you all to know right up front I have no malice whatsoever in my heart for any of the folks that are dairy farmers in Wisconsin or New York or Iowa or anywhere else. But I have got many

friends up there, and I want to stay friends with him. But you just

simply cannot pay those farmers a fair return, pay the plant a giveup charge, load that on a truck and haul it to east Tennessee and

put it on the shelf cheaper than what the consumers can buy my

milk, irregardless of the program. Federal order minimum pricing,

in the interest of farmers and consumers, provides a great financial

incentive for keeping milk production low.

On that note, the local impact, which has been stated earlier by

the dairymen from Iowa about what it does to the areas out there,

is an extremely important point. There is about $6 million in milk

checks that come back to our county where I live. Now, if you believe what the economist says, the multiplier effect, multiply that

by six, that is $36 million that is spent there in our local economy.

In Tennessee, we are a sales-tax-based State. That is how we build

our schools, pave our roads, educate our children. And if you take

that away, the only sales tax we get is off the milk that is hauled

in, would be what comes out of the store. It doesn’t provide any infrastructure money as the money that comes back in the milk

checks does to be spent locally.

A local supply of milk is much more also than just cheaper. It

is almost more dependable. Those of you here in the DC. area remember just a few days ago—it was on the news—of how bad it

was to get to the office in the snowstorm. If it was hard for you

to get to work, imagine if you were driving a milk truck or trying

to pick up milk and get it to the plant and the stores within the

Southeast.

The bottling plants in our area were begging for milk 2-weeks

ago, and milk was readily available. Now, imagine what it would

be like if all the milk supply you had, had to be trucked in.

The Federal Order Program also provides financial functions that

are important in the entire marketing chain. It ensures Class I pro-
251

ducers are paid the prices if milk is sold as beverage, Class II is

used in cheese and yogurt, Class III for manufacturing, Class IV

for milk for butter. Producers also assure that they are paid for the

components.

An entirely understandable question by this committee then is:

Does the market still work? I can tell you from recent experience

it certainly does. The parts of 1998 and 1999 weather-related difficulties in areas of the country kept milk supplies tight, and we

had record-high prices. Now the situation is reversed, and they are

at low prices as we have seen in the last 20-years.

To put that in context for all the non-farmers in the room, imagine trying to feed your family, pay your mortgage, educate your

children by having your paycheck cut 40-percent.

The position I am, a dairy farmer every day, if the milk produced

on my farm doesn’t move that day, I do not have a product to sell

by the next day. That is one of the most critical features of the Federal Dairy Program. It keeps dairy farmers on an equal basis from

being pitted against each other.

We have heard a lot of talk about deregulation. First, let me say

the current farm bill does not authorize deregulation, it does not

require changing Class I differentials, and it certainly did not want

to lower the income of the average dairy farmer. That is why it is

so important for Congress to intervene to repair the flaws in the

marketing order. Without those changes last year, entire investments in facilities would have been very dramatically affected.

Another aspect of the price regulation I would like to finish up

with is on compacts. I would like to say the Southern Dairy Compact would be a great help to the industry in our area to keep the

fast-growing market in the Southeast adequately supplied with

reasonably priced fresh milk. Compacts also allow everyone in the

milk marketing chain to have a say in how milk is priced.

On the subject of compacts, I would like to call for a higher level

of honesty in the debate of this issue. For instance, calling compacts undemocratic simply isn’t true. Over 5,000 legislators in 25-

States have voted in favor, and an amendment last year with dairy

compact language in it in the Senate here received 53-votes. Still,

we do not have a compact in the South, therefore denying the people and their legislators that spoke of having the benefit of local

dairy farmers retain them in their communities.

Another reason I wanted to be here today is to have the opportunity to remind this body and the American people that there is

one group that is clearly not sharing in the economic boom of the

country right now. As I said before, milk prices are the lowest level

in 20-years, and the Federal Milk Marketing Order provides at

least a small degree of stability, although more is needed.

I urge the U.S. Senate to continue looking for ways to keep farming economically vibrant and American farmers and rural communities having that opportunity for economic gain.

Again, I thank you for the opportunity.

[The prepared statement of Mr. Scarlett can be found in the appendix on page 326.]

The CHAIRMAN. Thank you, Mr. Scarlett, for your testimony.

Mr. Frydenlund.
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STATEMENT OF JOHN E. FRYDENLUND, DIRECTOR, CENTER

FOR INTERNATIONAL FOOD AND AGRICULTURE POLICY,

CITIZENS AGAINST GOVERNMENT WASTE, WASHINGTON, DC.

Mr. FRYDENLUND. Mr. Chairman and members of the Committee,

on behalf of Citizens Against Government Waste, I want to thank

you for this opportunity to testify on the subject of whether there

is a need for a Federal dairy policy.

CAGW is a 600,000-member, nonprofit, nonpartisan organization,

which grew out of President Reagan’s Private Sector Survey on

Cost Control, better known as the Grace Commission. The organization’s mission is to work for the elimination of waste, mismanagement, and inefficiency in the Federal Government, with the

goal of creating a Government that manages its programs with the

same eye to innovation, productivity, and economy that is dictated

by the private sector.

The Center for International Food and Agriculture Policy institutionalized CAGW’s long-standing goal of dismantling Depressionera agricultural price supports and regulations. In addition to a belief that Congress should build on the accomplishments of the 1996

freedom to farm bill and achieve a truly free market for agriculture, the center advances the philosophy that the best way to

wean America’s farmers off the Federal dole and assure them a

prosperous and secure future is to promote a more open global food

economy by dismantling barriers to free trade.

CAGW applauds you, Mr. Chairman, for holding this hearing,

particularly for asking the right question: Is there a need for a Federal dairy policy? It is appropriate to begin a discussion of dairy

policy with such an examination, rather than the traditional assumption that there should be a dairy program, which then simply

moves into a debate of what that program should be and how much

money should be allocated on its behalf.

It is now well past 60-years since the Federal Government first

determined that it needed to be involved in milk pricing. The result

was the creation of a dairy price support program and the Federal

Milk Market Order system. There may arguably have been some

justification for Federal subsidies and management of dairy production way back then before vast technological progress, modern production techniques to maximize output, efficiency, and quality, and

advancements in the Nation’s infrastructure made these policies

obsolete.

During seven decades of modernization and change outside of

Washington, the Federal Government’s stranglehold on milk-pricing structure has remained constant.

Just as is the case in every other industry, technological innovations have allowed some dairy farmers to become more cost-efficient. It should come as no surprise, then, that this country has experienced significant reductions in both the number of dairy farms

and milk cows. The time has come for leaders to acknowledge that

these trends represent progress rather than a cause for handwringing.

Until relatively recently, the cost of Federal meddling has been

most blatantly demonstrated by the excesses of the dairy price support program, which laid out huge sums of Federal taxpayer money

to dairy farmers. Now, however, the Federal dairy program is a
253

tangled web of mind-numbing pricing schemes that have metastasized into a more layered, incomprehensible, intrusive labyrinth increasingly divorced from economic realities. Rather than allowing

the marketplace to determine the price of milk, dairy prices are

controlled by behind-the-scenes maneuvering in Washington, bureaucratic log-rolling, and regional political favoritism that we have

heard so much about already today.

I have brought along a chart that truly illustrates how mind-boggling the system is that has been built over the last 60-years.

As with many other Government programs gone haywire, intervention in the dairy industry was designed to be temporary. And

as I said, until recently, the dairy price support program had been

the cornerstone of the Federal Government’s involvement in the

dairy industry. In the late 1970s and early 1980s, price supports

were driven to unprecedented heights as a result of regional politics and election-year payoffs which ultimately ended up costing

the taxpayers $17 billion during that decade and led to the voluntary diversion program and whole-herd buyouts.

These experiences have led to less congressional enthusiasm for

raising dairy price supports, but as this developed, the milk marketing orders have become the most important bulwark of Federal

involvement in milk pricing.

Within the milk marketing orders’ logic-free zone, the most illogical of all provisions is the differential pricing. These additional premiums are charged to the manufacturers of fluid milk based in

part on how far the manufacturing plants are from Eau Claire,

Wisconsin.

Perversely, the differential system penalizes dairy farmers in the

regions best suited to dairy farming and rewards dairy farmers operating in high-cost, inefficient areas far from Eau Claire. This

makes about as much sense as the Federal Government requiring

computers manufactured in Maine to be sold at higher prices than

those manufactured in the Silicon Valley.

It is equally ludicrous that the Federal Government established

minimum prices for milk or sets different prices for milk based

upon what it is used for. I would also like to point out that the extensive and time-consuming effort initiated in the 1996 farm bill to

provide modest reforms of the system, which was scuttled by Congress last year in the extension of the Northeast Dairy Compact,

was a serious setback for reform of the entire industry.

Interstate dairy compacts represent a threat to the long-term viability of the dairy industry, and without going too much into detail about all of our objections to this sort of milk cartel system and

providing what really is a milk tax on consumers, I would like to

point out that what we need to do is really look at dairy policy, get

outside of the box of just debating between the different regions

and deciding who are winners and losers. This unbelievable system

that has been developed over the years is only getting more complicated every time Congress decides that they are going to try to

equalize things or intervene to try and make the system more fair.

It has been demonstrated by the producers that have testified

here today that there is no system that this Federal Government

can put together that is ever going to be fair for every dairy farmer

in the country. If we are going to try to have a social engineering
254

policy that must determine that we never lose another farmer from

the land, then this is not the way to do it because you cannot even

do this fairly. The only way, then, if that is going to be the goal

that the Congress decides on, a social engineering policy to make

sure that every farmer has a fair income, then Congress needs to

get rid of the milk marketing order system, get rid of the dairy

price support program, and come up with a farm income assistance

program, some sort of supplemental assistance that is directed to

the farmers in need. And it is really the only logical scheme left.

[The prepared statement of Mr. Frydenlund can be found in the

appendix on page 331.]

The CHAIRMAN. Thank you very much for your testimony.

Mr. Hughes?

STATEMENT OF WILL HUGHES, UNIVERSITY OF WISCONSIN,

CENTER FOR COOPERATIVES, MADISON, WISCONSIN

Mr. HUGHES. Thank you, Chairman Lugar and Senator Harkin,

for having me to testify today. I don’t know if it is an advantage

or a disadvantage, but I am only representing myself today, and I

am speaking as a staff economist for the University of Wisconsin

Center for Cooperatives.

I have also had the honor to grow up on a dairy farm in the

Northeast and now reside in the Midwest. And I haven’t tried the

West out yet, but if looks like if you want to do dairy, you should

be looking at that area as well.

I think my first point today is that there is a tendency to exaggerate how important Federal orders are in the marketplace today.

There is also a tendency perhaps to over exaggerate how bad they

are. But what I want to address is the question of whether the

playing field is level, this equitability question, after all these reforms have taken place and we spent a lot of dollars and time in

the last 10 years working on it, and that is, I think, why I was invited here today.

The answer to the question ‘‘Is there a level playing field?’’ is a

resounding no. You, Mr. Chairman, used the word ‘‘de minimis,’’

and I like that word and will now put that into my portfolio.

In my written testimony, there is an Appendix a. It is near the

last part of the testimony, and it is a chart, a bar chart that shows

the distribution of Federal order benefits in the new system versus

the old system distributed across regions. And these benefits range

from a low of 37 cents a hundredweight to a high of $3.63 a hundredweight. It is a crude measurement. I can give you sophisticated

analysis that I have reference in my written testimony that would

show you about the same thing on a slightly different scale.

With respect to Class I milk, Federal orders have not been reformed, and I am showing that in my Appendix b’s that are attached in the testimony.

If you look at Appendix b1, that chart shows a plot of Class I differentials in Federal orders east of the Rocky Mountains by distance from Eau Claire, and the large black dot represents USDA’s

final rule. And as you can see, it moved the system slightly to the

more equitable plane.

FAPRI, which is a group that does forecasting and analysis on

policy, worked with USDA and came up with a consensus forecast,
255

and I would hope that this committee would look at that forecast.

It was really underutilized in the debates in Congress this last session and other information was abused to show worse results. But

that shows that 60 percent of the dairy farmers in the States were

benefited under the final rule proposal, and I would like you to look

at that.

Appendix b on the opposite page shows what we have with the

new 1A differentials, and it hardly looks like reform at all.

There are some other technical details that suggest that we could

have even raised the Class I price surface more than we thought,

and it relates to the Class I mover and changing the Basic formula

price [BFP].

Ask yourself the question: Do Federal orders increase milk production? Our analysis at the University of Wisconsin suggests they

do so by about a billion pounds. A billion pounds in the pipeline

has quite a price effect. They also decrease cheese prices by about

4-cents per pound, according to our analysis. And they also, therefore, affect the cheese milk, or the milk used in cheese, by about

40-cents.

Compacts do the same thing as Federal orders, only in a more

dramatic way. Our studies at the University of Wisconsin suggest

that compacts create many more losing farmers than they do benefiting farmers. For example, in my testimony, I refer to analysis

that the Northeast Compact, if you included New York and Pennsylvania, would add $237 million on about 12 percent of the farms

in the country versus taking away $146 million spread off a larger

number of farmers and, therefore, per hundredweight a lesser

amount of a loss.

So I am here to tell you that the world without regulation would

be pretty flat. I know there was a little discussion yesterday, but

Cornell did some analysis for USDA as to what would the price

surface look like, relative prices amongst areas, and they found it

to be—and they were looking at this in the aspect of without regulation. And they would say that there would be quite a narrowing

in the range from how we are regulating prices. And that work was

used to formulate Option 1B, the final rule, and so on.

Our history of trying good intentions has caused vicious cycles of

surpluses and low milk prices, the high supports in the 1980s, the

1985 increase in the differentials, we had to come up with buyouts

and diversion programs and so on. This is the law of unintended

consequences.

Building a national dairy program that treats farmers equitably

is essential, and that is what should preoccupy this committee until

the job is adequately done, and I am confident and hopeful, knowing the interests that sat at the table these 2-days, that can be

done. I think it is going to take a little trick, which I will get to

in a minute.

This is going to be complex because, as you have heard, there are

low-cost areas, high-cost areas, high-cost producers, low-cost producers. There are manufacturing areas, then there are fluid areas.

And the bottom line is, in trying to come up with balancing a system that works for all those players in equitable ways, I think we

are going to have to back off, as Mr. Jaeger said here, and be more

simple and basic in our approach. That ought to run on the prin-
256

ciple that less regulation is superior to more regulation, and we

ought to focus on helping the industry manage this downside pricerisk problem that we see repeatedly in recent years.

So what should we do? Short term, 1- to 2-years until we get to

the farm bill, say no to more or extensions to compacts. I have a

chart in my testimony that speaks to that. You have heard about

the price support program and the DEIP program. I do think that

is an important part of the safety net. At current levels, they do

not distort markets and work as a reasonable safety net.

I think Congress should consider additional direct payments, assuming prices will remain low for the next year or so. Direct payments at the levels and distributions that are possible will not distort markets, and they are the most effective means of supporting.

Farmers don’t like them that I have talked to because they are

perceived as a handout, but if they are tied to price levels and they

are truly needed and targeted, I think they can be effective.

The farm bill, congressional leadership. Steve Gunderson tried

this several years ago and it didn’t work. But if there was more

broad-based congressional leadership that laid down the hammer

that you will deregulate all regional programs unless the dairy industry and USDA develop a new national program, I think it can

be done, and it will require that hammer be put in place.

I believe if we don’t move to replacing Federal orders in the future through these other kinds of programs or, alternatively, adopting a California-style system, we can see the system self-destruct

over time. And I see time and time again that farmers value these

programs.

The problem is they become an entitlement, and lawyers would

say a property right, as you see this inequitable distribution of benefits, and that has to change.

Finally, keep developing tools that help dairy farmers manage

price risks and revenues by encouraging forward contracting options, maybe some support on premiums for that, and I agree with

an earlier gentleman, look at that revenue assurance as another

vehicle.

Is there a need for a Federal dairy policy? Yes. Will consumers

go without milk without one? No. Would the size and structure of

dairy farming be different without dairy policy? Yes, it would be.

Do we need to ensure a local supply of milk via Federal policy? No,

we should not do that. There will always be local milk production.

Promote fair competition, and farmers and the industry will find

ways to produce milk where it is needed. Be careful of protecting

the past without hindering the future.

Thank you.

[The prepared statement of Mr. Hughes can be found in the appendix on page 339.]

The CHAIRMAN. Thank you very much, Mr. Hughes.

Mr. Paul.

STATEMENT OF EUGENE PAUL, LEGISLATIVE COORDINATOR,

NATIONAL FARMERS ORGANIZATION, AMES, IOWA

Mr. PAUL. Mr. Chairman, on behalf of the National Farmers Organization, we want to express our appreciation to you and Senator

Harkin for holding these hearings today.
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Our organization represents independent producers nationwide

in negotiating contracts and other terms of trade for grain, livestock, and dairy. And our purpose is to help independent farmers

extract the dollars they need to cash flow their operations.

Dairy farmers today are facing some devastating situations. The

current dairy policies have brought extreme price volatility to the

dairy industry. Since September, the basic formula price has decreased by about 40-percent.

The milk price today is far below the milk production costs experienced by dairy producers in this country.

We can see the turmoil this has caused by looking at the exodus

of dairy operations over the past years. Since 1992, approximately

30-percent of our dairy farmers have gone out of business. With

that, it has had a negative impact on the rural businesses and infrastructure as well.

USDA’s dairy pricing reform leveled the field of milk pricing to

the lowest level found for milk in the country. The dairy pricing reform was designed to function like California’s State order pricing

system. The gains from being competitive with California’s milk

pricing system cannot be worth the further demise of this Nation’s

dairy industry.

The majority of America’s milk production is being utilized for

the production of dairy products. A great deal of focus has been

placed on Class I milk. However, Class I differentials are important, but most of the milk is used for the manufacturing of cheese

priced in Class III.

USDA’s new dairy pricing system and the California State order

milk prices are set using end product pricing formulas to establish

the value of milk to be used for the manufacturing of cheese, butter, and powdered milk. End product pricing formulas alone do not

find the true value of raw milk. Raw milk has a value before it is

processed into a dairy product. Raw milk’s value is the cost to

produce the milk, such as the hay, grain, equipment, utilities, and

labor.

Another major issue with end product pricing is the setting of a

make allowance level. Make allowances assist the milk processors

in covering the production costs of the plants; whereas, the milkproducing segment of the industry receives no production cost consideration at all.

It has been said that the dairy industry can export or trade its

way to a healthier condition. This idea has been the fix-all, saveall remedy for what ails the dairy industry. However, a recent economic report on this issue from the University of Wisconsin shows

the fallacy in export salvation for America’s dairy industry. The report predicts the direction and amount of milk price change for

America’s dairy producers as a result of free trade to be a negative

0.4-percent. Basically, chasing freer trade for the dairy industry

will result in lower milk prices for America’s dairy producers.

Some have looked at the Canadian market as a market to be

opened and conquered by this country’s dairy industry. All this

would do would be to lower the Canadian dairy producers’ milk

price to an inequitable level. The gain to America’s dairy producers

by ruining Canada’s current dairy system would be minimal, if any

gain at all.
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The situation we are facing today is the issue of price, and I fail

to see how lowering price in one area will benefit another. Why not

raise the price in the lower-priced areas to those areas which are

receiving a higher price? To this end, to provide some stability in

milk prices, the National Farmers Organization supports the

Northeast Dairy Compact Commission and the expansion of the

compact and the creation of similar entities to help producers extract more dollars from the market.

In addition, a dairy industry milk management program has

some benefits and should be given an opportunity in the United

States. We encourage a mandatory system; however, a voluntary

system could be established with the cooperation of dairy producers

and dairy cooperatives using a coordinated and systematic culling

of producing cows.

To deal with the situation facing us today, the National Farmers

Organization is requesting emergency action to be taken by USDA

to establish a floor price for the price of milk in all Federal Milk

Marketing Orders. We are calling on USDA to initiate emergency

rulemaking proceedings to institute a milk floor price of $13.50 per

hundredweight for Class III milk.

The economic situation facing America’s dairy producers today

must be addressed. Without quick action in the form of price relief,

which National Farmers Organization has requested, financial disaster will plague America’s dairy producers causing many more to

exit the industry.

Thank you for the opportunity to speak to you today?

[The prepared statement of Mr. Paul can be found in the appendix on page 355.]

The CHAIRMAN. Thank you very much, Mr. Paul, for your testimony.

Mr. Brey.

STATEMENT OF BILL BREY, PRESIDENT, WISCONSIN FARMERS

UNION, STURGEON BAY, WISCONSIN, ON BEHALF OF THE

NATIONAL FARMERS UNION

Mr. BREY. Thank you, Mr. Chairman, Senator Harkin.

On behalf of 300,00 farm and ranch families of the National

Farmers Union, I would like to thank you for the opportunity to

testify. I am Bill Brey, the president of the Wisconsin Farmers

Union. I have been a full-time dairy farmer from Sturgeon Bay,

Wisconsin, in northeast Wisconsin, and I farm there with my wife

and family. We milk 95-cows and run 600-acres of alfalfa, corn,

barley, canning peas, and soybeans.

Many people would say that Wisconsin is ideally suited to

produce milk. Yet, nowhere is the economic devastation brought on

by low prices more evident. My State has dropped from over

40,000-dairy farmers in the 1980s to 21,000 as of January 1st.

With prices hovering around $9, farmers will continue to be put out

of business.

National Dairy policy has become very contentious with one region pitted against another. However, it is the strong belief of the

members of National Farmers Union that only by working together

can we move forward to a national solution.
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I have worked to implement this strategy in my home State.

When we made plans for our 69th annual Wisconsin Farmers

Union convention held in Eau Claire, Wisconsin, on February 4th

and 5th, I invited producers from all regions of the country to participate on a national dairy producer panel. Our panel included

dairy farmers from Vermont, Alabama, Texas, Minnesota, California, and Wisconsin.

My testimony today will include two sections: National Farmers

Union support for continuation of dairy policy at the Federal level,

and the principles of agreement reached by panel participants.

National Farmers Union [NFU] believes there is a strong need

for Federal dairy policy. NFU supports continuation of the Federal

Milk Marketing Order system, the dairy price support system,

dairy nutritional programs, and dairy export programs.

Federal Milk Marketing Order system. While the Federal Milk

Marketing Order system is not perfect, it provides important protection for both producers and consumers. The system provides

testing and standards and helps ensure the orderly marketing of

dairy products throughout the United States. It ensures producers

are paid for the products they deliver and provides consumers with

a safe and healthful supply of dairy products wherever they live.

We believe that some changes are needed. The National Farmers

Union supports reform of the Federal Milk Marketing Order system on Class III and IV, as directed by Congress. In particular, we

are concerned that the new, higher processor manufacturing allowances set by USDA will result in less producer income. Farmers are

questioning why processors should receive a guaranteed cost of production for manufacturing, even while farmers are left at the mercy

of the market. We are considering the benefits of a variable manufacturing allowance that would adjust in the relationship to the

producers’ milk price.

Dairy price support program. The dairy support price sets a floor

on the price received by all producers, regardless of region and regardless of how each producer’s milk is used. National Farmers

Union favors a dairy price support program that is set at a level

sufficient to curve market volatility. The current level of $9.90 per

hundredweight is too low to act as a stabilizer. And I would like

you to make reference to page 5, a chart which shows the support

price was an effective price stabilizer until the late 1980s, when it

was reduced too far below the average market level.

The 5-year average base price for milk, the basic formulate price,

is $12.78. Therefore, our members believe a support price of $12.50

would protect against the huge drops producers have experienced

in the past few years. Commodity Credit Corporation purchases

may need to be capped to limit Government costs and avoid surplus

product.

A stable supply benefits processors by keeping plants operating

at capacity. Decreased volatility would also benefit consumers who

pay more when farm prices increase, but seldom see a corresponding decrease when farm prices go back down.

Immediate relief. In the short term, we believe that the Commodity Credit Corporation should continue to provide emergency assistance to farmers, for example, the $125 million appropriated by

Congress in last fall’s emergency funding. However, assuming that
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funding is distributed in the same manner as 1999, these payments

are likely to be in range of 14 cents per hundredweight, with a

maximum of $3,600 for any producer. This would be a payment of

approximately $1,400 for the average Wisconsin producer. The feed

alone for that same size producer would be about $7,000 for just

1 month. Since USDA is projecting significant drops to dairy producers’ income for 2000, emergency assistance will be more important than ever.

Dairy compacts. Our members have called for a nationwide solution that will ensure opportunities for all dairy farmers, regardless

of region. National Farmers Union will support dairy compacts to

the extent they are coupled with a support price that is high

enough to stabilize price and enable producers to earn a fair return

from the market.

National dairy trade policies. There is often discussion about

whether various U.S. dairy programs are allowable under the

World Trade Organization and how our programs will affect the

United States’ ability to negotiate further agreements. We would

point out that U.S. farmers produce 160-billion pounds of milk per

year and export only 3-billion. Since the lion’s share of our milk,

98.2-percent, is sold in the United States, it is imperative that the

United States maintain an ability to operate domestic programs for

food security. There is no financial advantage in supporting policies

that lower the market price to producers on 98.2-percent of the

milk just to increase exports.

In addition, since the world market is heavily subsidized, we support maintaining the DEIP.

Food and Drug Administration standards. We believe that the

standards for a hearing by FDA to change the definition of natural

cheese that thereby allows the use of imported milk protein concentrate would displace domestic milk used for manufacturing, resulting in great program costs and lower prices to dairy farmers.

Regional disagreements have caused some people to ask whether

total deregulation would be preferable to maintaining national policy. However, we believe the benefits provided by a Federal dairy

program far outweigh the items of contention.

In conclusion, I would urge Congress to try the same strategy.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Brey can be found in the appendix on page 362.]

The CHAIRMAN. Well, thank you very much, Mr. Brey.

Let me just begin the questioning by commenting that in the

panel today and, likewise, yesterday, the trade policy question

arose in testimony of many witnesses. Essentially, yesterday the

testimony was that American dairy producers, by and large, are

not competitive with imports from New Zealand and Australia that

are not subsidized, not very competitive against the European situation, which is heavily subsidized and almost overwhelming. And,

therefore, the solution was essentially barriers to imports, both to

protect against those who were more efficient as well as to level the

playing field against the preponderance of the subsidy of Europeans that might come in. This is with regard simply to the producer side.
261

Now, on the consumer side, consumers would argue that imports

might lower the price of milk, however it came, subsidized by the

Europeans or free market by the Australians or New Zealanders,

and, therefore, the quality of life for most Americans, but not for

dairy producers, would increase.

I don’t know whether a fortress–America situation is tenable indefinitely. It probably is temporarily because agriculture negotiations have broken down very badly. There is a glimmer of hope

that something might start at the WTO. It happened in Geneva

this week. But that has prospects for months and years of talking

about anything. And so as a result, this is probably not going to

change.

What I ask all of you, however, is during the course of this interim period, is it likely that American dairy producers will become

more efficient, costs will come down, so that if we ever do get into

a situation of world trade—which I suspect we will at some point;

I don’t know how you maintain immunity to all of this indefinitely—that we will be competitive?

If not, I suspect that we are in for some difficulty, but do any

of you have any feeling about this? Most of you have said—in fact,

all of us are calling for efficiency and lower cost, but we don’t understand the dairy business. You can’t lower cost at some point.

You just simply are there, and it is a tough business. Therefore, if

you can’t produce efficiently, you protect what you have got, in essence, in a fairly mature market where the amount of demand does

not increase much year by year, maybe a 1 percent increase per

year, very modest over the last decade.

Does anybody have any comment about do we become more efficient? Does it make any difference? Or is the trade policy you are

advocating—namely, keep the imports out and don’t get really

mixed up in this WTO business—is that the best we can do? Yes,

Sir?

Mr. HINSDALE. Well, of course, we focused here, since this is a

dairy hearing, on trying to balance the equities within dairy, and

then, of course, we can slide into the larger, more challenging question of balancing equities across commodity lines. And it is, of

course, interesting and unique that over 98 percent of dairy production is for use here in the country as opposed to the picture in

other commodities where it is upwards in the 50-percent range or

something, like wheat.

You know, as we have seen the consolidation in U.S. agriculture,

essentially you get the consumer consolidation in supermarkets,

you know, driving everything all the way back to the chain, and

we have seen the consolidation in poultry and consolidation in

hogs. And dairy is the other bookend because it is so capital-intensive and so strongly geographically rooted that it is probably one

of the most difficult forms of agriculture to achieve the concentration and efficiencies that have taken place elsewhere.

Certainly from the American Farm Bureau’s point of view, we

need to continue to move in the direction of freer and fairer trade

and simply recognize that a bulky, capita-intensive product like

milk is kind of the bookend over here.
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But certainly in the American Farm Bureau, we recognize that

the collective interest of agriculture is served by continuing to try

to move ahead with world trade.

The CHAIRMAN. Well, certainly that appears to be the testimony

of the American Farm Bureau here in the Committee. In other

words, essentially the testimony, as I understand it, is that the dynamics of American agriculture, the expansion of our income, the

potential for American farm families to do a whole lot better comes

from, as you suggest, exporting half of our soybeans, a third of our

corn, maybe a quarter of our wheat every year. The failure to do

that almost is bound to depress prices, depress income, make

things miserable for most of the farmers that the American Farm

Bureau represents.

So the dairy thing comes as a very distinct difference from this

situation. In other words, is the American Farm Bureau position

with regard to dairy that, despite the open business, all the delegations, the Farm Bureau, going to Geneva all the time and so forth,

that here we sort of draw a line around America for this situation—which is not a very dynamically growing situation. You know,

in essence, you gentlemen are talking about something that is very,

very stable.

Now, if we were to talk about increasing demand for dairy, it is

going to have to be with some other customers somewhere else in

the world. But what I am suggesting is, if our costs are much higher than some other people who are also competing in the rest of

the world, our chances of making those sales are not very good

without DEIP, which means we then subsidize exports to try to improve our position.

You know, now, maybe this is just the way that it is, that we

have a cost structure here that is not very competitive, a very mature market, and, therefore, we are constantly dividing up the pie,

either by region or by classes of milk or however many tiers you

want to look into the pricing. If so, that is a serious problem all

by itself, plus the fact that, as we heard yesterday, there appear

to be large differentials of return from large cow operations as opposed to medium as oppose to small.

And I would just say anecdotally from my own experience in Indiana, each time that I visit with dairy people, typically confidential meetings we want to have, and inevitably it is the 30-cow operation, a 65-year-old man and a 40-year-old son, and the 65-yearold man would like to figure out how to retire, how to get some equity from this situation and how to entice the 40-year-old son to

keep going. And the 40-year-old is not sure he wants to do this for

25 more years.

They come to me and they want a magic solution: What can the

Federal Government do to help our situation? Well, lots of things,

but typically these people the next time around in that county are

not in business. They are among those that are being described

today as the casualties of the process.

Now, I think, Mr. Frydenlund, you mentioned—or maybe Mr.

Hughes, if our policy is the retention of every one of these farmers,

then we really will have to have a very different policy altogether,

very targeted at the 30-cow people, or the 40 or 50 or so forth, because these are really hurting. They are on the margin, and when
263

the price goes down, it really becomes tough. Or the reinvestment

question, how do you get more competitive, or how do you refurbish

the infrastructure of what you got?

Do any of you have any broad thoughts? Some of you have expressed those, and I don’t mean to diminish that, but sort of help

us in this situation because we are discussing now why in this

panel we have a policy, why we have programs, why we are doing

any of this, as opposed to something, a distributional chart of how

we divvy it up regionally.

Mr. BREY. Mr. Chairman, I would like to get back and kind of

couple the whole—there were many questions you asked, and I

would like to lay it a little bit from some experiences that I had.

One is that us as dairymen in the United States, when we look

at the dynamics of what world trade is and we see that the Chairman is from New Zealand and we see also—I have been on some

dairy panels around the world, and the Chairman is also representing dairy, the vice chairman on the dairy committee side of it. That

lets—and when we look at production costs and efficiencies, I think

we have to look at—in our United States, if I have a 26,000-pound

herd average, which I have achieved, I am probably most efficient

as far as pounds per cow. If I change that—if I look at that, and

my cost of that has been hovering around the $14, $15 hundredweight like everyone else.

If I lay that over and I say to the New Zealander, who has grassfed cattle and no concentrates, no dry matter intake, no machinery,

no grains, especially none imported from Indiana, from that standpoint, I am using up the efficiency that I am comparing it as.

So when you look at New Zealand that exports 95 percent of

their product and has to put it on the world market, that is their

agriculture, they have to force it someplace. And from our standpoint, why should the United States be importing and force our domestic price to compete with the unrealistic benchmark of inefficiencies or efficiencies of that $7 versus what it costs me to produce

my milk?

The CHAIRMAN. It is a very important piece of testimony. You

know, correspondingly, when I talk to friends from New Zealand,

they would say you folks in Indiana have ideal conditions for production of corn. God has given you 39 inches of rainfall fairly steadily almost every year, and without irrigation, without other cost

factors that enter into other situations, you have got a very lowcost product which you send everywhere. And we certainly try to

do that. Delegations go from Indiana all over the world trying to

sell corn on the basis that we are low-cost and do have enormous

geographical weather advantages. Some would say the same thing

for wheat in wheat country and what have you.

This is the problem. Now, it may be that we decide that dairy

is distinctly different, and that really, I suspect, has been the decision of the Congress without distilling it quite this way, that we

have something here that is very different from corn or beans or

even pork, which now you have a surplus production and we export

and do so competitively where once we didn’t maybe 3 or 4 years

ago.

Do you have a thought, Mr. Hughes?
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Mr. HUGHES. Yes. I am not a trade expert, so with that as a caveat, you can find data around the country that can show you different results, but I believe—like looking at Cornell summarizes financial information on New York dairy farms, and we have some

in Wisconsin that show that productivity is increasing on a 1-to 2-

percent-a-year basis.

The CHAIRMAN. In dairy?

Mr. HUGHES. In dairy. Costs are going down. But USDA statistics are not showing that.

The CHAIRMAN. Well, why are they different? Why are your figures different?

Mr. HUGHES. That is a good question. Can’t answer that for you.

It is a methodological issue.

The CHAIRMAN. I see.

Mr. HUGHES. But the incentives in Europe, where they have production controls, they manage very intensively to lower costs. And

so particularly in the UK, Denmark, and the Netherlands, they can

compete with the U.S. pretty well. Some of the other countries are

not competitive with the U.S.

New Zealand and Australia, you know the story there. They can

run forage very efficiently through cattle.

The analysis that I have seen that I respect somewhat is that if

you could get to free trade, fair, free trade—that means eliminating

European subsidies and opening up access to markets—you could

see the gains to New Zealand and the losses to the European, with

about a wash for the U.S. So the problem is how to get there. And

you have heard Mr. Tillison testify about people cheating and there

are all kinds of institutional arrangements, and it is that how do

you get there. And I am quite skeptical that you can leap to that

situation without considerable shock to dairy producers in the

country.

The CHAIRMAN. Well, I would be skeptical, too, you know, for the

reasons that all of you have given, namely, we have an impossible

predicament with the Europeans.

I am just trying to think down the trail. There may come a day

when we have a different group of Senators sitting around here, a

different feeling in the country, and people will say, well, this dairy

business has gone on long enough. There will be a reforming spirit

coming through here, and people will say consumers ought to benefit, all the rest of us. And, by golly, if we want milk for 20-percent

less, the dairy farmers will say, well, that is totally unfair. It is a

cheap food policy, and these people are unreasonable, and we are

all going out of business and so forth. But consumers may say,

well, that is one of those problems. We all have problems. And

looking out after number one, namely, my family, as a consumer

I would like to have cheaper milk.

At that point we better have a cost structure, and I am heartened by what you are saying, Mr. Hughes, that while all this argument is going on somewhere else, somehow productivity is going

up, the cost structure is improving, and, you know, that is the most

heartening evidence because, you are right, USDA doesn’t show

that. Now, they may not be polling the same farmers or looking at

the same data, but we are trying to look for some good news here,

even while the fortress is holding and the political support for it.
265

For the moment, there is political support in the Congress for

roughly the programs that we have; otherwise, they would have

been dispensed with a while back. But they have not been. But I

think in part it is because the public doesn’t understand how milk

is priced. Most Congressmen don’t understand how milk is priced.

This is such a byzantine argument that, by and large, there is sympathy for dairy farmers and for other farmers. So, by and large,

money is voted to help them out.

Now, what some of you are saying is, even as we are voting it,

have we thought through who it is we want to help. Now, I think,

Mr. Paul, you have suggested that essentially—or maybe Mr. Brey,

that small farmers, when we had these general distributions, don’t

do particularly well because it is on a per-pound basis or whatever.

The big get more money. That is true of all Government programs

unless we have a very targeted cap sort of thing. One of you suggested, well, do a $12.50 general support, but cap

it off. Now, you could work that one to a point, I suppose, where

you has a pretty heavy cap. I mean, it came way down so that only

very small dairy herds were benefited. That would be a more direct

way of keeping all those folks in business so long as they could

make it on other grounds. And people think about those things

from time to time. Then other people come in and say, well, after

all, we have got a herd that is 80 cows, sort of a good, average

herd, or a couple of hundred, why are we being discriminated

against?

Now, you can go around and around, but to the extent that anyone wants to address this, what about a policy in which we have

no compacts, we have no marketing orders, but we do have a support price and it is higher, with the thought that some of you are

suggesting that it needs to be, because our costs are way up, well

above $12.50, you are saying, I think, in most farms. So this is well

below cost. It is sort of a safety net, and we have a national policy.

What would be wrong, just hypothetically say $12.50, and eliminate compacts and eliminate marketing orders and just say $12.50?

Then, if so, what kind of a cap? Is this for everybody? Does it offer

incentives for overproduction? Some of you were suggesting we

want disincentives for overproduction.

Does anybody have a thought about this? Yes, Mr. Frydenlund?

Mr. FRYDENLUND. Mr. Chairman, I would just caution that any

sort of artificial increase in the support price gets us down the

same road that we went in the 1970s and 1980s where the artificially high support prices led to increased production and————

The CHAIRMAN. To another whole-herd buyout or something of

that sort.

Mr. FRYDENLUND. Yes, it is a dangerous way to go. Now, I

don’t—if the assistance is somehow managed with some sort of targeting, that might have less of an impact. But I am not really sure

how that would work.

I do want to just say that I think that the efforts of members like

yourself in Congress that have been pushing for a global marketplace, or at least pushing for the World Trade Organization to level

that playing field, in the long run I think that is going to be of

more potential benefit for the entire dairy industry than probably

anything else. In fact, I would argue, without sounding too critical
266

of the entire dairy industry, that the time and effort that the dairy

industry has spent debating over which way to go on marketing orders and which way to go on support prices has all been focused

upon a very small—just the domestic market. And I think that the

dairy industry itself has failed to look at opportunities out in the

rest of the world, and that is a much bigger market than our very

limited static number of people here; whereas—and I know that

there are difficulties. For instance, bulk milk is not probably something that is going to be easily exported, but even in other commodities, you know, wheat, feed grains, etc., the growth opportunities

there are more and more becoming in value-added products, in

processed products, than just in the bulk commodities.

So the same dynamic could exist for dairy, and I think if we

didn’t have these programs that basically just keep us looking inward, there would be a greater incentive to produce for the world

market.

The CHAIRMAN. Mr. Brey?

Mr. BREY. Mr. Chairman, what I tried to illustrate in the example is that the 5-year average per hundredweight is $12.50. As of

this time, we have very little surplus, certainly not in cheese. And

if we would raise that price and keep the $12.50 rather than the

$10.10 that we are—why we are here today talking about the big

picture of it, the Northeast Compact in a sense would not call for

itself because it would be coming from—it would be non-regionalism because we would all be receiving that $12.50.

We said that wouldn’t be on all—I think it should be capped for

the like the family or farm unit————

The CHAIRMAN. Well, how many cows?

Mr. BREY. Probably 2-million pounds, 2- to 5-million pounds per

farm. I take that out of the Minnesota publication, the university,

average—the profit per cow ranges anywhere in between 50- and

100-cows. Those are the top graphs as far as income return per

cow.

Well, if that is the case, then at a 20,000-pound herd average,

you are at 2- to 3-million pounds per cow. So that is kind of what

that economic unit would be. Then the rest could be left to—if

there is—an export market or something of that nature. But in

order to keep this exodus from losing in our State alone 20,000

families—and the projection is it will cut another 10,000 out probably in the next 5-years, just not only because of age but because

of this downward pressure.

The other question that————

The CHAIRMAN. Just let me stop you for a second. Without putting too fine a point on it, you would say give the $12.50 to farmers

that have 100-cows or less, in essence, using the 20,000 times 100-

cows or so.

Mr. BREY. Or up to 100-cows.

The CHAIRMAN. Up to 100-cows.

Mr. BREY. For everyone.

The CHAIRMAN. Now, then everybody else gets whatever the market price is. In other words, there is no support there. So at that

point, you are on your own. Is that essentially right?

Mr. BREY. Pretty much so.

The CHAIRMAN. OK. Please continue.
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Mr. BREY. You know, we talk about supply and demand. USDA

projects the projection in 1999 and 2000 will reach 164-billion

pounds. Meanwhile, the commercial use forecast has also been increased. Commercial use on milk equivalent, milk-fat basis, including commercial exports, is forecast at 167-billion pounds, up from

last month’s forecast.

Well, why are we in such a downward pressure if we are asked—

if the projection is 165-billion and the need is called for 167-billion?

This signal from USDA should say that there is a demand for milk,

bringing this price up, not to where it is being depressed.

The CHAIRMAN. Well, the USDA I think testified yesterday that

the price will go up. It always is lower in January. And by June

or July, if we had the hearing, it would be a more cheerful group.

But, nevertheless, you know, you have to average these things

over a year. You have these cycles, but maybe not that much. Likewise, we heard yesterday there is quite a new demand for cheese.

Now, the cheese price, as opposed to the whole-milk price, is pretty

favorable. So, in essence, consumer demand seems to be increasing

for cheese, whereas it is very stable for whole milk at these prices.

I don’t know how that factors into the 164/167, but it is an important figure. As you say, there may be a little more demand

there.

Yes, Sir?

Mr. SCARLETT. Mr. Chairman, I would like to go back to the purpose of the orders when you are talking about doing away with orders and only having the price support. The purpose of the orders

there, be ever how many they are, the 31 or now the 11, the purpose of those orders is to provide—make sure there is a supply for

the consumers of milk or dairy products in those areas and to make

sure that is a stable thing.

So I would question highly about going only to a support price

and doing away with the orders because you have different needs

in different parts of the country as far as the consumer needs. And

also, as far as————

The CHAIRMAN. Well, Mr. Scarlett, on that point, some have testified that even though—you make a good point, and that is one

reason we have had these marketing orders—that milk can be supplied from other regions fairly rapidly, in other words, that consumers in Tennessee will not be without milk if marketing orders

don’t exist that are that narrow. The 31, maybe the 11 still gets

you there, maybe zero.

I think Mr. Hughes is testifying—and I think you answered your

own question. Would consumers get milk? You said yes. But, in essence, you are saying not necessarily, as I understand it.

Mr. SCARLETT. Well, Mr. Chairman, not necessarily, because we

have talked about the policy of keeping the farms and—of course,

I guess being my size of dairy, I would tend to disagree with Mr.

Brey over there.

The CHAIRMAN. His cap is too low?

Mr. SCARLETT. The cap. A nice fellow down home, they milk

about 400-head, and he said he never had a cold cookie until he

got married. He didn’t know what it was. He didn’t get a cookie

when it is hot. He has got give other brothers, and they are all

there. Do you penalize them for all staying on the farm and saying
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because they milk more, do you divide it out per person? I mean,

I guess it would raise in my mind some serious questions about

that.

But we have also talked about market policy and what the consumer wants and what we—you said yourself the consumer wanted

maybe the dairy at X-number of price or 20-percent less or whatever it happened to be. But as in my testimony, we have got—another issue to consider is the effect on the rural communities and

the effect on the economies within each State, and there are many

variables to that, that if you eliminate those, we would have to

bring into consideration of does the consumer—would they rather

pay—would they rather have that milk check coming back to the

community and being spent in there, or would they rather have to

pay more for their schools and pave their roads and direct taxes,

or how do we handle some problems like that?

The CHAIRMAN. That is a very important set of questions. This

committee wrestles, if we are on a different subject, on community

development, with just that idea. How do we get more vitality back

in hometown America and get more banks and more jobs and everything else? A lot of farm families need those jobs in order to

supplement income they have on the farm.

Yes, Mr. Hughes?

Mr. HUGHES. Well, I can’t answer all of your questions. They are

too heavy . But the idea of having a policy that is going to keep

X-number or all farmers in business is probably unrealistic, in my

opinion. Farmers enter and exit farming for lots of different reasons. Part of it is the price horizon. What do they expect their price

and income capabilities?

But the experiment in Vermont and in the New England States

with, you know, who has been exiting and what size farms they

are, where they have stabilized and increases prices, looks to me,

based on at least anecdotal evidence, that the smaller-herd size

exit faster in Vermont relative to the U.S. and their larger herds

grow more. So there you are providing that umbrella for the expansion. Well, why do farmers expand? Well, they want to have more

income units to cover more families, and you are not going to be

able to stand in the way of that process. And you shouldn’t, in my

opinion.

The CHAIRMAN. Well, it is an interesting question.

Mr. HUGHES. On capping, unless, you know, we are going to get

this country to full supply control, which————

The CHAIRMAN. It sort of oversimplifies the question, but Mr.

Scarlett’s point on this, if we cap this off at 100-cows at $12.50 and

you have a market price, conceivably consumers would be happy.

The price of milk generally in the country would be much lower.

All the Government money would be going essentially to one group

of people, but not to 300 more cows Mr. Scarlett has, and so he

would be selling a lot of milk very competitively. That might or

might not fit the community development idea of the checks coming

back to Tennessee or other situations, but it does rationalize the

question.

Now, this is one of these things in which there is no theological

answer. Pragmatically, these decisions happen because Members of

Congress push and poll and broker the situation on behalf of their
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constituents, as has happened before. But, nevertheless, as a preface why we are having these hearings, we came to an impasse last

November in which some people won and other people lost.

Now, people who lost said in order to stop the train of our filibuster, you are going to have to re-examine this. And many people

are very skeptical about these hearings. I heard some comment

yesterday that we were going through the motions and that, in essence, nothing is going to happen. Well, maybe so, maybe not.

As I said at the beginning of the hearing, we will sort of poll our

members, having heard all this testimony and as they read it and

so forth, and see which way they want to move. But I appreciate

very much your candor, a variety of points of view, the honesty

from your own experience that you have expressed, because, without that, why, we are simply flying blind. This is a group around

this table who want to do good, but they really need information,

and they need facts from people who are on the firing line.

Does anyone else have a comment? Yes, Sir?

Mr. PAUL. I just wanted to make one other comment, Senator.

When we talk about this free trade idea, I don’t believe we can ever

expect that the European Union is going to absolutely give up their

subsidies.

The CHAIRMAN. Maybe not.

Mr. PAUL. They are going to protect their farmers. And I think

the point that was raised by the witness from Tennessee, this local

supply has a great deal of truth to it because you are not only looking at a local supply of milk, you are dealing with the people that

are involved in those areas and the impact those people have on

that rural economy. As you said yourself, we are dealing with this

rural development. What are we trying to do? We are trying to put

dollars and people back in rural areas. There are people out there

right now, and if we need to do something with the price of milk

so that they can stay there and keep those local businesses,

schools, and so on going, I think that is—we have got to look at

a broader picture than just simply the price of milk.

The CHAIRMAN. Yes, Mr. Hinsdale?

Mr. HINSDALE. Just two brief things. One is I do believe that

many of the services and functions that have been provided by milk

marketing orders in that system will be taken over as the continued growth and development and consolidation and expansion of

farmer-owned cooperatives. I think farmer-owned cooperatives are

a very important mechanism in the dairy industry that will continue to become more important and make a lot of the Government

program stuff less relevant.

The second observation in terms of the question of measuring

equality or fairness and what that means, recognizing the geographical, environmental, and cultural diversities of our regions, I

happen to come from the State that has the most dairy-dependent

economy in the United States of America. Vermont is more dependent on the milk check than Kansas on wheat, Florida on citrus, or

Indiana on corn. And all the value-added, whether it is your Ben

and Jerry’s or your Cabot cheese and the culture that works in

companionship with that, our average community is less than 3,000

people and our average community has seven dairy farms. That is

how intimate the relationship is.
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So as we move forward with agricultural policy, there will be regional forms of agriculture, whether it is ethanol production or

dairy production in the Northeast, where there are certain forms

of agriculture that make a disproportionate contribution to the

economy and the culture of the area, which is why people fight so

hard for it. And what we need to find is to be able to allow in this

United States of America different regions that have different industries that are key to their regions, to have the opportunity to

have initiatives to develop those resources.

And I think that we need to do that, and I appreciate the opportunity to be here today.

The CHAIRMAN. Thank you.

You had your hand up, Mr. Brey.

Mr. BREY. Just as I don’t come to Washington, DC., very often,

and you ask a question and in my quick response sometimes I do

have a slip of the tongue, and I did mean that the price support

should be on all milk and should be capped. Whenever we go over

3-percent of domestic use, well, then it should be into the free market sense. And I base that on the fact that I did mention that milk

in the previous 5-years was at $12.78, and we have cleared the

market basically except for some small powder purchases. So why

should we, when we are projected to be 3.5-billion pounds below domestic production because of need, why should we be sacrificing a

$10 price for our milk?

Thank you.

The CHAIRMAN. Well, I appreciate that point. Obviously, we were

in a hypothetical discussion of targeting. Now, you can’t have it

both ways. Either you target or you say all milk. And so you take

Mr. Scarlett into your tent. Whereas, you had it a little bit excluded earlier on.

Well, I appreciate very much each of you for coming, some from

very long distance and great inconvenience, but you have added immeasurably to our understanding and I think to our other colleagues.

So saying, the hearing is adjourned.

[Whereupon, at 12:29 p.m., the Committee was adjourned.]
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