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HEARING TO REVIEW FEDERAL MILK

MARKETING RULEMAKING

PROCEDURES

HEARING

BEFORE THE

SUBCOMMITTEE ON 

LIVESTOCK, DAIRY, AND POULTRY

OF THE

COMMITTEE ON AGRICULTURE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

APRIL 24, 2007

Serial No. 110–13

(

Printed for the use of the Committee on Agriculture 

agriculture.house.gov 

COMMITTEE ON AGRICULTURE 

COLLIN C. PETERSON, Minnesota, Chairman 

TIM HOLDEN, Pennsylvania, 

Vice Chairman 

MIKE MCINTYRE, North Carolina 

BOB ETHERIDGE, North Carolina 

LEONARD L. BOSWELL, Iowa 

JOE BACA, California 

DENNIS A. CARDOZA, California 

DAVID SCOTT, Georgia 

JIM MARSHALL, Georgia 

STEPHANIE HERSETH SANDLIN, South 

Dakota 

HENRY CUELLAR, Texas 

JIM COSTA, California 

JOHN T. SALAZAR, Colorado 

BRAD ELLSWORTH, Indiana 

NANCY E. BOYDA, Kansas 

ZACHARY T. SPACE, Ohio 

TIMOTHY J. WALZ, Minnesota 

KIRSTEN E. GILLIBRAND, New York 

STEVE KAGEN, Wisconsin 

EARL POMEROY, North Dakota 

LINCOLN DAVIS, Tennessee 

JOHN BARROW, Georgia 

NICK LAMPSON, Texas 

JOE DONNELLY, Indiana 

TIM MAHONEY, Florida 

BOB GOODLATTE, Virginia, Ranking 

Minority Member 

TERRY EVERETT, Alabama 

FRANK D. LUCAS, Oklahoma 

JERRY MORAN, Kansas 

ROBIN HAYES, North Carolina 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

JO BONNER, Alabama 

MIKE ROGERS, Alabama 

STEVE KING, Iowa 

MARILYN N. MUSGRAVE, Colorado 

RANDY NEUGEBAUER, Texas 

CHARLES W. BOUSTANY, JR., Louisiana 

JOHN R. ‘‘RANDY’’ KUHL, JR., New York 

VIRGINIA FOXX, North Carolina 

K. MICHAEL CONAWAY, Texas 

JEFF FORTENBERRY, Nebraska 

JEAN SCHMIDT, Ohio 

ADRIAN SMITH, Nebraska 

KEVIN MCCARTHY, California 

TIM WALBERG, Michigan 

PROFESSIONAL STAFF

ROBERT L. LAREW, Chief of Staff 

ANDREW W. BAKER, Chief Counsel 

APRIL SLAYTON, Communications Director 

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

SUBCOMMITTEE ON LIVESTOCK, DAIRY, AND POULTRY

LEONARD L. BOSWELL, Iowa, Chairman 

KIRSTEN E. GILLIBRAND, New York 

STEVE KAGEN, Wisconsin 

TIM HOLDEN, Pennsylvania 

JOE BACA, California 

DENNIS A. CARDOZA, California 

NICK LAMPSON, Texas 

JOE DONNELLY, Indiana 

JIM COSTA, California 

TIM MAHONEY, Florida 

ROBIN HAYES, North Carolina, 

Ranking Minority Member 

MIKE ROGERS, Alabama 

STEVE KING, Iowa 

VIRGINIA FOXX, North Carolina 

K. MICHAEL CONAWAY, Texas 

JEAN SCHMIDT, Ohio 

ADRIAN SMITH, Nebraska 

TIM WALBERG, Michigan 

CHANDLER GOULE, Subcommittee Staff Director 

(II) 

(III)

C O N T E N T S 

Page 

Boswell, Hon. Leonard L., a Representative in Congress from Iowa, opening 

statement .............................................................................................................. 1

Prepared statement .......................................................................................... 64

Conaway, Hon. K. Michael, a Representative in Congress from Texas, opening 

statement .............................................................................................................. 17

Costa, Hon. Jim, a Representative in Congress from California, opening statement ...................................................................................................................... 52

Gillibrand, Hon. Kirsten E., a Representative in Congress from New York, 

opening statement ................................................................................................ 12

Goodlatte, Hon. Bob, a Representative in Congress from Virginia, opening 

statement .............................................................................................................. 3

Prepared statement .......................................................................................... 63

Hayes, Hon. Robin, a Representative in Congress from North Carolina, opening statement ........................................................................................................ 3

Prepared statement .......................................................................................... 66

Kagen, Hon. Steve, a Representative in Congress from Wisconsin, opening 

statement .............................................................................................................. 15

King, Hon. Steve, a Representative in Congress from Iowa, opening statement ...................................................................................................................... 56

Peterson, Hon. Collin C., a Representative in Congress from Minnesota, opening statement ........................................................................................................ 30

Prepared statement .......................................................................................... 61

Walberg, Hon. Tim, a Representative in Congress from Michigan, opening 

statement .............................................................................................................. 16

WITNESSES

Ahlem, Jr., William R., Co-Founder and Vice Chairman of the Board, Hilmar 

Cheese Company .................................................................................................. 49

Prepared statement .......................................................................................... 145

Day, Lloyd, Administrator, Agricultural Marketing Service, U.S. Department 

of Agriculture; accompanied by Dana Coale, Deputy Administrator, Dairy 

Programs, AMS, U.S. Department of Agriculture; Ron Bosecker, Administrator, National Agricultural Statistics Service, U.S. Department of Agriculture ................................................................................................................... 5

Prepared statement .......................................................................................... 67

Report, entitled Questions and Answers on Federal Milk Marketing Orders ................................................................................................................. 79

Donohue, Dennis, General Manager, Manitowoc Milk Producer Cooperative; 

on behalf of Midwest Dairy Coalition ................................................................. 28

Prepared statement .......................................................................................... 103

Erickson, Warren, Executive Vice President & COO, Anderson-Erickson Dairy 

Company ............................................................................................................... 45

Prepared statement .......................................................................................... 135

French, Billy, Dairy Farmer; on behalf of Virginia State Dairymen’s Association; Maryland & Virginia Milk Producers; and South East Dairy Farmers 

Association ............................................................................................................ 30

Prepared statement .......................................................................................... 108

Gallagher, Edward W., Vice President, Economics and Risk Management, 

Dairylea Cooperative Inc. .................................................................................... 34

Prepared statement .......................................................................................... 115

Hitchell, John, General Manager, Raw Milk Procurement & Regulations, 

Kroger Co. ............................................................................................................. 50

Prepared statement .......................................................................................... 151

Page

IV

Kraft, Chris, Owner, Dairy Farm; Board Member, Dairy Farmers of America, 

Inc. (DFA) ............................................................................................................. 26

Prepared statement .......................................................................................... 97

Krug, Kelly, Director, Division of Marketing Services, California Department 

of Food and Agriculture ....................................................................................... 8

Prepared statement .......................................................................................... 92

Ooms, Eric, Dairy Farmer; Member, Board of Directors, and Chairman, Dairy 

Committee, New York Farm Bureau .................................................................. 32

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

Submitted material, article, entitled ‘‘Predictability Needed in Federal Order 

Hearing Process’’, by Geoffrey Vanden Heuvel, dated April 20, 2007, Cheese 

Reporter ................................................................................................................. 155

Reidy, Mike, Senior Vice President of Procurement, Logistics, and Business 

Development, Leprino Foods Company; Chairman, International Dairy 

Foods Association (IDFA) .................................................................................... 44

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

Wells, Douglas J., Co-President, Wells’ Dairy, Inc. .............................................. 47

Prepared statement .......................................................................................... 141

(1)

HEARING TO REVIEW THE FEDERAL MILK 

MARKETING RULEMAKING PROCEDURES 

TUESDAY, APRIL 24, 2007

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON LIVESTOCK, DAIRY, AND POULTRY, 

COMMITTEE ON AGRICULTURE, 

Washington, D.C. 

The Subcommittee met, pursuant to call, at 10 a.m., in Room 

1300 of the Longworth House Office Building, Hon. Leonard L. 

Boswell [Chairman of the Subcommittee] presiding. 

Members present: Representatives Boswell, Gillibrand, Kagen, 

Holden, Baca, Donnelly, Costa, Peterson (ex officio), Hayes, 

Conaway, Smith, Walberg, and Goodlatte (ex officio). 

Staff present: Chandler Goule, Tyler Jameson, John Riley, Sharon Rusnak, Lisa Shelton, April Slayton, Debbie Smith, Kristin 

Sosanie, Lindsey Correa, John Goldberg, Alise Kowalski, and 

Jamie Weyer. 

OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A 

REPRESENTATIVE IN CONGRESS FROM NORTH CAROLINA 

Mr. BOSWELL. Well, good morning and welcome to our hearing 

today. We appreciate you being here to enlighten us on the Federal 

Milk Marketing Order. I found it to be a very interesting process 

which requires a little learning. I would like to thank you and I 

appreciate you taking the time to address some of the concerns of 

the rulemaking procedure for Federal Milk Marketing Orders. A 

special thanks to our witnesses for testifying before the Committee 

and a special welcome to our two Iowans, Warren Erickson from 

my district, and Doug Wells from Mr. King’s district. I very much 

look forward to hearing their testimony as well as the rest. 

Since January, I have been on sort of a crash course in dairy policy, not having an extensive background in the dairy industry, although I did grow up milking cows, but I did it the old-fashioned 

way and I think my father might have celebrated my departure, 

and I say that respectfully because after I left the farm when we 

were hand-milking, he got a surge system, and I came home the 

first time on leave from the military and I said, ‘‘What is going on 

here, Pop?’’ He said, ‘‘Since you are not here to milk your 10 cows,’’ 

or however many it was I was assigned, ‘‘I found something to take 

your place.’’ It was pretty nice. 

But anyway, I have been trying to learn all of this process as 

quickly as I can and I find it very, very challenging. A running joke 

I hear over and over around here is that there are three people in 

2

D.C. who fully understand dairy policy; however, two of them 

aren’t telling the truth. 

With that being said and as we begin to learn more about the 

issues of the dairy industry, and as I spoke to dairy producers in 

my district, a recurring theme kept arising: the rulemaking process 

for Federal Milk Marketing Orders takes too long, often taking up 

to 2 years to get a rule approved and implemented by the USDA. 

Many in the industry who have concerns over of the length of the 

rulemaking procedures point to the California model. Granted that 

the California order covers only one state, I might say a very large 

and a very important state, and the Federal Orders cover almost 

70 percent of the milk marketing in the United States. The California model has a time table that must be met. These time tables 

ensure that hearings are held promptly and rulings are passed and 

implemented in a timely fashion. One of the major complaints with 

the current Federal Milk Marketing Orders is that they do not currently represent the dairy market of 2007. 

After reading through much of the testimony, there is a consensus throughout the dairy industry that the rulemaking procedures take too long, but there are varying views on how to achieve 

a more streamlined process. We are interested in hearing about the 

new steps that the Agricultural Marketing Service is implementing 

to ensure quicker turnaround on rulemaking. I appreciate USDA 

recognizing that there has been a problem in the amount of time 

that it has taken some rules to pass and to be implemented, but 

I also welcome discussion on further improvements that can be 

made. Federal Milk Marketing Orders were created to assist the 

marketing of dairy by dairy producers and have done just that for 

years. We must ensure that the process is quick and efficient and 

represents what the dairy market of 2007 looks like. 

As we look forward toward the 2007 Farm Bill discussion that 

we are in the process of doing right now, we will be looking at different proposals to change the Federal Milk Marketing Order System. One such proposal is to create a commission to review and 

recommend ways to streamline the system, increase its responsiveness to market forces and ensure that it is still serving the best 

interests of the industry and the consumers. I look forward to more 

conversation on that issue. I find it interesting that the USDA acknowledges the consolidation of dairy industry on the heels of last 

week’s hearing on the market structure of the livestock industry. 

They recognize that today we have considerably more dairy producers than processors and grocers. With only 10 retail grocer companies, concentration of the dairy industry is evident. There is 

some concern that the grocery companies, without the Federal Milk 

Marketing Orders, could push milk prices down to the processing 

industry, which in turn would push lower prices down to the dairy 

farmers. Dairy is not a commodity that can be withheld from the 

market until prices improve. Since dairy must be sold every day, 

producers are susceptible to having to sell their product regardless 

of the price. This is one reason why the Federal Milk Marketing 

Orders were created, to balance competition in the dairy industry. 

I appreciate everyone taking the time to discuss the issues at 

hand. I welcome further discussion on the Federal Milk Marketing 

Order. So thank you again for joining us today and at this time, 

3

I would like to turn it over to my good friend and colleague, the 

Ranking Member, Robin Hayes, from North Carolina, for any opening remarks he might wish to make. 

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

OPENING STATEMENT OF HON. ROBIN HAYES, A 

REPRESENTATIVE IN CONGRESS FROM NORTH CAROLINA 

Mr. HAYES. Thank you, Mr. Chairman, and thank you for holding 

the hearing today. Thank you to all of the witnesses for your time 

and attention to this important matter. 

As you are all aware, during my chairmanship in the previous 

two Congresses, dairy was under the jurisdiction of another subcommittee, so I have not had the opportunity to fully immerse myself in what is among the most complex problems—excuse the play 

on words—program under the Ag Committee’s jurisdiction. I have 

been looking forward to this hearing as a chance to learn as much 

as I can about this industry, especially considering it is the only 

farm bill program that the Subcommittee has jurisdiction over. 

Now, as we get into these issues, I think it will be pretty clear that 

some of us up here on the dais tend to take a free market approach, while others tend to favor some level of government involvement in the marketplace. Where I think we all agree is that 

if the government is involved, it needs to be a facilitator, not an 

impediment. 

What I know about the Federal Milk Marketing Order System: 

the industry faces some fairly cumbersome hurdles, both administrative and legislative, that only serve to hamper efforts to improve 

the Orders for all participants, and I appreciate that USDA has acknowledged this fact and is working hard to do what they can to 

improve the process. I recognize also that there is a consensus 

among the industry that more needs to be done. I appreciate all of 

the witnesses, again, for being here and I look forward to the discussion of this important issue. Thank you, Mr. Chairman. 

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

of the hearing:] 

Mr. BOSWELL. Thank you, Mr. Hayes, and I appreciate your comments. I think, at this time, we are ready to start with our first 

panel and so thank you very much. I would like for each of you to 

just for a moment, for all present, to introduce yourselves and then 

we will start with——

Mr. GOODLATTE. Mr. Chairman? 

Mr. BOSWELL. Where is Mr. Goodlatte? Oh, there he is. I am 

sorry. 

Mr. GOODLATTE. I wonder if I might make a statement? 

Mr. BOSWELL. I expect you would be up here for some reason or 

other. We would like to recognize the Ranking Member of the full 

committee, Mr. Goodlatte, of course. 

OPENING STATEMENT OF HON. BOB GOODLATTE, A 

REPRESENTATIVE IN CONGRESS FROM VIRGINIA 

Mr. GOODLATTE. Thank you, Mr. Chairman. I very much appreciate your holding this hearing and I appreciate the opportunity to 

give a few remarks. 

4

I found that the easiest way to clear a room is to begin talking 

about dairy policy. Few markets suffer such an extreme level of 

government regulation. Dairymen are over-regulated in just about 

every aspect of their business. When we discuss dairy policy in this 

Subcommittee, we must always be cognizant that the slightest 

change can have severe repercussions. As such, it is very rare for 

the Agriculture Committee to consider dairy proposals that are acceptable to all players. However, as the full committee traveled 

throughout the country last year, a common theme among dairy 

producers and processors emerged: the Federal Milk Marketing 

Order System needs to be more responsive. 

As most of us have become painfully aware, even simple changes 

to Federal Orders can often take a year or more to accomplish. For 

example, dairymen in my region of the country petitioned for a 

change in October of 2005 to adjust transportation credits in the 

Southeast and Appalachian Orders. The USDA proceeded to consider this proposal on an expedited basis. A year later, the Department published an interim rule that covered only a portion of the 

original petition. As we sit here today, this rulemaking is still open 

and the problem for my dairymen has yet to be resolved. It will be 

easy to sit here and blame the USDA for the length and complexity 

of the process. If we did that, however, we would be ignoring the 

fact that the USDA is simply abiding by the laws our predecessors 

created. Likewise, we would be ignoring the effect the various industry participants have in slowing down the process when it suits 

them to do so. Unlike other Federal rulemaking procedures that 

are regulated under the Administrative Procedure Act, Federal 

Milk Marketing Order rulemaking is regulated by the arcane procedures of the Agricultural Marketing Agreement Act. 

The USDA has some discretion to improve their internal management of the process, and we will hear today that this is something the USDA Dairy Program is committed to doing. Unfortunately, that will only get us so far. The rest needs to be done by 

the Members of this Committee. As we begin this process, we are 

fortunate that we have a successful model that we can evaluate. 

There are many aspects of the California system that we could incorporate into a Federal system, which is encouraging. If we are 

successful in capturing the best of both systems, we may actually 

have finally done something good for dairy, at least in terms of 

making our decisions more expeditiously and in a manner that will 

be more responsive to the marketplace. Thank you, Mr. Chairman. 

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

Mr. BOSWELL. Thank you, Mr. Goodlatte, and again, I apologize 

for not recognizing your presence. So we will take note of that the 

next time. At this time, I would request the other Members to submit their opening statements for the record so the witnesses may 

begin their testimony and give us ample time for questions. And 

we would like to welcome our first panel, as I said earlier, to the 

table. And so Administrator Day, I want to just ask you to introduce your two deputies and then we will introduce Mr. Krug and 

we will get started. 

5

STATEMENT OF LLOYD DAY, ADMINISTRATOR,

AGRICULTURAL MARKETING SERVICES, U.S. DEPARTMENT

OF AGRICULTURE; ACCOMPANIED BY DANA COALE, DEPUTY 

ADMINISTRATOR, DAIRY PROGRAMS, AMS, U.S.

DEPARTMENT OF AGRICULTURE; AND RON BOSECKER,

ADMINISTRATOR, NATIONAL AGRICULTURAL STATISTICS 

SERVICE, U.S. DEPARTMENT OF AGRICULTURE 

Mr. DAY. Well, Mr. Chairman and Members of the Subcommittee, good morning and thank you for the invitation to appear before you today. Accompanying me is Ronald Bosecker, the 

Administrator of the National Agricultural Statistics Service, and 

Dana Coale, the Deputy Administrator of AMS’s Dairy Programs. 

The following remarks will provide a brief overview of the Federal 

Milk Marketing Order System, including a review of its rulemaking 

procedures. My complete statement has been submitted for the 

record. 

I wanted to briefly touch on the current status of the U.S. dairy 

industry. Although the dairy industry is facing increased feed costs 

and higher energy costs, slowed increases in milk production and 

robust demand for dairy products are resulting in stronger milk 

prices. The average Federal Order uniform milk price of $15.61 per 

hundredweight reported for March of this year is a year-over-year 

increase of more than 23 percent. Internationally, the United 

States has become a leading exporter of nonfat milk products since 

2005 and is expected to remain the leader through 2007 and beyond. We expect exports of 295,000 metric tons for 2007, an increase of 1.7 percent over 2006 levels, even as the overall market 

is contracting slightly. The tight international markets led to higher prices, which in turn have boosted domestic prices. 

AMS administers, among other programs, the Federal Milk Marketing Order Program. Federal Milk Marketing Orders are authorized by the Agricultural Marketing Agreement Act of 1937, as 

amended. The Act authorizes the Secretary of Agriculture to establish and maintain such orderly marketing conditions as will provide, in the interest of producers and consumers, an orderly flow 

of the supply to avoid unreasonable fluctuations in supplies and 

prices. Funded by user fees, the 10 Federal Orders cover a majority 

of the United States and are a major part of milk marketing in the 

United States. More than 90 percent of U.S. milk is marketed 

under either Federal Orders or under similar regulations issued by 

state governments. A milk market administrator administers each 

Order. 

The Federal Milk Marketing Order System facilitates the marketing of milk by dairy farmers and their cooperative associations. 

Federal Orders regulate handlers who buy milk from farmers and 

their cooperatives. Federal Orders set minimum prices paid by regulated handlers for milk according to how it is used. Dairy farmers 

who supply enough milk to the market’s fluid handlers to meet an 

Order’s performance standards share in the revenue of all milk 

sales under the Order. Regardless of how an individual dairy farmer’s milk is used, the farmer receives at least the blend or market 

average minimum price for milk sold in all classes. Federal Milk 

Marketing Orders provide a structured means of sharing the benefits and compensating for the additional costs for supplying Class 

6

I needs of a market and prevent dairy farmers from being subject 

to undue pressures from buyers in the marketing of a highly perishable product. 

Milk Marketing Orders benefit dairy farmers, manufacturers and 

processors, and others in the marketing chain, in other ways. In 

addition to market information made available by Dairy Market 

News, the Federal Milk Order Program amasses a considerable 

amount of data on producer numbers, milk marketings, prices, 

fluid milk sales and dairy product production that AMS publishes 

for the use of all market participants. These data are made available over the Internet and thus are more current and accessible 

than ever before. 

It should be noted that the Federal Milk Marketing Order Program is a marketing program, not a price or income support program. USDA operates the Milk Price Support Program and the 

Milk Income Loss Contract Program, or MILC Program, for those 

latter purposes. Federal Milk Orders do not regulate dairy farmers. 

Dairy farmers are able to produce as much milk as they wish and 

they can sell to any handler who is willing to buy their milk. Federal Orders do not guarantee a market for a farmer’s milk. Farmers must find their own market and must arrange for the delivery 

of their milk to the handlers and bear those marketing costs. 

Further up the marketing chain, the grocery industry is also 

highly concentrated. Absent Milk Marketing Orders, the potential 

exists to push lower milk prices down to handlers, who in turn 

could push lower prices down to dairy farmers to below a sustainable long-run average production cost level. The perishable nature 

of raw farm milk puts the dairy farmer in a vulnerable negotiating 

position. Raw milk, unlike store-bought commodities, cannot be 

withheld from the market in an effort to gain a better price. Federal Milk Orders help balance the competition between many dairy 

farmers and relatively few fluid milk processors. 

The Agricultural Marketing Agreement Act of 1937, as amended, 

requires that formal rulemaking procedures be used to make 

changes to the Federal Milk Marketing Order. The process is extensive and time consuming but provides for maximum industry 

participation and transparency. The industry offers proposals, provides testimonies in support or in opposition to proposals, and may 

cross-examine the witnesses at public hearings before an Administrative Law Judge, submit briefs and proposes findings of facts, 

comments on recommended decisions, and produces approved final 

decisions to referenda before any changes to an Order are effective. 

AMS is aware of the concern about timely decisions and in response undertook an extensive internal review of its part in the 

process and developed several new rulemaking initiatives and customer service standards. During this process, AMS consulted with 

other organizations, including the California Department of Food 

and Agriculture, to determine best practices that could be incorporated into the Federal rulemaking process. Our goal is to improve timeliness while maintaining transparency and the opportunity for public involvement that currently exists. Some of the 

steps initiated by AMS include having meetings to discuss issues 

with interested parties before the proposals are submitted; holding 

pre-hearing information sessions to discussion proposals received 

7

with interested parties before the ex parte rulemaking restrictions 

apply; we have had held one such session to date on the current 

Class III and IV proceeding; developing supplemental rules of practice to better define public input timelines once the formal rulemaking process begins; and procuring the services of court reporters, in terms of best value rather than lowest cost, to reduce transcript delivery times and improve their quality and accuracy, and 

this has been very successful. 

Under the new customer service standards, we are planning to 

have amendments issued within 14 months for any non-emergency 

rulemaking proceeding. This process would allow 3 months in total 

for public participation. In situations when emergency marketing 

conditions warrant the omission of a recommended decision, the 

Department could move from a hearing to final amendments in 10 

months or less. These new standards are reducing the amendatory 

time from more than 2 years to around 1 year. We have had extensive discussions with the industry regarding the time-frames necessary for insuring sound, reasonable decisions that allow maximum public participation, and have concluded that our revised 

process will yield better results than a mandated timeframe. 

My written testimony for the record discusses in detail why the 

Department is opposed to mandated time-frames. The problems associated with mandated time-frames include the inability to respond to urgent issues, such as those presented by the hurricanes 

in 2004 and the potential for increased litigation. It is important 

to understand that the Federal Milk Marketing Order Program 

continually changes to reflect relevant marketing conditions facing 

the dairy industry. Since 2000, AMS has undertaken 19 

rulemakings to amend Federal Orders, requiring the publication of 

more than 62 documents in the Federal Register. Of these 

rulemakings, 14 have been finalized. 

Finally, I would like to stress, again, that Federal Milk Marketing Orders today remain an important tool for dairy farmers. 

AMS will continue to work with all sectors of the U.S. dairy industry to administer Federal Milk Marketing Orders so that dairy 

farmers are assured of a reasonable minimum price for their milk, 

and consumers are assured of an adequate supply of fluid milk to 

meet their needs throughout the year. This concludes my statement, Mr. Chairman. I would be pleased to respond to any questions. 

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

the hearing:] 

Mr. BOSWELL. Well, thank you, Administrator Day. I thought you 

might introduce your two deputies, so allow me, with your permission, to do that with you or for you. But you have Dana Coale from 

Dairy Programs with you. Welcome. Glad to have you here. I want 

the panel to know that. And also Ron Bosecker. Glad to have you 

here. 

Mr. BOSECKER. Thank you, sir. 

Mr. BOSWELL. And with that, I would like to recognize Mr. Krug, 

Director of Marketing Services, California Department of Food and 

Agriculture, from Sacramento. Welcome, Mr. Krug. We recognize 

you at this time. 

8

STATEMENT OF KELLY KRUG, DIRECTOR, DIVISION OF

MARKETING SERVICES, CALIFORNIA DEPARTMENT OF 

FOOD AND AGRICULTURE 

Mr. KRUG. Thank you and good morning. My name is Kelly 

Krug. I am the Director of the Division of Marketing Services of 

the California Department of Food and Agriculture. Thank you for 

the invitation to speak to you today about the hearing process used 

by the California dairy pricing and pooling systems. 

I direct the division of the Department that administers the 

state’s milk pooling and pricing system. For more than 70 years, 

the Department’s California dairy pricing program has worked to 

carry out four goals established by the California Legislature, 

which are stated in the Food and Agricultural Code. They are: (1) 

to maintain an adequate and continuous supply of pure and wholesome food milk to consumers; (2) to eliminate unfair dairy trade 

practices; (3) promote and encourage intelligent production and orderly marketing; and (4) maintain a reasonable level of stability 

and prosperity in the California dairy industry. These goals address the interest of all parties, including producers, processors, cooperatives, retailers and consumers. 

California’s dairy pricing system is similar to Federal Milk Marketing Orders. Both rely on established minimum farm milk prices 

for producers. USDA’s Federal Milk Marketing Orders regulate 

more than 2⁄3 of the Grade A milk marketed today. California is the 

principal milk production area that does not fall under the jurisdiction of a Federal Order and has maintained its own state order 

marketing program since the passage of the Young Act in 1935. 

California also has operated a milk pooling program since the passage and implementation of the Gonsalves Milk Pooling Act in 

1968, which provides for dairy producers to share the revenue from 

the sales of all classes of milk. Again, California’s operation of milk 

pooling is quite similar to pooling that is done in Federal Milk 

Marketing Orders. 

Currently, California operates its milk pricing plan with two 

marketing areas, northern California and southern California. 

Each marketing area has a separate but essentially identical stabilization and marketing plan. Each plan specifies the formulae for 

establishing minimum prices for California’s five classes of milk. 

Much like the Federal Milk Marketing Orders, and to promote stability in the state’s dairy industry, California’s milk marketing program establishes minimum prices that processors must pay for food 

grade or for Grade A milk received from dairy farms, based on endproduct use. These prices are established within defined marketing 

areas where the milk production and marketing practices are similar. 

The California pricing system was designed to encourage innovation and to react quickly to market signals. Minimum farm prices 

are determined by supply and demand signals that are based upon 

actual market conditions and prices for manufactured dairy products. These formulae are established through a public hearing process in which interested parties offer testimony and evidence relating to the proposed formulae. Revisions to these pricing formulae, 

other provisions of the stabilization marketing plans, and provisions of the pooling plan for market milk are made only after a 

9

public hearing has been held. Most hearings are initiated by entities representing either milk producers, cooperatives or milk processors, but they can be requested in writing by any interested 

party. Infrequently, the Department will call for a hearing on its 

motion. This formal hearing process generally allows for changes to 

be implemented in approximately 3 to 5 months. 

Next, I will outline the steps of the hearing system. The request 

for a hearing must be received in writing and it must specify which 

plan is recommended for change, that is, which of the stabilization 

plans or the milk pooling plan. A request must explain why a 

change is sought and must include relevant analysis and data 

along with the proposed implementation language. Once a request 

is received, the Department has 15 calendar days to decide if a 

hearing would be granted. If the Department accepts the request, 

a formal hearing announcement is released with a time table for 

the hearing events. A filing period for submission of alternative 

proposals is identified and a few weeks before the hearing is conducted, the Department will hold a pre-hearing workshop. The 

workshop allows the requester, and any parties filing alternatives, 

to explain their proposals. The Department also performs initial 

analyses of all the proposals, which are released at the pre-hearing 

workshop. Departmental exhibits are made available to the public 

7 days prior to the date of the hearing, then the hearing is conducted. 

Most hearings require 1, or possibly 2, days to complete. The Department generally allows up to 10-day brief filing period for participants to clarify or amplify their testimony presented at the 

hearing. From the date of the hearing completion, which is the end 

of the oral testimony, the Department is required by the Food and 

Agriculture Code to implement any changes resulting from the 

hearing within 62 days. The Code also requires a 10-day notice to 

the public of the upcoming changes, which reduces the analysis 

time to 52 days from the date of the hearing closure. I have included a hearing timeline diagram with my testimony that further 

explains the hearing process. Also a summary brochure is included 

that provides details of the dairy hearing process to interested parties. 

This concludes my testimony. Thank you for the opportunity to 

speak to you today about the hearing process used for the California dairy pricing and pooling systems. If you have any questions 

regarding our program, I would be pleased to try to answer them. 

Thank you. 

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

of the hearing:] 

Mr. BOSWELL. Well, thank you, Mr. Krug. I think we will have 

a question round now. I will ask a couple questions and I will remind Members that we are going to try to limit to 5 minutes, then 

we could have a second round if we need, and I will adhere to that 

myself. But you mentioned something, Administrator Day, about 

the number of reforms to speed up the process. Can you expand a 

little bit on the steps that you are taking? Just briefly, what steps 

are you actually suggesting you are going to take? 

Mr. DAY. Sure. I would be happy to, Mr. Chairman. First, we, 

like you, recognize that speed is very important to be responsive as 

10

possible to the dairy industry. Therefore we undertook an extensive 

review, meeting with folks from California and with industry to determine what we could do to speed things up, to understanding, 

first off, when we are going into a hearing, what the issues are, the 

relevant issues are, to bring the players together in this informal 

meeting process, which is the next step, in order to get all of our 

ducks in a row, so to speak, in order to when we actually announce 

a hearing, that folks are prepared for that hearing and they come 

in and they have that opportunity to testify in a clean and efficient 

way. We then moved on to develop administrative procedures that 

we are going to put in place for ourselves and for the public and 

we are going to be publishing that very shortly. That will talk 

about the timelines for public participation, which will be streamlined as well, as well as looking at our own internal processes to 

make that move faster. And then the third area is court reporters. 

These are legal proceedings and so the transcript, which can go on 

for—the hearings sometimes go on for weeks—need to be done in 

a very efficient, effective and accurate way. And so we have moved 

to hiring best value instead of—or the reporters that are the best, 

regardless of the price, so that we are able to get accurate statements and an accurate body of evidence that we can present to the 

public in a more efficient way. 

Mr. BOSWELL. Well, thanks very much. I think I will move over 

to Mr. Krug just for a moment. In the California State, where you 

enforce tight deadlines, have they been hard to enforce? 

Mr. KRUG. I think that because they have been in place for a 

long time and there are a lot of long-term relationships in the dairy 

industry and producers, processors, co-op side, no, it has worked 

pretty well. 

Mr. BOSWELL. What has been your major challenge? 

Mr. KRUG. The time for economists to analyze the testimony 

thoroughly. 

Mr. BOSWELL. Okay. And not to put you on the spot, but we are 

here for everybody to work together and I know you are too. Would 

you think that the USDA would be able to work a model similar 

to yours? 

Mr. KRUG. Well, obviously, it would take a major change to the 

rule process. Possibly the regional issues that are involved make 

the Federal system more complicated. 

Mr. BOSWELL. It would take more time? 

Mr. KRUG. Yes. And I think that there, with probably some additional time, maybe a rigid calendar would work well, but you might 

need to pull it out or lengthen it somewhat. 

Mr. BOSWELL. Thank you very much. Back to you Administrator 

Day, if I could. A few witnesses, in their written testimony, have 

suggested creating a Federal Orders commission with producers 

and processors charged with hashing out their own problems. What 

would you think of this proposal and would it be helpful to the 

agency to have the industry come together and offer solutions to 

some of the issues that come up with a Federal Order? 

Mr. DAY. Well, whenever we can have industry consensus, it is 

always a good thing and that is one of the reasons why sometimes 

the rulemaking for the Federal Orders takes so much time, because 

there is not even anything close to industry consensus. I think a 

11

commission is something that we would certainly be happy to look 

into and work with. We would have to make sure that it was composed of the right balance of folks from the industry and USDA 

and others, so we would be happy to work with that. 

Mr. BOSWELL. I appreciate that. I think now that I am going to 

recognize my Ranking Member and ask what questions he might 

have. I want to recognize you for 5 minutes, sir. 

Mr. HAYES. Thank you, Mr. Chairman. Mr. Day, last Friday, 

USDA announced a reporting error with regard to a National Agricultural Statistics Service survey of nonfat dry milk prices. Can 

you outline the process you are now involved in to examine the extent and impact of this reporting error? 

Mr. DAY. I would like to turn that question over to the Administrator of NASS, Administrator Bosecker. 

Mr. HAYES. Okay. 

Mr. BOSECKER. Thank you for the question. Once again, my 

name is Ronald Bosecker. I am the Administrator of the National 

Agricultural Statistics Service, or NASS. We are the statistical arm 

of the Department, the data collection arm. We issue over 500 reports per year. One of those data series is the Dairy Products 

Prices Program that we have been collecting data from the plants 

for 8 years now, week in and week out, 52 weeks a year, and an 

error was brought to our attention recently. We made a revision in 

a recent report. We had noticed an anomaly in the prices, but there 

are technical reasons why the prices, which are weighted by product, could differ from the spot prices reported in Dairy Market 

News. And we were looking at the plants that might be involved 

and as a matter of fact, annually, we visit the plants and make 

sure they are reporting according to the rules, about what product 

or what prices are supposed to be included and what are supposed 

to be excluded, and we were in the process of this at the first instance that we heard that there were problems, there could be 

problems, and we were visiting all of the plants to make sure they 

were reporting correctly. As the problem grew, recently, we went 

back to plants again to re-verify and that is when the error was 

discovered. 

Mr. HAYES. So from this point forward, what are you doing to examine the extent and impact of the error? I am not sure I got that 

answer. 

Mr. BOSECKER. Currently, we are revisiting the plants again. 

That is part of our standard procedure. But we are instituting a 

special visitation for all of the plants to once again go over the inclusions and exclusions in the program and make sure that is thoroughly understood, and we are going to ask them, as well, to review the data they have reported for the last year and make sure 

that the reports that we have gotten from all the plants are accurate. 

Mr. HAYES. Okay. When are you going to report back to us on 

the impact of this error? 

Mr. BOSECKER. There will be the data collection period over the 

45 days and then there will be the processing of the data that we 

have and the economic analysis and then the calculations of the 

impact of any changes that are found, and so I would suspect July 

might be the earliest that we could have answer for you. 

12

Mr. HAYES. Okay, we won’t hold dinner for you, but get that to 

us when you can. Mr. Day, do you intend to seek legislative 

changes in the Agricultural Adjustment Act to expedite processing 

of Federal Order amendment petitions? And also, time is getting 

short. You have expressed in your testimony that USDA is doing 

a number of things to speed up the decision making process of the 

Department, as it relates to Federal Orders. And I will tell you, 

some of the producers in the Southeast have a lot of concern about 

the Orders and there is talk of suspending the Orders in our area. 

I am wondering, given the original purpose of the Order System to 

ensure we all have adequate access to fresh fluid milk, do you 

think we still need the Orders to do this today? 

Mr. DAY. Well, thank you for that question. We are not seeking 

any changes in legislation at this time. We are trying to do all of 

the changes administratively. With regard to the Southeast, we 

have been working proactively with the Southeast dairy industry 

to find consensus among all the different participants, in order to 

see how the Orders can achieve their purposes of improving the situation in the Southeast. We have recently met with them. They 

have found some consensus and they have sent a proposal to us 

which we are analyzing as we speak. So in answer to the question, 

are the Orders still useful to them, I believe they are and I believe 

this proposal will help address the situation, both in the short and 

medium term, in the Southeast. 

Mr. HAYES. Thank you, Mr. Chairman. I yield back. 

Mr. BOSWELL. Thank you, Mr. Hayes. At this time, we would like 

to recognize, for 5 minutes, the lady from New York, Mrs. 

Gillibrand. 

OPENING STATEMENT OF HON. KIRSTEN E. GILLIBRAND, A 

REPRESENTATIVE IN CONGRESS FROM NEW YORK 

Mrs. GILLIBRAND. Good morning. Thank you for coming and 

thank you for giving us your time and testimony. I come from upstate New York and in upstate New York, our dairy farms are really in a crisis right now. With high feed costs, with high fuel costs 

and low milk prices, they are really having a very difficult time 

making a living. And most of them, because of the low milk prices 

last summer at $12 per hundredweight, are heavily in debt, hundreds of thousands of dollars in debt, and their big concern is that 

they are not going to be able to recover because of that high level 

of debt. Even if the prices do go to a proper level, they will not be 

able to pay off all of their debt and continue to sustain their farm. 

So I am very concerned about the issue that my colleague 

brought up, about this misreporting of pricing, and I would like you 

to address a little more fully how you are going to review the price 

reporting procedures and make them more effective. And I want to 

just read something from The Milkweed, which is a popular publication for our dairy farmers. It says, ‘‘Failure by USDA to input accurate nonfat dry milk commodity prices has caused a systemic 

failure in the Federal Milk Order Pricing System. Because of too 

low milk powder survey prices, USDA’s complicated milk pricing 

system has low-balled dairy farmers’ milk prices during the past 

half year. During that time, USDA’s Class IV prices have been unVerDate 0ct 09 2002 12:53 Mar 05, 2009 Jkt 041481 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 I:\DOCS\110-13\41525.TXT HAG2 PsN: JAMIE
13

dervalued, because prices for nonfat dry milk have been 

misreported to USDA’s weekly dairy commodity price survey.’’

I would like you to address what you are doing now, but also 

what you didn’t address, what is to stop more underreporting in 

the future and how you are going to deal with this on a long-term 

basis. For some of our dairy farmers, they have analyzed that this 

has cost them as much as $3 per hundredweight in the prices they 

received because of this fraudulent activity. 

Mr. BOSECKER. Thank you, Congresswoman. As you mentioned, 

the program is complex. There are a number of instructions to our 

reporters for what they are to include and what they are to exclude. One of the things they are to exclude is a long-term fixed 

price contract and that is specified on each questionnaire, weekly. 

And as I mentioned, we visit them annually, in person, to talk to 

the officials who fill out the reports and we go over each of these 

items, what is to be included and excluded. However, because of 

the complexity, it is possible that misreporting can occur. We take 

it very seriously, the potential for misreporting, and that is why we 

visit with the plants and periodically go over what they should do. 

The plant in question that we revisited very quickly, cooperated 

with us to provide the data and now we are again visiting all the 

plants within the next 45 days to make sure, number one, that 

they understanding going forward and to try to find out what the 

impact might have been in the past. There are a lot of numbers 

that are floating around out there. We want to do our best to try 

to find out just how much that might be. 

Mrs. GILLIBRAND. And what will you do going forward? Once you 

figure out what the mistake was, what will you do going forward 

to prevent this from happening again? 

Mr. BOSECKER. NASS is working cooperatively with our compatriots in the AMS to define a rule for auditing of the plants, and 

I would let Administrator Day address that. 

Mr. DAY. Right. We are moving rulemaking through the Department. I believe we are expediting that to get it out as quickly, by 

the end of this week, over to other members of the U.S. Government that review rulemakings that we produce. And they are sensitive as well to the importance of this issue, given the 

misreporting that has occurred. And once that rule is in place, the 

Agricultural Marketing Service will have auditing power to go in 

and look at the pricing to ensure that handlers are giving NASS 

accurate pricing data. 

Mrs. GILLIBRAND. Thank you. 

Mr. BOSWELL. Thank you and we will have a second round. 

Okay. The chair would like to recognize Mr. Goodlatte for any 

questions he might have. 

Mr. GOODLATTE. Thank you, Mr. Chairman. Administrator Day 

and Administrator Bosecker and Deputy Administrator Coale, welcome. Mr. Krug, we are very pleased to have your testimony, too, 

as I alluded to in my opening remarks. Let me first say that I appreciate the efforts that the Department has made to work with 

the dairy industry in the Southeast to address some of the unique 

problems that we are facing. I know that you are considering some 

proposals. You referenced that in response to the questions from 

Mr. Hayes. Those proposals were just submitted last month. I wonVerDate 0ct 09 2002 12:53 Mar 05, 2009 Jkt 041481 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 I:\DOCS\110-13\41525.TXT HAG2 PsN: JAMIE
14

der if you could tell us what the current status of that action is? 

What is the process? When might we expect to have some decisions 

made about the proposals that were submitted? 

Mr. DAY. We received the proposal on April 9, I believe. Is that 

right, Dana? And we are analyzing those proposals right now and 

from that we will announce a hearing on the proposals, once we 

finish the analysis that it warrants a hearing. And so from that we 

will go into in the rulemaking process and given that this has been 

a significant concern in the Southeast, I would think we would go 

under this under an emergency rulemaking to implement it as 

quickly as possible. And we will use those procedures that we have 

dictated or discussed early before, to make it move as smoothly as 

possible and as quickly as possible. 

Mr. GOODLATTE. Thank you. Any idea of when you might announce such a hearing? 

Mr. DAY. I would assume in the very near future. 

Mr. GOODLATTE. Okay. Regarding the broader issue that I had 

mentioned in my opening remarks, and Mr. Hayes also mentioned, 

of Marketing Order reform, in a full committee hearing just earlier 

this year, on February 14, I asked Secretary Johanns about the 

possibility of legislative proposals from the USDA to improve the 

Order amendment process. The Secretary’s answer focused more on 

the mandates of the Administrative Procedure Act than the Agricultural Marketing Agreement Act. Having had an opportunity for 

further review, I am wondering, you said in response to Mr. Hayes, 

that you are not looking for any legislative proposals. This time you 

were looking for some internal administrative changes and that is 

good. I am glad you are doing that. But as I indicated, I am not 

sure that is going to be enough and so I am wondering if the USDA 

might at least be able to clarify the record regarding what can be 

fixed administratively and what requires legislative attention, so 

that if the Members of this Subcommittee want to work with the 

Chairman of the Subcommittee and the Chairman of the full committee on a legislative fix what things are beyond your purview, 

and what things you can and are attempting to address administratively. 

Mr. DAY. Well, administratively we have done some of the things 

that I have discussed already before and we are working to develop 

supplemental rules of practice through informal rulemaking that 

will define the parameters of everything from submitting briefs to 

everything that the industry has to put together for the formal 

rulemaking process. The only legislative thing, as I understand, 

that you could do is somehow amend the Act, and that would be 

the Administrative Procedure Act, that governs formal rulemaking, 

which is fairly controversial and I know it would have lots of folks 

with lots of different opinions on that. But if you were able to do 

something like that, it could potentially speed up the process. 

Mr. GOODLATTE. So it is your opinion that amendments to the 

Agricultural Marketing Agreement Act would not be helpful? 

Mr. DAY. At this time, I don’t think they would be helpful. I 

think what would be useful is that, in this commission that folks 

are discussing to put together, if they could take a look at potentially what exists within both administrative purviews as well as 

15

legislative purviews for potential fixes, we could certainly consider 

further what could be done both legislatively and administratively. 

Mr. GOODLATTE. Well, as we move forward in this Subcommittee, 

I hope that you will make a further examination of that and advise 

us of any things that you identify that are within the jurisdiction 

of this Committee that could be done to legislatively streamline the 

decision making process, because it is one that I know that the Department has been very dedicated in acting on in this particular 

case, which I am very familiar with, but one that nonetheless requires such a lengthy process, that by the time a decision is made, 

marketing conditions have often changed yet again. And in terms 

of the concern addressed by the gentlewoman from New York, 

dairy farmers across the country are very much squeezed right now 

by, well, they are not the lowest prices, they are relatively low 

prices and that is juxtaposed against high input costs that require 

a quick response in terms of marketing Orders. Thank you, Mr. 

Chairman. 

Mr. DAY. Yes, we would be happy to look at that and see what 

we could come up with. 

Mr. GOODLATTE. Thank you, Mr. Chairman. 

Mr. BOSWELL. Thank you, Mr. Goodlatte. The chair at this time 

would recognize the gentleman from Indiana, Mr. Donnelly. He 

stepped out. I guess we are going to move on then to the good doctor from Wisconsin, Dr. Kagen. 

OPENING STATEMENT OF HON. STEVE KAGEN, A 

REPRESENTATIVE IN CONGRESS FROM WISCONSIN 

Mr. KAGEN. Thank you, Mr. Chairman. Mr. Day, what is the 

minimum time that AMS could issue a decision on a Federal Marketing Order? 

Mr. DAY. The minimum time? Well, it depends. On an emergency 

basis, we have done it within about 3 months, but in most cases, 

we are trying to focus to under a year on an emergency basis; 

about 14 months, on a normal rulemaking procedure. 

Mr. KAGEN. Well, if you were an emergency room physician and 

you had to wait a period of time, as you suggest, the patient 

wouldn’t make it. So I am sure you are interested in squeezing that 

time down even more. What are you doing in that regard to hasten 

it? 

Mr. DAY. Well, we have discussed a little bit earlier today some 

of the procedures that we are putting in place to bring it down for 

the normal cases from 2 years to about a year or 14 months and 

those include everything from bringing the industry together beforehand to having a pre-hearing meeting to working within the 

administrative procedures that we have outlined to develop supplemental rules of practice through internal rulemaking and then finally by procuring better or the best court reporters we can in 

order to get—when that evidence comes through, to get it done as 

quickly as possibly so we can then submit it out to the public so 

that they can view and comment on it. 

Mr. KAGEN. Does the USDA have any plans to address the role 

that whey plays in Class III milk prices? 

Mr. DAY. That is under consideration. 

Mr. KAGEN. Can you elaborate? 

16

Mr. DAY. Well, it is under current rulemaking, so I am afraid I 

am, by law, not able to elaborate on that. 

Mr. KAGEN. I wouldn’t want you to violate any laws. I will yield 

back my time. 

Mr. BOSWELL. Thank you. The chair at this time would recognize 

the gentleman from Michigan, I have it straight, Mr. Walberg. 

OPENING STATEMENT OF HON. TIM WALBERG, A 

REPRESENTATIVE IN CONGRESS FROM MICHIGAN 

Mr. WALBERG. Thank you, Mr. Chairman. I had the privilege of 

having seven agricultural listening sessions 2 weeks ago for in-district work period and frankly, the dairy concerns were probably 

number one of all of the testimony, information, and concerns that 

were addressed, so I appreciate the opportunity to ask some questions today. And Mr. Krug, thank you for joining us here this 

morning. Let me ask you. Recognizing the inherent differences in 

the scope of the Federal and California milk marketing programs, 

I assume there are aspects of the California system that simply 

would not work for the Federal system. You have confirmed that 

to some degree already. Can you offer some perspective on what 

you would think will or will not work in the Federal system? 

Mr. KRUG. Well, one major difference of our two systems is the 

amount of testimony submitted in the record and that probably 

comes about because cross-examination is not allowed in our hearing process of the witnesses, except questioning by the panel from 

the Department of Agriculture. Questions can be submitted to the 

panel to be asked. The audience can submit those questions. But 

anyway, I know that the records that get generated in the Federal 

process are huge and then it takes a long time for the analysts to 

go through the record. So I think that is partly because you have 

10 Orders and so many geographic areas and the regional issues 

that are out there; so that makes the issue much more complex 

than we probably handle in one state. 

Mr. WALBERG. Of course, you are a diverse agricultural state. 

Michigan has the, I guess, distinction of being second only to California in the diversity of its agriculture. But you are saying the administrative process is much more broad and cumbersome here? 

Mr. KRUG. Well, the rules are set up for a more exhaustive process under the Federal Order System. We have very tight timeframes and the hearings generally don’t go longer than 2 days. And 

when you have a 2-day record, it is easier to do that analysis in 

a shorter period of time. 

Mr. WALBERG. Okay, thank you. Administrator Day, let me ask 

you. Within the context of Doha, the United States has proposed 

cutting amber box by 60 percent; and 83 percent for the EU. To put 

a dollar figure on this, the United States proposed to reduce its domestic support from the current level of approximately $20 billion 

to around $8 billion. Combining MILC and the price support program, dairy accounts for more than $5 billion. Do you envision the 

Administration proposing a reduction in the level of the domestic 

support to the dairy sector? 

Mr. DAY. That is a very good question, Mr. Walberg. I notice 

from this hearing that I need new glasses because it is very difficult to read the names. But I am not responsible for the Doha disVerDate 0ct 09 2002 12:53 Mar 05, 2009 Jkt 041481 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 I:\DOCS\110-13\41525.TXT HAG2 PsN: JAMIE
17

cussions and the debates and so I will read to you what I believe 

would be the Secretary’s response to that, to a similar question 

that he received. The proposal that we have for the farm bill recognizes that milk prices have been well above support prices in recent years and the trend is expected to continue. Therefore our proposal focused on a safety net for dairy farmers to address the variability in milk prices. We maintain the MILC program, but propose 

that the MILC payments are consistent with our other counter-cyclical safety net programs. The payment rate would be phased 

down over the life of the program and payments would be based 

on 85 percent of historical milk marketings over the 2004 through 

2006 period. The proposals are also good WTO policy, because payments that are based on historical production are less trade-distorting. Now, I know that doesn’t answer your question, if we were 

going to reduce that support based on what the Doha deal is, 

but——

Mr. WALBERG. Well, it sounds like a reduction. 

Mr. DAY. Well, it is a small reduction, but one that still maintains that safety net. 

Mr. WALBERG. Okay, thank you. I appreciate that and I yield 

back. 

Mr. BOSWELL. Thank you. At this time, the chair recognizes the 

gentleman from Texas, Mr. Conaway. 

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A 

REPRESENTATIVE IN CONGRESS FROM TEXAS 

Mr. CONAWAY. Thank you, Mr. Chairman. I appreciate that. And 

based on your opening statement, I am even less qualified to ask 

questions this morning than you are, because I don’t have a lot of 

dairy in my district, but I do have a couple of points that caught 

me during the testimony. One, our colleague from New York used 

the word fraud with respect to the reporting error. Mr. Bosecker, 

is it fraud, mistakes, honest errors, or what? 

Mr. BOSECKER. At this point, we cannot answer for sure on that 

question. We are going back to the plants and I must say that 

when we did re-contact a plant in question, they were very forthcoming. 

Mr. CONAWAY. Do they have a turnover of personnel? Is there 

somebody new preparing the reports? I suspect these reports are 

basically the same every period. Do they have somebody new doing 

it and are they just misunderstood? 

Mr. BOSECKER. That is not my understanding. I don’t have any 

knowledge that there was someone new. 

Mr. CONAWAY. So the same person made a change in it? 

Mr. BOSECKER. However, there could be changes and what is entering their pricing schemes come in and out and something may 

not have been in there for a long time and showed up. There are 

a number of factors that are possible. 

Mr. CONAWAY. Okay. Mr. Day, you used the word emergency and 

you also used the word urgent. Let me ask this other question first. 

Something that struck me that was really odd is that USDA has 

a problem with court reporters. Court reporting or hearing reporting is done everywhere and you are the first person who has come 

18

to us, or at any place I have ever been, who said you had a problem 

getting qualified, competent reporters. What did you just tell us? 

Mr. DAY. That is a very good question. We used to have a practice of getting the best value, in other words, the least expensive 

court reporters that weren’t as good as getting a higher-paid, higher-skilled court reporter, and so we have moved to paying a higher 

premium to get folks that will be able to get the court reporting 

done in a quick and efficient way. 

Mr. CONAWAY. How long did it take you to come to the conclusion 

that your reporting wasn’t being done timely? I mean, how long 

have you had this problem? 

Mr. DAY. We moved to it in 2005, so it was 2 years ago and I 

don’t know——

Mr. CONAWAY. Yes, before 2005, you weren’t using court reporters? 

Mr. DAY. I am going to turn it over to the person who actually 

made a lot of these changes and has been working hard to streamline the system, Deputy Administrator Coale. 

Ms. COALE. Thank you. Prior to 2005, we were required, under 

the contracting regulations or rules in place at USDA, to use a 

USDA-contracted court reporting service and this was a service 

that USDA contracted for. We used them in one particular hearing 

and the industry can attest to this. It took us over 3 months to get 

a hearing transcript from the proceeding and ultimately, when we 

did get the transcript, it was in such poor shape that we weren’t 

able to——

Mr. CONAWAY. Okay. Given my limited time, Ms. Coale, is this 

the only the only problem you had? 

Ms. COALE. No, prior to that. Once we started doing the best 

service, since 2005, we have had good delivery on our——

Mr. CONAWAY. So Mr. Day, the comment about reporting is a 

dated issue? 

Mr. DAY. Correct. 

Mr. CONAWAY. I am not sure how it is helpful to us this morning. 

Help me understand what emergency and urgent mean, in the context of a 14-month rulemaking process. What denotes emergency 

that takes 14 months to fix? I have a little different context on 

emergency, kind of like what my colleague from Wisconsin was 

talking about. 

Mr. DAY. Well, it is not an emergency, it is more the marketing 

conditions which have changed and the industry comes to us and 

they request emergency proceedings so that we can expedite the 

rulemaking and so it doesn’t take 2 years, so that we can get it 

done within a year. 

Mr. CONAWAY. I am sure the witnesses that will follow will be 

very relieved that we have trimmed it off from 24 months to 14 

months. Again, I am not really qualified to be grilling you like this, 

Mr. Day, but what I have heard from you this morning is an awful 

lot of mumbo-jumbo. 

Mr. DAY. Well, I am sorry it sounds like mumbo-jumbo. It sounded like mumbo-jumbo when I first had to deal with it myself, sir, 

I can assure you. But the way that it is structured is so that there 

is a maximum public participation and transparency in the Federal 

rulemaking process, through the Administrative Procedure Act, so 

19

that all participants have the ability to present their case and also 

to cross-examine the case of those who are putting the proposal out 

there. And so it becomes this complex body of evidence—excuse 

me—that is reviewed by all participants in the industry and then 

they produce comments on it. So it is not that it is mumbo-jumbo 

so much that it is a complex legal proceeding that is structured 

now for maximum public participation that can stand up to litigation, which it frequently comes under. 

Mr. CONAWAY. Okay. Thank you, Mr. Chairman. 

Mr. BOSWELL. Thank you, Mr. Conaway. And that is our first 

round. By the way, it was an interesting question. Mr. Day, we 

could find some court reporters. I could direct you to a little college 

that is turning out some good ones, but you would have to ask me 

that. I couldn’t volunteer that. A question I would have, Mr. Day: 

Each decision made in a Federal Order is voted on by the producers in that group or Order, but they are not necessarily given 

the right to vote, the individuals. The Order allows for cooperatives 

to block-vote their membership. Does this create any concern to you 

for what the producers themselves might feel as far as you collecting information? Do you feel they should have the right to be 

able to vote on decisions that affect their business? 

Mr. DAY. That is an excellent question. Historically, since these 

cooperatives are composed of boards that are made up of their producers, we feel that that issue of the producers not having a say 

in the vote isn’t actually a problem. They have the right to go 

through their cooperative process to tell their board what——

Mr. BOSWELL. Well, I understand that, but I thought we should 

discuss it a little bit. I have been a lifetime supporter of co-ops. I 

have chaired a co-op board for many years and times, but it is so 

volatile, this business of milk marketing, that I just wonder if there 

have been times that you felt like you maybe ought to have reached 

out to the individual producers themselves, and that was the reason for the question. What would AMS need to add to its current 

budget and staffing levels to provide the level of data collection 

that is ultimately now provided by CDFA? 

Mr. DAY. The level of the data collection? 

Mr. BOSWELL. Yes. And auditing. 

Mr. DAY. I think we will have to get back to you on that. 

Mr. BOSWELL. Okay, would you do that? 

Mr. DAY. Yes. 

Mr. BOSWELL. We are delving into budget matters as well. And 

I had another question for you, Mr. Krug, but I think you have 

pretty well answered it, on the timeliness of getting your decisions 

out, so I thank you for that. At this time, I would recognize Mr. 

Hayes. 

Mr. HAYES. No questions. 

Mr. BOSWELL. No questions. Mrs. Gillibrand? 

Mrs. GILLIBRAND. Thank you, Mr. Chairman. I would like you to 

take some time. I have looked at the USDA’s website and you have 

discussion questions and answers on Federal Milk Marketing Orders and the question of today is how are specific price levels determined? And your answer on the website reasonably reflects economic conditions affecting the supply and demand for milk, such as 

feed prices, assure a level of farm income adequate to maintain 

20

productive capacity sufficient to meet anticipated and future needs, 

be in the public interest, and to assure adequate supply. I would 

like you to address these four principles, particularly, has the milk 

pricing been reflecting the cost of feed? With the interest in cornbased ethanol, feed prices have skyrocketed and when I look in 

these industry magazines, they recommend that dairy farmers lock 

in feed prices now because those prices are going to continue to go 

up. 

So I want you to address that, how you look at the feed prices. 

I also want you to look and explain to me how you assure a level 

of farm income adequate to maintain productive capacity sufficient 

to meet anticipated future needs, because from what I have been 

able to understand over the past several months and over the past 

year, that milk pricing hasn’t reflected the adequate level of farm 

income and that our farms are going out of business. In the Northeast and in New York State alone, over 30 percent of our dairy 

farms have gone out of business over the last several years and it 

is really impacting our economy, our quality of life, the level of 

wholesome foods available, so please address these issues. 

Mr. DAY. Well, thank you for that question, Mrs. Gillibrand. I 

understand full well the concern that many dairy farmers, and 

many beef and poultry farmers as well, are facing right now with 

the higher cost of feed. I just want to reiterate that the Marketing 

Order Program is not a price support program. What we do is guarantee a minimum price, a blend price based on what is actually the 

supply and demand factors that NASS reports on the price of milk 

and butter and cheese. And so what we do is we add, for dairy 

farmers, the price is less for Class III and IV than it is for I and 

II, they get that blend price no matter what. And many in the industry have tried to come to us in the last several weeks, because 

of the increasing price of corn, to say you need to use the Marketing Orders to fix that, but again, we are not a price support system. 

Mrs. GILLIBRAND. Let me interrupt you for a moment. Is the answer on your website, then, incorrect? 

Mr. DAY. What was the answer, again? 

Mrs. GILLIBRAND. It says, how are specific price levels determined? Point A, reasonably reflect economic conditions affecting 

the supply and demand for milk, such as the price of feeds. 

Mr. DAY. That is true. It is in there and it is part of what is the 

make allowance, which becomes the price of manufacturing of 

Class III and IV product, and then the price of Class I and II product is a differential that is on top of that, but those are economic 

factors that are under consideration in that formula. And recently 

there was a court case in January that upheld that decision. Or in 

February. Excuse me. 

Mrs. GILLIBRAND. So please address the second point. I understand it is not a price support system, but if these are how the 

prices are determined, are you actually using these four components in your price system? I mean are you, in fact, assuring a 

level of farm income adequate to maintain productive capacity sufficient to meet anticipated future needs? 

Mr. DAY. One of the issues about that, that is a good question 

because at the end of the day, the production of the product and 

21

the amount of supply and demand is going to determine what the 

price of that product is. And if the price of the product goes into 

a point where the farmers, such as the ones you are discussing, are 

not able to pay their loans, then the statement on the website is 

not exactly accurate, because farmers react in all sectors, in dairy, 

in corn, in whatever, to the price in the marketplace. As that price 

goes up, as you saw from the recent corn planting intentions, more 

people are going to move into that commodity and so we have these 

unfortunate swings that occur. But what this program does is at 

least guarantee a minimum price for those producers and some of 

them obviously don’t make it and we are distressed by that, but 

that happens in all segments of agriculture, unfortunately. 

Mrs. GILLIBRAND. I only have 17 seconds, but in the last item it 

says be in the public interest. How do you, as the USDA, define 

the public interest? Is survivability of dairy part of the public interest? 

Mr. DAY. Well, certainly and part of the public interest is also 

to have an adequate supply of fluid milk, and so through the Marketing Order Program, we are able to do that, both by guaranteeing a minimum price as well as by balancing it with the blend 

price so that you don’t have the potential chaotic conditions that 

might occur when processors and farmers, or farmers are competing to get a different price from the processors. 

Mrs. GILLIBRAND. Thank you, Mr. Chairman. Thank you for your 

testimony. 

Mr. BOSWELL. Thank you. The chair recognizes the gentleman 

from Virginia, Mr. Goodlatte. 

Mr. GOODLATTE. Thank you, Mr. Chairman. Let me follow up on 

the question from Mrs. Gillibrand. Administrator Day, in response 

to my questions, you said the Administration wasn’t looking to 

offer any legislative solutions and you pointed to the Administrative Procedure Act as being something that is very controversial 

and making changes to that could be quite difficult and I certainly 

understand that. That is a government-wide administrative process, is it not? 

Mr. DAY. Yes. 

Mr. GOODLATTE. That it governs actions taken by the Environmental Protection Agency, actions of all kinds of environmental 

and labor regulations and so on. What you are attempting to do, 

and I appreciate very much the sincerity of what you have had to 

say and what is said on your website about trying to be responsive 

to the needs of dairy farmers. What you are trying to do is react 

quickly to changing market conditions. That is a very different type 

of thing than some of the types of regulations that are issued under 

the Administrative Procedure Act, is it not? 

Mr. DAY. Yes, it is, sir. 

Mr. GOODLATTE. Well, one of the things that I understand has 

been an ongoing discussion is whether or not dairy policy, changes 

in dairy policy, like the transportation issue that we have been concerned about in the Southeast and other issues related to responding to things like the make Order and how farmers address the fact 

that their grain prices go up a lot more quickly in a year, which 

was what you said you tried to get emergency responses taken care 

of. Wouldn’t it be better to think outside the box here and examine 

22

whether or not there ought not to be a better way to make these 

decisions more quickly than under the Administrative Procedure 

Act? That would certainly be under the jurisdiction of this Committee, to look at changes in the Agricultural Marketing Agreement 

Act that would allow us to come up with a new way of allowing 

you to act more quickly to make some of these decisions. 

Mr. DAY. Oh, we would certainly be open to consideration of any 

new ideas. 

Mr. GOODLATTE. Well, we are looking for ways to empower you 

to be able to act more quickly. Obviously taking into account all the 

complexities that go into dairy policy, and we certainly understand 

that, but at the same time recognizing that when a farmer is hung 

out there with high grain prices, high energy prices, they need 

changes pretty quickly as has been correctly noted, that is not how 

you would respond to other types of emergencies when people are 

hurting pretty badly. So I hope that we can expand these discussions and include the Chairman and his staff and others to look at 

whether there isn’t a creative way to insert into this farm bill some 

new process that you could follow that would allow you to act more 

promptly, and to address the things that have been noted by Mr. 

Krug, that actually are correct if you start from the premise that 

we are hamstrung by the Administrative Procedure Act. Maybe 

there is a way to put you on to a different process than to simply 

say you have got to follow all of those procedures, because that is 

what is done with all other regulations under the Federal Government. 

Mr. DAY. Right. 

Mr. GOODLATTE. And I think there are other sectors of our economy that react much more quickly to market forces and are not 

bound by the process of the Administrative Procedure Act and we 

certainly wouldn’t expect, for example, the Federal Reserve to respond to interest rates in that fashion and to say we will get back 

to you in a year about whether we need to raise or lower interest 

rates. 

Mr. DAY. And we look forward to working with you on that, sir. 

Mr. GOODLATTE. I thank you and I thank the Chairman. 

Mr. BOSWELL. The chair appreciates, Mr. Goodlatte, your comments and let us associate ourselves, the whole committee, with 

those suggestions. Thank you very much. And we would like to 

work with you and expedite, if at all possible, the things we have 

been discussing about. At this time, the chair would recognize the 

gentleman from Wisconsin, Dr. Kagen. 

Mr. KAGEN. Thank you, Mr. Chairman. I have to apologize to you 

for being late, so I didn’t get to hear Dana Coale speak, but I would 

like to ask you, since the Agricultural Marketing Agreement Act of 

1937 was enacted and subsequently amended, ‘‘to establish and 

maintain such orderly marketing conditions as will provide, in the 

interest of producers and consumers, an orderly flow of supply to 

avoid unreasonable fluctuations in supplies and prices.’’ Can you 

remind me of two things that you are most proud of in doing, in 

your position, to see that that Act is carried out? Dana. 

Ms. COALE. Thank you, sir. I have been in the position for the 

last 21⁄2 years and I think one perfect example of how we were able 

to react to marketing conditions would have occurred when the 

23

hurricanes hit in the Southeast region of the United States in 

2004. During that time, there were several hurricanes and what we 

saw was a huge disruption to the marketing of milk in that region. 

The Department was able to work very closely with the industry 

and we were able to identify provisions within the Orders that 

could be changed to help ensure that fluid milk was being obtained 

by the marketplace for consumers, and that the dairy industry was 

not having to incur unnecessary transportation costs to meet those 

needs. 

Mr. KAGEN. So under extreme emergencies, you can respond 

rather quickly? 

Ms. COALE. Absolutely. One of the unique things that made that 

situation work very effectively for everyone was the fact that there 

was nearly complete consensus in the industry, both on the processing side and the producer side, and I think if you were to examine the industry, that that is a very rare occurrence, for everyone 

to have a consensus. But everybody identified the need and we 

were able to move quickly on that. I think that is an important 

thing for the industry as a whole. To move forward and to move 

more rapidly, we need to be able to build consensus within the industry on issues that can be addressed within the Federal Order 

program, and I think that will go a great length in helping to expedite any processes and any proceedings that come before us. Part 

of the challenges that we face is, when we hold a hearing, there 

are very differing opinions and these differing opinions occur not 

only between processors and producers, but they occur between 

producers themselves. It makes it very challenging for the Department to look at all sides of the issue and determine what is truly 

an appropriate response and appropriate action that is going to ensure the efficient marketing of milk for the industry. 

Mr. KAGEN. And what can you identify for us this morning as 

perhaps your most glaring need to improve upon? 

Ms. COALE. The most glaring need to improve upon, there are 

probably several issues that could be addressed on that. I think if 

we were to look at particular proceedings, I could identify a couple 

that I would have desired that they would have moved more quickly. But part of that is a failure for possibly USDA and the industry 

to discuss the issue prior to getting into restrictions by the rulemaking process, to identify things that would be needed for the evidentiary record of the proceeding for the Department to be able to 

make a decision. Absent having that information on the record, it 

becomes very difficult to make a decision. Part of the process that 

we implemented with the current Class III/IV proceeding was to 

put in place a pre-hearing workshop and this was designed clearly 

after the California system. When we talked with them, we made 

modifications to it to fit our current program. But what that was, 

it was an attempt for the Department and the industry to have a 

thorough conversation before anybody who was interested in participating, to discuss the issues so that everybody understood what 

the proposals were that were being considered and what information would be needed by the Department to be able to make a decision based on the hearing as we are going through it. 

Mr. KAGEN. Thank you very much. I yield back. 

24

Mr. BOSWELL. Thank you, Dr. Kagen. Mr. Walberg is recognized 

for 5 minutes. 

Mr. WALBERG. Thank you, Mr. Chairman. Just to take another 

shot at the rulemaking process and follow up a bit with what Mr. 

Goodlatte addressed, if indeed, in the Agricultural Marketing 

Agreement Act, the formal rulemaking process is required. If we 

were to go to an informal rulemaking process, would that speed it 

up, the whole process of making the rules, and would it be valuable 

enough to proceed in that direction? 

Mr. DAY. Well, I think it is certainly something that we can discuss as we continue to have a discussion related to how we can 

speed up this process. I think the quick answer is that moving to 

informal rulemaking would not necessarily make it any faster because, as Dana just articulated very well, there is often a lot of division about a given proposal. The good thing about formal rulemaking and the process as it is today, is that it raises all of that 

discussion into an evidentiary record of the proceeding that can 

then be decided upon and analyzed and stand up in a court of law, 

because often these cases are, before they even become final rules, 

there is an injunction of some kind. 

Mr. WALBERG. Well, it just seems that though there is disagreement out there and significant, that some way, somehow, that 

there can be a coming together and present those diverse opinions 

and even hopefully come to agreement that we have to coalesce 

around an issue and make a decision to bring it before the rulemaking process and ultimately the process could move more quickly in a formal proceeding. I don’t necessarily understand why we 

have to major on the disagreements to the point that we just extend the disagreement talk over and over and over. 

Mr. DAY. Yes, I understand and I think what we have tried to 

do in the Southeast is something where we worked together with 

the industry to bring everyone together so that before we move into 

a hearing process, that we built that consensus, and I think we will 

have to see how that proceeding moves forward, but I think that 

will be evidence of where the Department has actually gone out 

and been proactive to address a certain economic condition to build 

that industry consensus before we get into a proceeding and hopefully that will make it a lot smoother and a lot faster and a lot less 

contentious. 

Mr. WALBERG. Well, hopefully that would be the case. I know the 

producers don’t have that luxury in most cases. In the process of 

going through this, first, the farm bill myself, I have been doing 

101 training and educating and mentoring the process and reading 

reports and things like that. It was interesting to read some of your 

reports, the USDA, and one such indicated that, with the milk program and the price support program, they seem to be contradicting 

each other, in some ways going in the opposite direction, and indicating that it has a net negative impact upon the producer prices. 

And so my question is, if their combined effect is to hurt producers, 

why has the Administration proposed to continue these two programs beyond the 2007 Farm Bill? 

Mr. DAY. I am not aware of the study or the comments where 

farmers have said that they hurt producers. I know that when the 

Secretary conducted his farm bill hearings around the country, a 

25

lot of dairy farmers came to talk to him and some of them talked 

about MILC, some about the dairy support program, some talked 

about the speed of Federal Milk Marketing Orders, but it seemed 

pretty uniform, especially when he met with smaller farmers, that 

there was a lot of support for the MILC and for the Milk Price Support Program, and because of that, the Administration moved forward to continue those programs, sir. 

Mr. WALBERG. I mean, this was just coming from your reports indicated that the simultaneous operation of the milk program and 

the price support program has a net negative impact on producer 

prices, and so I am just responding to that statement. 

Mr. DAY. Yes. 

Mr. WALBERG. I am wondering why, if that be the case, the Administration goes forward and pushes the continuation of these 

programs, the two programs, that seems to, according to your reports, have a negative impact on producer prices. 

Mr. DAY. Well, I will have to look at those reports in question, 

but I believe the farmers around the country see those two programs as providing that safety net for them in the event that production increases so much that prices fall dramatically. 

Mr. WALBERG. Okay. Well, I appreciate you checking on the report, then, and finding out why the Department says that it is a 

problem and when the producers are saying that it isn’t a problem, 

what you are telling me today. So I see my time is up. Thank you. 

Mr. BOSWELL. Thank you. Well, I think that pretty much brings 

us to closure. Anybody have any last question they want to ask to 

this panel? Mrs. Gillibrand, please go ahead. 

Mrs. GILLIBRAND. Just one question. My background is as an attorney and I did a lot of antitrust law and so that is the framework 

that I look at for this new industry that I am now trying to represent, the dairy farmers of upstate New York, and I have a question about DairyAmerica. It is a marketing agency of cooperatives 

and they understand that they control roughly 80 to 85 percent of 

all nonfat dry milk produced in the country. Have you guys ever 

analyzed any antitrust issues or concerns about how this kind of 

organization could impact the pricing? 

Mr. DAY. I think that would be the Department of Justice that 

would look into that. I don’t know. From our perspective at AMS, 

we haven’t done anything like that. 

Mrs. GILLIBRAND. Is it relevant at all to your inquiry if information comes only from one entity? 

Mr. DAY. Could you repeat that question? 

Mrs. GILLIBRAND. Is it relevant to your analysis at all, of the 

source of the information for pricing? 

Mr. DAY. I think that is a question for you, Ron. 

Mr. BOSECKER. Certainly since all of our data are weighted by 

the amount of the product that is actually sold, then the size of the 

firm would very definitely impact the overall average price of the 

product. 

Mrs. GILLIBRAND. Thank you. 

Mr. BOSWELL. Okay. Well, thank you very much. We appreciate 

your testimony and your participation and we will excuse you at 

this time and ask the second panel, if they would join us at the 

table. Thank you very much. And so just by introduction, we have 

26

Mr. Chris Kraft, a Board Member of Dairy Farmers of America, 

from Fort Morgan, Colorado. Welcome. Mr. Dennis Donohue, General Manager, Manitowoc Milk Producers Cooperative, from 

Manitowoc, Wisconsin. Am I saying it right, Manitowoc? Mr. Billy 

French, Dairy Farmer, testifying on behalf of Virginia State Dairymen’s Association, from Maurertown, Virginia. Did you by chance 

know an old colleague of mine that lived just up the hill in 

Maurertown, on the hill, named Roy Calvert? We served in the 

Army together and I am aware that he is recently deceased and if 

you happen to see Jean, please give her my regards. Thank you. 

I saw him just a few days before he passed. He was a great soldier. 

And Mr. Eric Ooms, a Dairy Farmer, Old Chatham, New York, and 

from Mrs. Gillibrand’s district. I was just informed. That is good 

and we welcome you. Mr. Ed Gallagher, Vice President, Economics 

and Risk Management, for Dairylea Cooperative, Inc. from Syracuse, New York. So with that, Mr. Kraft, please begin at this time. 

Thank you very much. 

STATEMENT OF CHRIS KRAFT, OWNER, DAIRY FARM; 

MEMBER, DAIRY FARMERS OF AMERICA, INC. (DFA) 

Mr. KRAFT. Good morning. I am Chris Kraft and my wife, Mary, 

and I own and operate two dairy farms in the Fort Morgan, Colorado area. 

The U.S. dairy marketplace is composed of approximately 62,000 

commercial dairy farms, 400 fluid milk plants owned by perhaps as 

few as 75 entities. Ten retail companies that, according to industry 

publication Supermarket News, account for 68.4 percent of all grocery sales, have a firm grip on the retail grocery market. Clearly, 

dairy farmers are not in a position of equal bargaining power and 

Federal Orders are the key in maintaining a more level playing 

field for dairy farmers. Orders provide the marketing framework 

for dairy farmers. They announce and enforce minimum prices, provide common terms of trade for milk marketing, and ensure timely 

and accurate payment for milk sold by farmers, and audit milk 

sales to help farmers capture their share of the consumer dollars. 

Without them, producer incomes would be worse and we feel consumers would be ill served. 

Because the dairy industry and markets evolve, Orders must be 

open to change. While the industry appreciates the fact that the 

change process should be open, transparent and deliberate, the extreme slowness of the process leads many to become disgruntled 

and discouraged, leading to frequent complaints. I am concerned 

that if the Federal Order hearing process is not improved, producers will succumb to the constant rhetoric about the negatives of 

Orders and throw the baby out with the bath water. 

In my testimony today, I will outline three issues involving the 

Federal Order System and hearing process. They include: (1) 

changes needed to streamline the Order hearing and decision procedure and the data necessary to hold a hearing; (2) the inadequacy of staffing levels at key positions within the Order System; 

and (3) a few key comparisons between the Federal Order System 

and the California order system. 

The industry is very concerned about the length of time that it 

takes to make changes in the provisions of a Federal Order. There 

27

are no mandated time constraints to institute a sense of urgency 

to the process. Our cooperative has had several business lines that 

are currently stymied in their planning and marketing operations 

because an Order decision that affects them has not been announced in a reasonable time. We feel that USDA does a good job 

of moving decisions through the process, so long as the decision 

itself remains inside the dairy program staff area. However, once 

they travel up the chain of command and back down with any revisions needing multiple briefings, reviews and rewrites, the process 

often stalls. It would be helpful if USDA revised its administrative 

procedures rules to institute guidelines and time tables. For example, if all the decisions were required to be published to the dairy 

industry within a certain time period, possibly a hundred days 

after a hearing, USDA would have to streamline the process. The 

Committee should get a clear answer from Mr. Day this morning, 

whether or not USDA believes it can promptly effect this type of 

rule change in its own administrative procedures process, or 

whether it requires a Congressional action. Either the Federal 

Order System should be exempted from certain other review processes or given the authority to certify that a particular decision 

meets the intended nondairy rules or requirements. 

Mr. Gallagher outlines several examples of procedural changes 

specific to the hearing process, including a formal review of the 

process by a third party that would report back to this Committee. 

We very much endorse this review concept and urge the Committee 

to adopt it. More specifically, we would be willing to participate in 

the process if asked. We would appreciate the Committee requesting a report from Mr. Day, within 60 days, as to what USDA intends to do to speed up the hearing process and follow the progress 

reports on how these steps are being completed. A second issue related to the hearing process that needs attention, because the dairy 

industry, by itself, cannot do an adequate job in this area, is collecting data relative to the product formula price hearings. 

Milk is a perishable product. As a dairy farmer, I have to sell my 

product every day. I simply can’t put milk in an elevator and wait 

to bargain for a better price tomorrow. Our industry requires a system that establishes prices in a reasonable time and is responsive 

to market conditions. Our current system uses storable products to 

set prices on perishable milk. This mechanism is termed product 

price formula pricing. It is a reasonable way to price milk, but to 

do this the industry needs a good price discovery, milk component 

and plant yield data and the cost to convert milk into various products. Everyone in the industry has a vested interest in the numbers 

that must be generated for the price formulae so each of our individual company data represented at the hearings is biased. We 

need USDA to do the product yield research and cost surveys and 

post the data for industry to use. The process of sorting through 

all of this proprietary data at a hearing is difficult at best. Each 

side has its own data set and reports as it chooses, but always with 

an eye to their own interest. 

I think I have gone over my time and I think that I will conclude 

right here. There are some other suggestions that we have and I 

thank you for your time. 

28

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

Mr. BOSWELL. Thank you. The chair would recognize Mr. 

Donohue for 5 minutes. 

STATEMENT OF DENNIS DONOHUE, GENERAL MANAGER, 

MANITOWOC MILK PRODUCERS COOPERATIVE; ON BEHALF 

OF MIDWEST DAIRY COALITION 

Mr. DONOHUE. Chairman Boswell, Ranking Member Hayes and 

Members of the Subcommittee, thank you for the opportunity to 

testify today. I am Dennis Donohue, General Manager of 

Manitowoc Milk Producers Cooperative based in Manitowoc, Wisconsin. I offer this testimony on behalf of my cooperative as well 

as the Midwest Dairy Coalition. 

The Federal Milk Marketing Order System has been in existence 

since the Agricultural Marketing Act of 1937. The number of Federal Orders has ranged from a high of 83 to the current low of 10 

Orders. Even though the number of Orders has been consolidated, 

the rulemaking procedures are more time consuming, convoluted 

and costly than ever. It is no secret that Federal Orders are controversial in the upper Midwest. Many producers and cooperatives 

in our region believe that the structure of the Federal Orders is biased in favor of high Class I utilization regions and against regions 

such as ours, where the majority of the milk is used in manufacturing. Some producers and producer groups argue that Federal 

Orders should be eliminated all together. My cooperative does not 

support the elimination. However, we do share the concerns about 

the need for more equitable structure for the Federal Orders. 

Without a doubt, some of the frustration is related to the cumbersome and uncertain procedures for making changes. First, there 

appear to be no clear and consistent criteria for USDA to use in 

determining whether a hearing request will be granted. Some proposals that seem to have little merit are given full hearings, seemingly for political reasons. This wastes time and money for taxpayers, farmers, cooperatives and processors. 

Second, there are no clear and consistent criteria for how long it 

will take USDA to respond to a request for a hearing. For example, 

in September of 2005, a significant portion of the dairy industry requested an emergency hearing to adjust make allowances for manufacturing dairy products. A hearing was not held on the issue 

until January 24, 2006, about 4 months after the initial request. 

In contrast, in the case of a recent request by National Milk Producers Federation for an emergency hearing to amend Class I and 

II price formulae, the request was made on October 2, 2006 and a 

hearing was held on December 11, 2006, roughly 2 months later. 

Third, the timeline for how long a hearing will be held after it 

has been formally announced is often too short. The process of preparing for a Federal Order hearing is very involved and complicated. The affected parties should be given adequate and consistent time to prepare. Once a hearing starts, the process is much 

too time consuming and costly. It is not uncommon for hearings to 

last a week or more for single witnesses to be on the stand for 

statements and cross-examined for 3 hours or more. As a result, 

29

the price tag for legal and technical representation also runs in the 

tens of thousands of dollars for a single hearing subject. 

After a hearing is completed, the delays before a decision is made 

are excessively long. In the case of the Class III and IV make allowance changes, the tentative final decision was issued on November 22, 2006, roughly 10 months after the hearing began on the 

subject, and this was designated an emergency hearing. Once a 

final decision has been announced, producers and cooperatives are 

also given an inadequate amount of time to vote on the referendum. When a cooperative such as mine is involved, we must 

discuss the subject at a board meeting before we make a decision. 

In some cases, the referendum deadline is so soon, that there is no 

time for the board to meet. Many have pointed out that the procedures used in California’s state orders are much more streamlined 

and standardized and have suggested that the Federal Order process be modified to follow the California model. In general I agree. 

With the multi-regional nature of the Federal Order System, it 

may require slightly more time for USDA to provide full analysis. 

In light of these concerns, the Federal Milk Marketing Order 

rulemaking procedures should be modified to: (1) Establish clear 

and objective criteria for determining whether a hearing request 

will be granted. Parties requesting a hearing should be required to 

show that the proposal is consistent with the requirements of the 

AMA Act of 1937 and there is significant support for that proposal. 

In the absence of those criteria, USDA should not grant the hearing. (2) Establish a clear timeline for how long USDA has to respond to a hearing request. USDA should be given a maximum of 

2 or 3 weeks to grant or decline a hearing request. (3) Establish 

a clear timeline for how much time needs to elapse between the 

hearing announcement and the hearing date to give adequate time 

to prepare for the hearing. Once a hearing is announced by USDA, 

the hearing should be held 45 to 50 days later. (4) Establish clear 

procedures and time limits on presentation and cross-examination 

during the hearing process. (5) Establish time limits for how long 

USDA will have to issue a decision after the completion of a Federal Order hearing. USDA should have no longer than 3 months to 

issue a decision after a hearing is completed, perhaps even less in 

the case of a single Order decision. (6) Establish timelines for how 

long the affected parties will have to review a decision prior to the 

referendum deadline. Once a decision is announced, affected parties should have 45 days to vote on the referendum to ensure that 

cooperative boards have time to meet. By establishing clear and objective procedures for rulemaking, we all gain. It takes the guesswork out of the process, minimizes cost and ensures that no one 

group has an unfair advantage. 

In closing, the Federal Order rulemaking procedures are one 

small aspect of the concerns related to the Federal Milk Marketing 

Order System, and even smaller still relative to the many dairy 

policy issues confronting the Committee as you prepare to mark up 

the 2007 Farm Bill. Therefore it is important to reiterate that our 

main dairy policy priority for the farm bill is to maintain and 

strengthen a credible safety net for dairy producers, as reflected by 

the continuation of the MILC Program and reauthorization of the 

30

Milk Support Program, with adequate changes to make it a true 

safety net. Thank you for this opportunity to testify. 

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

Mr. BOSWELL. Thank you. Chairman Peterson, did you want to 

make any comment at this time? 

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A 

REPRESENTATIVE IN CONGRESS FROM MINNESOTA 

Mr. PETERSON. I want to thank you, Mr. Chairman and Ranking 

Member—Mr. Goodlatte, you are the Ranking Member today on 

this Subcommittee—for holding this hearing and I think it is important that people get an opportunity to learn more about this 

part of the dairy policy, which continues to be a problem, the unresponsiveness of the Federal System. By the time they get done 

making these conclusions to these Order processes, the problem 

they are trying to fix has gone away. So we have got to try to figure 

out a better way to do this and I think this is a good place to start. 

I think we can learn a lot from the way California operates and 

eventually, I hope that we can get the whole country on the same 

page in dairy policy. This hearing will get us started in that direction. So thank you for your leadership. 

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

Mr. BOSWELL. We know you have got a lot on your plate and we 

appreciate you being here for whatever time you can expend. 

Mr. PETERSON. Thank you. 

Mr. BOSWELL. Thank you. Mr. French, welcome. We will recognize you for 5 minutes. 

STATEMENT OF BILLY FRENCH, DAIRY FARMER, ON BEHALF 

OF VIRGINIA STATE DAIRYMEN’S ASSOCIATION; MARYLAND 

& VIRGINIA MILK PRODUCERS; AND SOUTH EAST DAIRY 

FARMERS ASSOCIATION 

Mr. FRENCH. Good morning, Chairman Boswell, Ranking Member Hayes, Members of the Subcommittee and my Congressman, 

Bob Goodlatte. I want to thank you for the opportunity to appear 

here today on behalf of the Virginia State Dairymen’s Association, 

my cooperative, Maryland & Virginia Milk Producers, and the 

South East Dairy Farmers Association. 

I am here today as a part of what I believe is a consensus in the 

U.S. dairy industry, that regulated milk marketing is beneficial for 

farmers, processors and consumers. While we have a regulated system, it is a system that is designed to respond to the signals sent 

by the marketplace. When those market conditions change, the regulations are supposed to change with them. We may be living in 

the age of instant messaging, overnight mail isn’t fast enough anymore, but our milk marketing regulations have not be able to keep 

up to date fast enough for several years now. So I am also here to 

join the consensus opinion in the industry that our rulemaking 

process needs an update. 

Like dairy farmers everywhere, we are struggling in the southeastern United States. After nearly 2 years or rock-bottom milk 

prices, we now have above average farm prices. Our market-based 

31

system is indeed responding. Projections for the next several 

months look relatively strong. Our input costs, however, are at 

record prices. Fuel prices have been high for more than 2 years. 

Just a little less than a year ago, the price of feed grain began a 

rapid climb. Only the announcement of record corn planting intentions, along with the predictions of a normal weather year in the 

corn belt, have started to soften the feed grain prices in just the 

past couple weeks. Like dairy farmers everywhere, I am concerned 

that our input costs to milk price ratio will remain challenging, at 

best, for the foreseeable future. 

Unlike dairy farmers everywhere, though, we in the Southeast 

face these production challenges in the face of a fluid milk market 

that gets bigger every day. Population growth in the region far exceeds trends in other parts of the country. Federal Milk Marketing 

Orders 5, 6 and 7 are home to 5 metropolitan areas that experienced population growth exceeding 20 percent from 2000 to 2006. 

There are only a total of 16 cities that grew that fast during that 

time period in the entire country. The City of Atlanta, in the heart 

of the Southeast, is the fastest growing big city in the country. 

That population growth not only fuels demand, it also challenges 

supply because it drives up prices for agricultural land. According 

to the USDA’s National Agricultural Statistics Service, the Southeast has the highest increase in cropland value in 2005, up $890 

per acre in just 1 year to an average price of $4,550 per acre. The 

increase was even more dramatic in Virginia, with an increase of 

21 percent in just 1 year to an average price of $4,900 per acre. 

State statistics show a similar increase in 2006. 

To recap, we have the same challenges of input costs as dairy 

farmers everywhere else, but we operate in a region with a constantly growing population and where affordable farmland is increasingly difficult to come by. I believe our needs for a milk marketing regulatory system that responds to the changing market 

conditions might be even more immediate than we need elsewhere 

in the country. 

The industry in the Southeast has been affected in the past few 

years by those higher input costs much more than other regions of 

the country. We have asked for and received a hearing on increasing transportation credits to help cover the cost of moving an increasing amount of milk into the region during more weeks of the 

year to satisfy our market. The inter-market credits have been increased but our request for intra-market credits, which would help 

cover the cost of moving milk within our markets, has yet to be 

acted upon. 

The Federal make allowance hearing, while addressing Class III 

and IV prices only, has reduced producer income in the region, 

when the price signals sent to the farmers should have been just 

the opposite. At the same time, Federal Order Class I differentials 

in use today reflect economic conditions of a decade ago. 

And then there is the weather. You may have heard we have had 

a few hurricanes in the Southeast in the past few years. Extreme 

weather challenges every part of the country occasionally, but here 

again the Southeast is different. Even before the tragic events of 

Hurricanes Katrina and Rita in 2005, there were Charlie, Frances, 

Ivan and Jeanne a year earlier. In 2004, the industry in the SouthVerDate 0ct 09 2002 12:53 Mar 05, 2009 Jkt 041481 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 I:\DOCS\110-13\41525.TXT HAG2 PsN: JAMIE
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east sent a request for an emergency hearing to seek assistance in 

covering the extraordinary cost of transporting milk during and 

after the four hurricane hits that year. Production was lost and 

had to be replaced, most often with milk transported from great 

distances and at great cost. When plants were shut down, the milk 

normally supplied to them had to be process elsewhere, again with 

additional transportation costs incurred. 

We asked for a simple, temporary 3 month increase in Class I 

prices in Federal Orders 5, 6 and 7. Processors joined us in the request. There was no opposition to the request or to treating the request as an emergency. Our request was made early that fall, once 

the damage had been fully assessed. In the meantime, farmers in 

the entire region bore the additional milk marketing costs associated with the four hurricanes in a row. With all of this being said, 

however, the USDA AMS staff is operating within the current requirements of the system. Federal Order rulemaking must follow 

set protocols. Interested parties are allowed to have their say. 

I see that my time is up, so I think I have covered most everything. Thank you. 

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

of the hearing:] 

Mr. BOSWELL. Thank you, Mr. French. The chair would now like 

to recognize Mr. Ooms. 

STATEMENT OF ERIC OOMS, DAIRY FARMER; MEMBER, BOARD 

OF DIRECTORS, AND CHAIRMAN, DAIRY COMMITTEE, NEW 

YORK FARM BUREAU 

Mr. OOMS. Thank you for the opportunity to be here today. My 

name is Eric Ooms. My father and two brothers and I own and operate a 400-cow dairy in Chatham, New York. We also grow approximately 1,800 acres of corn, alfalfa and grass for our herd and 

sell some to neighboring farms as well. I serve on the New York 

Farm Bureau Board of Directors and also as the Chairman of the 

New York Farm Bureau Dairy Committee. The Farm Bureau is a 

general farm organization and it is in that capacity that I will be 

addressing you today. 

As a dairy farmer, I would be remiss if I did not emphasize the 

importance of the MILC Program and how important it is to have 

it extended in the farm bill and returned to the 45 percent rate 

that it started at in 2001. I realize that is not the charge of this 

hearing, but I had to mention it. 

With the recent negative price/cost paradigm that the dairy industry has endured, many farmers are calling for closer scrutiny or 

elimination of the Federal Orders. While I do not have any objection to reviewing the Orders to assess whether the current patchwork structure with so many unregulated and state-regulated 

areas is practical, to eliminate them at this point may be shortsighted. It is important to remember that the Orders exist in large 

part to facilitate the movement of milk within a region, not necessarily to ensure a fair price to my farm or any other farm, for 

that matter, even though we found today that their website says 

something different. 

The first thing that comes to mind is the urgent need to amend 

the Federal Order System in such a way that it would be more reVerDate 0ct 09 2002 12:53 Mar 05, 2009 Jkt 041481 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 I:\DOCS\110-13\41525.TXT HAG2 PsN: JAMIE
33

sponsive to changes in the marketplace. With the recent high energy prices, there were several calls for USDA to review and adjust 

the make allowance for cheese. Several cooperatives asked for an 

emergency hearing on this issue as early as March 2005. It took 

until November 2005 to agree to hold the hearing, which was held 

in January 2006. Based on testimony presented in January, the 

Department decided to have a follow-up emergency hearing in September 2006. By November 2006, a decision was reached. Despite 

an unsuccessful lawsuit, the new rule was implemented in February 2007. That is 2 years to commence and act on an emergency 

hearing. I can only guess that if there were a call for a hearing and 

it was not seen as an emergency, the Department would still be 

gathering facts about what the Wright Brothers had been up to in 

Kitty Hawk, North Carolina. Regardless of what one thinks about 

the need for the changes that were made, this process should be 

able to be completed in 6 months or less. While this was going on, 

California, which has a state order, dealt with the exact same issue 

and the process took less than 5 months. As a producer, it would 

be easy to think, why can’t we in the Northeast simply opt out of 

the Federal Order and do it that way? But when you realize the 

number of States that we are dealing with in our milk shed, it is 

not that simple. 

It would also be a good idea to include the ability for the Federal 

Orders to have the authority to add in a fuel price adjustment 

mechanism that can be paid by handlers. As it currently stands, 

when our haulers need more money to haul milk, and no one can 

doubt that these costs are legitimate, it always falls on the backs 

of farmers. There has to be a practical way to push this cost to a 

place where it is not 100 percent on the backs of farmers. With the 

recent low milk prices, there has been a great deal of concern about 

whether our cooperative system is working for us. Let me state 

clearly, I feel that the answer to dairy farmers’ problems can be cooperatives, so I would implore all of you to retain or strengthen 

Capper-Volstead. This does not mean that there does not ever need 

to be oversight of cooperatives or that being certain that cooperatives are doing an adequate job of educating their members as to 

what is happening with an industry. One tool that we use to keep 

informed is we get a monthly newsletter from the Federal Milk 

Market Administrator so we can keep an eye on our cooperatives. 

One other thing of concern is the lack of oversight in auditing 

over price reporting through the NASS survey. It is more than a 

little disturbing that my family’s income is based on a survey that 

essentially uses the honor system. Whether there is fraud or not, 

whether it is malicious or not, USDA needs to audit the reports 

just to be certain that they are correct. 

Lastly, part of the reason why we need to streamline the process 

is the petition that is currently before the Department that would 

increase the price of milk for Class I and Class II. With the price 

of a gallon of milk in Brooklyn tied directly to the price of a 40 

pound block of cheese in Chicago, there certainly is merit to having 

a hearing to deal with the issue. The length of time that this hearing will take is an effective barrier for any regular farmer from following or participating in the process, because few of us have 3 

years to follow a hearing process. 

34

I thank you for the opportunity to speak here today and I would 

be happy to entertain any questions you may have. 

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

of the hearing:] 

Mr. BOSWELL. Thank you, Mr. Ooms. The chair recognizes Mr. 

Gallagher for 5 minutes. 

STATEMENT OF EDWARD W. GALLAGHER, VICE PRESIDENT, 

ECONOMICS AND RISK MANAGEMENT, DAIRYLEA

COOPERATIVE INC. 

Mr. GALLAGHER. Good morning. My name is Edward Gallagher. 

I am the Vice President of Economics and Risk Management for 

Dairylea Cooperative. Dairylea is the largest dairy cooperative in 

New York State and the largest dairy cooperative in the Northeast 

and the fifth largest in the United States. We want to thank you 

for holding this hearing and we want to thank you for inviting 

Dairylea to testify before you today. 

Dairylea is strong and our 2,400 members are strong supporters 

of the Federal Order System. We think it is one of the most important economic development programs for the United States dairy 

industry that has ever been implemented. However, the rulemaking process does need to change. Federal Orders will need to 

change to survive. The Orders must adapt to changing markets, 

marketing conditions, business practices and technological advancements. Federal Orders must be able to quickly adjust the regulations as circumstances arise if the program is going to remain 

relevant. Presently, the process of changing Federal Orders to 

adapt to these changes takes far too long. Reform of the process is 

necessary. 

As part of this reform, the Secretary of Agriculture must have a 

mechanism that allows him or her to quickly address issues that 

are causing disruptions in the marketplace. For instance, incentives to increase ethanol production are leading to strong increases 

in livestock feed prices without a commensurate response in the 

milk price, or at least not one that has shown up to a large enough 

degree yet. This has compounded the dairy farm profitability issue 

emanating from higher input prices because of energy-related 

items. The Secretary of Agriculture must have tools at hand to 

react quickly. It would help, for instance, if a decision to raise 

Class I prices could be immediately implemented. As it is, a hearing about increasing Class I prices ended 4 months ago and the industry has no idea when the decision might be issued. 

The present operation of the Federal Order hearing process has 

resulted in hearings with no resolutions or hearings where the ultimate resolution takes years. The failure to provide quick decisions 

has implications on the underlying support for the Federal Order 

program and generates business risk for dairy farmers, plant operators, and businesses that market dairy products. Dairylea has proposed for consideration and debate an 8 point plan to improve the 

situation. 

First of all, the Secretary should have authority to quickly increase milk prices. Second, there are two national Federal Order 

hearings that have concluded without a final decision being impleVerDate 0ct 09 2002 12:53 Mar 05, 2009 Jkt 041481 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 I:\DOCS\110-13\41525.TXT HAG2 PsN: JAMIE
35

mented or the proceedings terminated. This Committee should urge 

USDA to move to a final Order and implementation within the 

next 45 days. Third, it has been testified today about a number of 

initiatives taken by USDA to speed up the hearing process. These 

should be acknowledged, supported and encouraged to continue. 

Fourth, an independent review should occur relative to the hearing 

process and the post-hearing decision process. Fifth, statutory 

changes to the hearing and amendatory process are needed. Strict 

timelines are needed in order to get timely decisions. The Code of 

Federal Regulations should be amended to facilitate a different and 

faster hearing process. Deadlines for the steps of the process must 

be included. As part of this process reform, there must be greater 

interaction between those seeking changes and USDA prior to requesting a hearing. Industry-wide pre-hearing conferences and the 

advance submission of hearing testimony must be required. The industry has to work better together, USDA, cooperatives, milk 

plants, the entire industry needs to work differently to get better 

solutions. And the proposal that Dairylea has made in Exhibit 1, I believe can result in more timely information. In fact, if the industry works together the right way, USDA should have all the information they need, for the most part, to make a decision before 

the hearing even starts, if you have advance submission of testimony. Most of the hearing record that has any relevancy to it is 

in the testimony of the people testifying at the hearing. If this is 

already in before the hearing starts, USDA can already start their 

economic analysis before day one of the hearing. I think that is vitally important. 

Sixth, hire and retain additional Administrative Law Judges and 

make sure there are professional court reporting services. Seventh, 

increase the use of the market administrator’s staff members. 

USDA will be challenged to be able to maintain the professional 

staff that it needs to work through the complex issues. There are 

cost-of-living issues, there are quality-of-life issues working in an 

expensive market such as this. USDA is fortunate to have a number of satellite offices around the country, including one in Albany, 

New York, that provides a much more stable quality of life that I 

believe can help them attract and retain high-quality people that 

can help them move through this hearing process. 

And finally, I believe it is necessary to have the Secretary of Agriculture make at least an annual report to this Committee on how 

the Federal Order hearing process, amendatory process, is coming 

and what changes have been made and to make a report that encapsulates what is going on in the Federal Order program. 

With that, my time is up. I thank you again for the opportunity 

to testify before you and I look forward to any questions you may 

have. 

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

Mr. BOSWELL. Well, thank you, Mr. Gallagher. I appreciate all of 

your comments, particularly that last one. That is what we are just 

buzzing up here about. That was a good thought. In fact, you lined 

up quite an order of priorities, so I assume you had them in order 

of precedence? 

Mr. GALLAGHER. Pardon me? I am sorry. 

36

Mr. BOSWELL. Was your number one recommendation for what 

we——

Mr. GALLAGHER. It has to be done. 

Mr. BOSWELL. It has to be done. Well, with that, I think I will 

just ask the rest of the panel to tell us what would be your top recommendation, if we would do something to improve the Federal 

Order System. No particular order. Whoever is ready to respond. 

What is your top recommendation? Mr. Ooms, we will just start 

with you. We will just go down the line. 

Mr. OOMS. I would just say that I had a number of suggestions 

that would just expedite the process, because there are a lot of 

things that USDA has the power to do. As a small businessman 

and dairy farmer, I hear bureaucrats tell me that it takes 10 or 14 

months and it is just not good enough. We can do better than that. 

We are living——

Mr. BOSWELL. I think you have all made that very clear, but if 

you were just to say tomorrow you will do something first, what 

would you have them do? 

Mr. OOMS. From my farm perspective, I would have them decouple Class I from the cheese price. 

Mr. BOSWELL. Okay. Thank you. Mr. French? 

Mr. FRENCH. In this process, if we would just set a timeline to 

have timely regulations that we can live with, it would be the number one thing today. 

Mr. BOSWELL. A timeline, okay. Mr. Donohue? Thank you. 

Mr. DONOHUE. Possibly even reducing the number of Orders from 

10 to possibly even looking at a single Order. 

Mr. BOSWELL. One Order, okay. Mr. Kraft? 

Mr. KRAFT. Make decisions on hearings that have already happened. 

Mr. BOSWELL. Make decisions on the hearings that have already 

happened, okay. That is a good comment. Okay, with that, Mr. 

Kraft, you mentioned that the California system does an unparalleled job of collecting industry data for hearings on price formulae. 

In your opinion, where is the USDA falling short of this data collection? 

Mr. KRAFT. Well, there is no auditing process on the survey. 

They don’t check. They need to check the numbers and make sure 

they are right. 

Mr. BOSWELL. Okay. All right. Mr. French, you said in your testimony that the Class I differentials in use today reflect economic 

conditions of a decade ago. What should they be? 

Mr. FRENCH. The Class I price in the Southeast is probably reflective of the value of Class I, but our blend price is getting reduced down by the lower-class usage that we have. And the Class 

I, the producers that I talk to in the field look at the price in the 

grocery store and they always relate that back to the hundredweight they are receiving and tell you there is no relationship. And 

when the price of the Class goes up in the grocery store and their 

farm check doesn’t show it, then they ask you why. I served on the 

Board for 3 years and that was always the question you got, why 

is the price for milk so high in the grocery store and yet we are 

getting so little on the farm? And so the average producer out 

there, that is what they see day to day as the value of his product, 

37

is that grocery store price and they don’t see that correlation between the grocery store price and his farm check. And so they are 

all going to tell you that if the value of their milk is what it is in 

the grocery store, then the value at the farm needs to be higher 

and they will tell you that 100 percent if you meet at the farm gate 

or at the auction. That is what they are all going to hit you with. 

They will all tell you it is going to be higher somewhere. They see 

a value somewhere with the grocery store. Now, we all know that 

is not realistic, but it certainly needs to go hand in hand. 

Mr. BOSWELL. Now, if it gives you any comfort as a farmer myself, as a cow/calf producer, I have noticed that in the cost of beefsteak. However, your point is well made and I appreciate it. The 

chair would recognize Mrs. Gillibrand for 5 minutes. 

Mrs. GILLIBRAND. Thank you, Mr. Chairman. I would like to talk 

to each of you about your ideas for change. So Mr. Ooms, can you 

talk about what you think the impact would be if you decoupled 

Class I from the price of cheese? And then I would like the other 

panelists to also describe what they think the impact would be. 

Mr. OOMS. Well, it would depend on what region of the country 

you are in and what your Class I would be in your region. I know 

the biggest thing for us is we do have Class differentials that do 

address this, but it would make a big difference in that, and he just 

talked about it. The price of milk in the stores are based on what 

they can get for their product. But if you think about it, our milk 

is largely set by the price of cheese in Chicago at the Mercantile 

Exchange or the NASS, which is obviously unaudited. So it is going 

to be different in every area of the country, but there should be a 

price discovery mechanism, whether it be regional or national, for 

Class I milk. As far as the impact to my farm, it is going to vary. 

I couldn’t give you that right here today. I could get back to you 

on that. 

Mrs. GILLIBRAND. But to the broader issue, it sounds like, certainly from our region of the country, the price of milk is just too 

low and it is typically too low and it doesn’t reflect the cost of producing the milk, and I understand that the cost differentials for 

Class I are supposed to reflect that. Do you have any sense, as just 

a producer, why these price mechanism aren’t working? Do they, 

perhaps, not have enough influence in the formula? 

Mr. OOMS. Well, I think part of the problem is, is I know that 

with the make allowance change, they were asked to change the 

make allowance for cheese to reflect the transportation or the fuel 

costs to go into making cheese. At the same time, they were asked 

to, I know I talked with Ed about it, about changing the differential for Class I and the judge kind of set that aside because it was 

too controversial. And then the industry was segmented, because 

we all agreed on the whole package, but the way the process moved 

so slow, it was important to those that were cheese producers to 

get that fixed right away and we knew if we included the Class I, 

if the process was sped up, even if they didn’t address Class I at 

that point, at least we would have had a hearing on it. But the 

problem is, as you get too many issues on the plate, you end up 

cutting stuff out, because when I see that the Southeast producers 

have their thing, and I agree with what they are asking for, and 

38

I said to myself, this is never going to happen because they are just 

never going to get to it. 

Mrs. GILLIBRAND. Thank you. And many of you have talked 

about transportation costs and you do refer to that in your testimony. If transportation costs weren’t wholly absorbed by the producers, what could an alternative system be to address the differential issue? 

Mr. OOMS. This is for me? 

Mrs. GILLIBRAND. Well, I will finish with you and then I will go 

to the others. Thank you. 

Mr. OOMS. Okay. I know that Ed and some of his contemporaries 

in the Northeast, and I would defer to Ed on that, as far as how 

we could accomplish that. 

Mrs. GILLIBRAND. Ed, go ahead. 

Mr. GALLAGHER. Thank you. Relative to passing hauling on up 

through the marketing channel to the consumers, I think, is vitally 

important. There a number of initiatives that have been undertaken already. We have some fuel surcharges that we pass along 

on some of our sales of milk already. The Pennsylvania Milk Marketing Board, a state regulation has recognized that particular 

issue and in their state regulation they have a fuel surcharge. I do 

believe that there should be some sort of a surcharge mechanism 

under Federal Orders to help pass those costs along to the final 

consumer, where they should be paid. 

Mrs. GILLIBRAND. Okay. Thank you. Anyone else on those two 

issues? 

Mr. KRAFT. We are in a difficult position because we pay fuel to 

the farm for all our input costs and we pay fuel from the farm for 

the milk that is going to the plants. So I know you talk a lot about 

the cost of moving the milk from the farm to the market, but we 

are getting hit on both sides, as well as harvesting costs. So the 

fuel costs on our operations is totally absorbed by us and I don’t 

have any solutions to that, other than that it would be nice if that 

was shared a little bit. We have some processor friends behind us. 

I don’t know if they would have the same opinion, but it would be 

pleasant. 

Mr. FRENCH. If you have a discussion about transportation costs 

in the Southeast in the past year, you would have really got beat 

up, because not only do we have the transportation costs of our 

own milk, but in the Southeast we are hauling supplemental milk 

in to cover our needs and the dairy farmers in the Southeast were 

covering that cost too. I know that first panel said that we had a 

minimum blend that we could receive, but in the Southeast, because of those transportation costs, we actually received the low 

blend for a good many, the last 2 years, because of that supplemental cost to haul the milk in to service the market was bourne 

by the dairy farmers. We have done a lot of work in the last year, 

on behalf of a lot of people, to get that changed around to gain 

some efficiencies and correct that, to where now we are at least 

above the blend. But that transportation cost is huge when the 

price of fuel goes to $3 a gallon for diesel and the distance that we 

are now hauling milk to cover all of those markets. 

I don’t know that the system will ever be able to respond fast 

enough, as fast as our fuel prices go up and down. When the fuel 

39

hits $3 and we start processing in Washington, D.C., the price 

drops back down and it is no longer an issue. There has to be something in place so that those agencies that oversee those milk marketings can control that issue at the time. That is just something 

that is going to have to be in place if they can call on and do and 

not have a hearing. But the transportation in the Southeast has 

been huge for the past and that has to do with all over the country, 

the system that was set up was set up for a surplus that was all 

over the United States and how we have certain areas that are deficit and other areas that are surplus that were not surplus 30 

years ago. So it is changing and our system is just not changing 

fast enough to meet those. 

Mr. BOSWELL. Excellent discussion. Thank you very much. The 

chair recognizes Mr. Goodlatte for questions for 5 minutes. 

Mr. GOODLATTE. Well, thank you, Mr. Chairman. And I want to 

particularly welcome Billy French, who is a constituent and very 

knowledgeable dairy farmer. His son was a page here at the Capitol last year and I know, from that, that he is not only a great 

dairy farmer, but also a great family man, so welcome, Billy. I 

want to welcome all of you. I appreciate your testimony here today 

and I would like to hear from each of you what you, as dairy producers, recommend this Committee do legislatively to speed up the 

process the USDA uses to amend Federal Orders. You could tell 

from the testimony of Administrator Day, that they are searching 

but they are somewhat reluctant to tell us to think outside the box 

and do something pretty dramatic. But given not only the problem 

with fuel costs, but also with feed costs, which change and sometimes can change fairly rapidly, as we have seen with corn prices 

over the last year. They need to be able to respond to you much 

more quickly. So what specifically can we do in that regard? Mr. 

Kraft, I will start with you. 

Mr. KRAFT. Well, providing that the legislative process is faster 

than the milk marketing process, which moves faster is somewhat 

debatable, I would hope that——

Mr. GOODLATTE. Well, it is, but your timing is good because we 

are going to write a farm bill this year and the farm bill is the 

place to put this. 

Mr. KRAFT. Well, like I said in my testimony, what we really 

need is a process that works and is much more responsive. And so 

I would hope that if they don’t do it themselves, if you would require them to do some reporting, to do the audits on the reporting, 

to do some timely reporting as far as the process of a Federal 

Order hearing would go. So that would be my recommendation, is 

to hold their feet to the fire and make them have some deadlines 

so that the process moves ahead. 

Mr. GOODLATTE. Thank you. Mr. Donohue? 

Mr. DONOHUE. Yes, I think the same thing. You could look at 

doing it legislatively, but in issues regarding Federal Orders, it 

does become very controversial and regionalized, and it can get 

bogged down in the Congressional type of situation just as well. 

Mr. GOODLATTE. Let me correct any misimpression here. We are 

not going to decide, on a case-by-case basis, what the transportation allowance is. What we are trying to do is change the process 

so that the Administrator and the USDA are required to make 

40

their decisions much more quickly. We are not under any illusion 

that there isn’t going to be the same controversy there has always 

been between regions of the country, between producers and processors, and everything else that goes into this. But like many other 

sectors of our economy, people face controversy and make decisions 

much more rapidly. As I indicated to you, if you think this is controversial, think about what investors think about whether or not 

interest rates should be raised. 

If you are going to pay for credit, you don’t want those interest 

rates raised. If you have money you are lending, you want the interest rates raised. That comes out where the rubber meets the 

road. But when the Federal Reserve meets, they make a decision, 

they make the decision quickly and it takes effect immediately. 

Now, when prices change for energy, when prices change for feed, 

when the market shifts because of changes in demand and changes 

in technology that have enabled us to ship from the Shenandoah 

Valley our milk greater and greater distances, now it is going down 

to South Carolina and Georgia, we need to have a recognition that 

that costs somebody money to do it and we are not going to be producing it much longer if it costs more to produce it and ship than 

you get paid for it. 

And because this is not a free market system, this is a very 

tightly government-controlled system, and if there is consensus on 

eliminating that and going to a free market system, I would like 

to hear about it. But I haven’t heard that, so we have got to change 

the government-controlled system to respond much more rapidly 

than it does now. That means everybody gets to have their say, but 

then quickly make a decision about what the change is going to be. 

Don’t study the request, then set a date for a hearing, then have 

the hearing and then take months to examine the hearing record, 

then come up with a decision that might be a year or more late to 

the changes that have already taken place in the market. If you 

agree with that effort to both have them administratively change 

some of their procedures and for us legislatively to change what 

they can’t change administratively, those are the ideas I am looking for. 

Mr. DONOHUE. Yes, in my testimony some of the points I made 

out to Mr. Gallagher have a precise timeframe, that once a request 

is made for a hearing, you have 2 to 3 weeks to grant the hearing. 

You have so long in the hearing process. You have so long and hold 

their feet to that. And if there is clear, concise criteria in every step 

of the way, it is going to speed up the whole process. 

Mr. GOODLATTE. Thank you. Mr. French? 

Mr. FRENCH. And I agree with what both of those gentlemen presented in their testimony. Certainly there is a process where we 

can have a timely decision made and we certainly don’t have it 

now. It is not going to solve all of the problems in the industry, 

that is for sure. It is not going to solve all of the contention that 

we have out there. But I think everybody would agree that if we 

had a timely decision-making process and everybody understood it, 

it would go towards alleviating a lot of those concerns and aggravation that we have today. 

Mr. GOODLATTE. Thank you. Mr. Ooms? 

41

Mr. OOMS. I could just reiterate what they have said and what 

you have said. I am not the expert here on this issue. I am looking 

at it from a dairy farmer perspective and I am just going to say 

that it needs to be fixed and there is no reason why we can’t give 

them timelines. I don’t want to close anybody out of the process, 

but when I heard them hemming and hawing about the need for 

consensus in the industry, just because there isn’t consensus 

doesn’t mean that they can’t take the facts and make a decision 

based on the facts. I don’t believe they look for consensus. I believe 

they try to make a good decision. So this whole, ‘‘We need to develop consensus’’ I don’t buy that. So the need for more time for 

consensus is probably not realistic. 

Mr. GOODLATTE. Madam Chairman, my time has expired, but I 

would like them to expand on that in one area that I think you and 

the gentleman from Wisconsin would also be interested in, if I 

might. The USDA has testified, I don’t think today but previously, 

against mandating time-frames, which is exactly what Mr. 

Donohue mentioned, in the law since it conflicts with their discretion to prioritize amendment petitions. And I wonder, Mr. French, 

I will start with you and Mr. Donohue, tell us what you think 

about that. Do you think that we should not mandate specific timeframes that they have to adhere to, so that they could move one 

petition ahead of another if they think it is more urgent? Or do you 

think we should say find the resources to address all of the petitions that are coming at you, in a timely fashion? 

Mr. FRENCH. I think, in the speed in which today’s industry operates at, we don’t have the luxury to prioritize and take one issue 

at a time and I don’t think they should, either. I know when I have 

a cow that is sick and a child that has to be somewhere in school, 

I have got to figure it out and get both of them done. I don’t have 

a chance to say, well, the cow dies and the kid gets to school. It 

is not an option on my part. We handle everything that comes 

across the plate today and get some done in a timely fashion or we 

are not in business. I think that the people that we pay in the government need to do the same thing. It is sometimes a rough day. 

I understand that very well. But you still have to get it all done. 

Mr. GOODLATTE. Mr. Donohue? 

Mr. DONOHUE. Yes, I agree. You hear sometimes, that it was 

hard. We couldn’t schedule an Administrative Law Judge and 

things like that. But if people have their ducks in order, the hearing has been requested and the timeframe should be followed. 

Mr. GOODLATTE. Mr. Kraft? 

Mr. KRAFT. In business you have an incentive to do things in a 

timely manner, as was said before, and in government it is a lot 

of times the opposite. If you work yourself out of a job, you don’t 

have a job anymore. So you have to have some sort of an incentive 

or some sort of structure to make sure that things happen in a 

timely manner. 

Mr. GOODLATTE. Mr. Gallagher, I neglected you in the first question, so you close. Mr. Chairman, in your absence, the Chairman 

was very generous with her discretion. 

Mr. GALLAGHER. Thank you. 

Mr. BOSWELL. Actually, we are all that way over here. 

42

Mr. GALLAGHER. USDA has had plenty of time to perform to the 

market and meet self-imposed deadlines. They have not. They need 

to have deadlines established for them to get the process done faster. 

Mr. GOODLATTE. Thank you. Thank you, Mr. Chairman. 

Mr. BOSWELL. You are very welcome. Dr. Kagen? 

Mr. KAGEN. Thank you, Mr. Chairman. I was a little confused 

there with all of this discussion about timelines and dates and 

deadlines. I thought we were talking about our involvement in a 

religious civil war in Iraq. Mr. Gallagher, as an economist, are you 

really suggesting that the Secretary of Agriculture should have the 

power to determine milk prices? 

Mr. GALLAGHER. I believe that the Secretary should have some 

sort of an authority to be able to quickly react to cost price squeezes, like those that are hampering the dairy industry right now. 

Mr. KAGEN. Is that a free market description that you have just 

described? 

Mr. GALLAGHER. No, I think we could set up some sort of parameters. For instance, you could do something that would say that if 

the milk/feed ratio was below some number for a certain period of 

time, then something should be done on the Class I price. Something like that could be happening and there could be some ability 

for them to just go and within 30 to 60 days have it implemented. 

Mr. KAGEN. And then a ratio also for fuel costs? 

Mr. GALLAGHER. Sure. 

Mr. KAGEN. A ratio for hired hand costs? 

Mr. GALLAGHER. Pardon me? 

Mr. KAGEN. Hired hand, you know, employee costs? 

Mr. GALLAGHER. It would be easy for an economic analysis to be 

put together that could show something like that, in fact. 

Mr. KAGEN. And a ratio for healthcare costs? 

Mr. GALLAGHER. Yes, we are working on a cost of production formula right now within Dairylea to utilize in regulatory proceedings. 

Mr. KAGEN. So you don’t have any concerns about the Secretary 

of Agriculture possessing too much power? You think that the Congress or some form of legislation could rein him or her in? 

Mr. GALLAGHER. Again, with the right parameters wrapped 

around it, I believe it could work. 

Mr. KAGEN. Well, I have been a small businessman for over 25 

years and I have been moving at the speed of business and now 

I am moving at the speed of government, so you understand there 

is some hesitancy for me to really accept that that is really going 

to be very functional. 

Mr. GALLAGHER. I understand. 

Mr. KAGEN. And again, Mr. Gallagher, would you agree with this 

Dutch fellow sitting next to you, the Dutch farmer? I know if you 

are not Dutch you are not much. I have heard it all. From my area 

of the country, the V’s in the phonebook are extensive, van this, 

van that. Would you agree with him that we really need greater 

oversight and audits, and have you done any audits of pricing? 

Mr. GALLAGHER. We audit our internal operations, surely, relative to, I think if you are referring to audits of the NASS price 

survey——

43

Mr. KAGEN. Yes. 

Mr. GALLAGHER.—I think it is a huge problem that there are no 

audits being done already and it is beyond my ability to comprehend why that is not occurring. 

Mr. KAGEN. Would you call it shocking? 

Mr. GALLAGHER. Yes, I would. 

Mr. KAGEN. Okay. And I don’t mean to pry into your businesses, 

but what is your cost per hundred? Mr. Ooms? 

Mr. OOMS. I would guesstimate, because there are so many vari- ables that go into it, but when we can stay around $15 a hundredweight; there is a lot of belt tightening. But that would just be a 

ballpark guess. 

Mr. KAGEN. In the last 3 months, what is your average payment 

per hundred? 

Mr. OOMS. Actually, the last 3 months we have been just over—

just around $15.80, $15 and we dropped down below around $12 

for a good number of years. But the last 3 months, because of whey 

prices rebounding, if it was actually reported correctly, it probably 

would have been more, but that will be discovered. So the last 3 

months they have been around $15.85, $15.58 and the last one was 

$16.30. 

Mr. KAGEN. Mr. Donohue? 

Mr. DONOHUE. I am a quad manager and we don’t really—all our 

members are in proprietary dairy plants and we don’t pay those. 

Mr. KAGEN. Okay. 

Mr. DONOHUE. So I cannot reflect on costs of production. 

Mr. KAGEN. Mr. Kraft? 

Mr. KRAFT. I think Mr. Ooms is probably right. It is very difficult 

to tell from month to month because of fuel prices changing so fast 

and I can tell you that, in the last 6 months, our feed costs have 

moved up 47 percent and that is a real number. I paid $19 a ton 

for corn salvage in the field last fall and we just made contracts 

with the guys, the farmers around us that grow corn for us and we 

are going to be paying $28 a ton this year. So that tells you what 

is going on. And it is very difficult to give you an accurate number. 

We kind of do it for a whole year, which is a conglomerate. 

Mr. KAGEN. Yes. 

Mr. KRAFT. But when costs are moving up so rapidly and the 

price that we receive for our milk lags behind it, not responding, 

that is where we get caught in a squeeze. 

Mr. KAGEN. Thank you all for your time. I appreciate you being 

here. I yield back. 

Mr. BOSWELL. Well, I would like to thank the whole panel. It has 

been an excellent discussion and worth our time to have you here. 

Thank you very much for coming and we are going to excuse you 

at this time, and I invite the third panel to come to the table. I 

welcome to the third panel to table and apologize for the long delay 

you have had. You have been patient. Thank you very much. We 

appreciate it. And so we will just get started right away if we can. 

We have, just for introductions, Mr. Mike Reidy, Senior Vice President, Procurement, Logistics and Business Development, Leprino 

Foods Company, Denver, Colorado. Welcome. Mr. Warren Erickson, 

Executive Vice President and COO of Anderson-Erickson Dairy 

Company in Des Moines. Welcome. Mr. Doug Wells, Co-President 

44

of Wells’ Dairy, Incorporated, La Mars, Iowa. Welcome. You didn’t 

bring any samples. No, I am just kidding. Mr. William Ahelm, CoFounder and Vice Chairman of Hilmar Cheese Company, California. Welcome. And Mr. John Hitchell, General Manager, Raw 

Milk Procurement and Regulations, the Kroger Company, Cincinnati, Ohio. Welcome. So with that, we would like to start with 

you, Mr. Reidy; please begin when you are ready. 

STATEMENT OF MIKE REIDY, SENIOR VICE PRESIDENT,

PROCUREMENT, LOGISTICS AND BUSINESS DEVELOPMENT, 

LEPRINO FOODS COMPANY; CHAIRMAN, INTERNATIONAL 

DAIRY FOODS ASSOCIATION (IDFA) 

Mr. REIDY. Thank you, Mr. Chairman and Members of the Subcommittee. My name, again, is Mike Reidy, Senior Vice President 

of Procurement, Logistics and Business Development for Leprino 

Foods Company based in Denver, Colorado. Leprino if the largest 

mozzarella cheese manufacturing company in the world, with facilities in California, Colorado, Michigan, Nebraska, New Mexico, New 

York and Pennsylvania. I am also the Chairman of the International Dairy Foods Association, IDFA. 

IDFA and its members are committed to working with dairy 

farmers and Congress on new policies that ensure a healthy dairy 

industry. That is why today, at hearings in both the House and the 

Senate, we are releasing our dairy policy proposals for the 2007 

Farm Bill, called Ensuring a Healthy U.S. Dairy Industry: A Blueprint for the 2007 Farm Bill, and it looks like this. It can be found 

at www.heatlhydairyindustry.org.

Our comprehensive proposals include an improved dairy farmer 

safety net, with direct payments not tied to price or current production; greater access to risk management tools, like revenue insurance and forward contracting; a plan to identify needed improvements in the Nation’s milk pricing system through the establishment of a blue ribbon commission to look at Federal Milk Marketing Orders; and securing long-term trade prospects through repeal of the dairy import assessment. A copy of our blueprint will 

be delivered to your offices this afternoon. 

As our policy proposals suggest, the Federal Milk Marketing 

Order System cannot be viewed in isolation. It is only a part of the 

government’s involvement in dairy. Federal Orders exist along side 

the decades-old Dairy Price Support Program and the newer Milk 

Income Loss Contract Program. They are supposed to operate as 

the principal safety nets for dairy farmers. However, if these safety 

net programs were working effectively and truly helping today’s 

dairy farmers, I would argue that we would not have the level of 

controversy and uncertainty over the Federal Order System that 

brings us here today. 

At Leprino, we purchase between 4 percent and 5 percent of the 

Nation’s milk supply. We have a keen interest in making sure we 

keep our existing market strong while finding new outlets for the 

cheese and other dairy products we produce. As such, I have dayto-day experience in seeing how Federal Orders and current U.S. 

dairy policies impact the marketplace. Leprino does not subscribe 

to the dismantlement of the Federal Order System. In fact, while 

many in the industry think we would be better off in a deregulated 

45

environment, there is no consensus. However, there is increasing 

frustration with the length of time it takes USDA to make needed 

changes, and mounting concern when decisions finally arrive, because they are escalating regional divisiveness within our industry. 

This must be examined and improved. 

For example, only in the dairy industry do we have to go to the 

government to ask for permission to update the margins processors 

can use to cover their costs of turning raw milk into finished dairy 

products. It has taken USDA over a year to address this emergency 

issue, as you have heard several times this morning. And while we 

wait, some cheese companies and cooperatives have closed factories 

and many others are still challenged to make ends meet. These 

milk pricing issues are bound to get worse as USDA struggles to 

make the 1937 Federal Orders fit the business realities of today. 

We need strategic processes to sort out the future of the Order System. That is why Leprino supports the creation of a blue ribbon 

commission to analyze these issues more fully and make recommendations that are built on consensus among producers and 

processors. 

As a company fully invested in the long-term health and success 

of the U.S. dairy industry, Leprino believes this Committee must 

pursue a holistic approach to dairy policy. We cannot find our way 

forward on Federal Orders unless producers have a reasonable 

safety net program. We think the structure of the underlying safety 

nets can change for the betterment of producers and processors. We 

support a direct payment program that would decouple payments 

from price and production and would be available year round to 

help farmers. This type of direct payment has the added advantage 

of not distorting markets, which is good for processors. A complete 

safety net also needs to provide more risk management tools 

through forward contracting and revenue insurance. 

Finally, our dairy policies should support expanding market opportunities. This can be done by not erecting artificial barriers to 

trade, like the dairy import assessment, which might lead to retaliation that may threaten any number of U.S. dairy exports, including the whey and lactose products we make. Mr. Chairman, establishing a commission on Federal Orders and fixing the dairy safety 

net in this farm bill is a tall order, but the time has come. Thank 

you for the opportunity to speak to you today. 

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

of the hearing:] 

Mr. BOSWELL. Thank you. Mr. Erickson, welcome. Five minutes. 

STATEMENT OF WARREN ERICKSON, SENIOR EXECUTIVE VICE 

PRESIDENT & COO, ANDERSON-ERICKSON DAIRY COMPANY 

Mr. ERICKSON. Thank you for the opportunity to be here today. 

I am Warren Erickson, Chief Operating Officer of AndersonErickson Dairy. Oh, you got to hit the talk button. Excuse me. Mr. 

Chairman, you know our company well and I want to thank you 

for your leadership as our Congressman, on behalf of the Iowa 

dairy industry. 

I came back to my family’s dairy business after some time in the 

accounting industry and I am here to tell you that complicated tax 

and accounting issues can’t hold a candle to the Federal Milk MarVerDate 0ct 09 2002 12:53 Mar 05, 2009 Jkt 041481 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 I:\DOCS\110-13\41525.TXT HAG2 PsN: JAMIE
46

keting Orders. That is why we support Congress creating a commission of industry experts and USDA officials to look at the future 

of the Federal Milk Marketing Orders and the problems that 

plague the system. Here are just a few examples we have experienced. 

After 70 years, the Federal Government still operates a discriminatory pricing system that assigns milk prices based on the products it is used to make. At AE, we pay the highest price for the 

milk that we buy. We produce fluid milk, known as Class I, and 

yogurt and other cultured products, known as Class II. There are 

also two other classes, Class III for milk used to make cheese and 

Class IV for milk being turned into butter and powder. As far as 

I know, no other perishable commodity in America prices their 

commodities that way, and there is no real reason that milk 

should. 

For fluid milk processors like us, we also pay more for milk 

based on a system that originally priced milk from the distance of 

a plant from Eau Claire, Wisconsin. Known as Class I differentials 

today, you can see from this map that the price still goes up the 

further you get away from Eau Claire. This regionally-based pricing method doesn’t fit today’s economics or dairy industry. And I 

can tell you from firsthand experience that the formal rulemaking 

process used by the USDA to modify complicated Federal Order 

rules is unresponsive, based on the realities of our business environment, unreasonably slow and costly to everyone involved. 

Here is an example of how out of touch the Orders are. At AE, 

we buy from both co-ops and independent farms. We have a new 

dairy farm in our area and we plan to buy their milk. But how to 

do I explain to them that the Class I price reported every month 

by the USDA is what I pay for the milk but not what my farm supplier receives? In frustration, I refer to it as a communist system 

where the market administrator tells me what to pay instead of 

what my supplier and I both agree on is a fair price. In addition, 

it is exceedingly complicated to explain to the supplier what they 

will receive as payment for the milk shipped to AE. A more 

straightforward approach would be much easier for all parties involved. But a straightforward approach is difficult with the current 

system. For example, several years ago, I testified at a USDA hearing on the implementation of Congressionally-mandated Federal 

Order reform. Can you imagine being cross-examined by the USDA 

on the interplay between milk, cheese, butter and powder prices 

and the distance of my plant from Eau Claire, Wisconsin? I gave 

it my best shot. 

After 3 years of deliberation during the last Federal Order reform, countless hours of testimony and hundreds of thousands of 

dollars spent by processors, co-ops and the government on the process, the USDA ultimately proposed a more market-oriented pricing 

system. However, Congress intervened and mandated a different 

scheme with higher Class I differentials. This result hit our bottom 

line pretty hard. Higher prices for our milk leads to less consumption, which not only hurts my business, but the dairy farmers as 

well. From my perspective, a pricing system that makes my milk 

from Iowa more expensive than milk going to a Minnesota cheese 

47

plant, but less expensive than milk in Florida doesn’t make a lot 

of sense. 

You see now why we have this tension in the system. The outcome is always different depending on where your farm or plant is 

located and what the milk is used for. There has got to be a better 

way. However, nobody can agree on how to fix the Federal Order 

System. And fixing it will not be an easy or fast process because 

the problems are so complex and the solutions so politically 

charged. 

Mr. Chairman, I believe Congress can rise above the regionalism 

and divisiveness that comes with trying to solve such a problem in 

a political arena by charging the dairy industry to work together 

to find consensus and solve our own problems. That is why we support Congress creating a commission made up of producers, processors, USDA officials and experts to recommend ways to streamline and simplify the system, increase its responsiveness to market 

forces, and ensure it is still serving the best interests of the industry and consumers. 

In spite of all of the complications and uncertainties, AE will continue to do our best to meet our consumers’ demand and try to increase milk and dairy consumption. We will continue to try to do 

business according to the highest standards of quality my grandfather established when he started our company 77 years ago. In 

the short term, please give us some assistance by establishing a 

Federal Order commission. Thank you. 

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

Mr. BOSWELL. Well, thank you, Mr. Erickson. You have referred 

to that new farmer and I think I know where you are talking 

about, trying to explain it to him and you made the comment it is 

kind of like the communist system. 

Mr. ERICKSON. Yes, sir. 

Mr. BOSWELL. I am going to ask you to consider if maybe you 

could encourage or I encourage you to say, that there is a right 

way, a wrong way, and the USDA way, which we are trying to fix. 

Mr. ERICKSON. I will take that into account, Mr. Chairman. 

Mr. BOSWELL. Okay. Thank you. Mr. Wells? 

STATEMENT OF DOUGLAS J. WELLS, CO-PRESIDENT, WELLS’ 

DAIRY, INC. 

Mr. WELLS. Well, thank you, Mr. Chairman, for your earlier 

warm welcome of Warren and I, and congratulations on your chairmanship, and the opportunity to be here today. 

As a regional processor serving a national market, Federal Orders and our Nation’s dairy policies greatly impact our business. At 

Wells’ Dairy, we are constantly looking for ways to make our business processes faster, more efficient and reduce waste. Competition 

in the dairy industry is challenging and our margins are squeezed 

very tightly. We have a strong relationship with our suppliers and 

we take pride in dealing with all family-owned farm businesses. 

Unfortunately, Federal Milk Marketing Orders and other Federal 

dairy programs are based on outdated, inefficient business models 

that in many ways impede our ability to increase sales of dairy 

products in the marketplace. Since 1976, milk consumption has deVerDate 0ct 09 2002 12:53 Mar 05, 2009 Jkt 041481 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 I:\DOCS\110-13\41525.TXT HAG2 PsN: JAMIE
48

clined by 36 percent to 21 gallons per capita in 2005, the lowest 

level on record. Looking back, Federal Orders played an important 

role, helping to stabilize milk supply after the Great Depression 

and through World War II. However, I can’t think of any other 

business in America where the government sets the price, constrains allowable overhead costs, requires manual reporting of 

what is bought, manufactured, transported and sold, and then 

charges us, the milk buyers, the cost of administering this system. 

Let me give you an example. Wells operates partially in the Central Order. In 2005, the rules changed so that now, to qualify for 

the producer settlement fund, or pool, we have to ship farm milk 

that would normally be processed in our Omaha yogurt plant to La 

Mars. At the same time, we have to do the reverse and that is 

transport milk that is produced close to our La Mars plant to 

Omaha. Federal Order rules didn’t allow processors to vote on this 

decision; only dairy farmers, and more pointedly, their co-ops were 

the only voters. Wells’ Dairy competes with companies inside the 

Federal Orders, with California, which is outside the Federal system, and with some unregulated plants. 

You have heard how cumbersome and slow the regulatory pricing 

system is and you have heard of ideas being discussed to fix the 

system, such as bringing California into the Federal system, or 

making one national Order. It is impossible to generalize about the 

impact of these proposals on Wells’ Dairy. The devil is in the details. That is why we need a commission to study and make nonpoliticized recommendations and wring as much inefficiency out of 

the system as is possible. We can look to California for a possible 

model to consider. Their system does have speed and responsiveness in making cost changes. 

Mr. Chairman, one way to improve the system is to take away 

some of the uncertainty and better manage price risk by allowing 

producers and processors to forward contract. Because of Federal 

Orders, processors like Wells’ Dairy are restricted from working out 

price agreements or forward contracts with producers. Wells participated in USDA’s Dairy Forward Contracting Pilot Program 

until it expired in 2004. The program was very successful. We need 

to get this basic risk management tool back and please, in the process, don’t add unnecessary paperwork and oversight. Dairy processors and producers are intelligent business people and we do not 

need additional USDA hand holding. 

Mr. Chairman, bringing back the Dairy Forward Contracting 

Program is the number one farm bill issue for us at Wells’ Dairy. 

Forward contracting will help us plan ahead to ensure that Iowa’s 

processing capacity can handle Iowa’s growing milk supply. Forward contracting will help make it easier to do long-term planning 

and attract needed investment in farms and plants. 

I want to finish on the point I started with in this testimony. 

Business efficiency can only go so far unless it is complimented by 

governmental efficiency. We need more efficiency in the Federal 

Order System and to find the right solutions will require a well 

thought out consensus from a commission of experts, not quick 

fixes. Unrestricted use of dairy forward contracting is also needed 

to ensure that all milk buyers and sellers can achieve greater price 

49

stability, a key component in any successful business plan. Thank 

you for your time. 

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

of the hearing:] 

Mr. BOSWELL. Thank you for your testimony. Mr. Ahlem? 

STATEMENT OF WILLIAM R. AHELM, JR., CO-FOUNDER AND 

VICE CHAIRMAN OF THE BOARD, HILMAR CHEESE COMPANY 

Mr. AHELM. My name is Bill Ahelm and I want to thank you for 

the opportunity of testifying today. I too got a lot of kicks out of 

hand-milking when I was a child, Mr. Chairman. 

Mr. BOSWELL. You did say kicks? 

Mr. AHELM. Yes. I want to thank you for the warm welcome 

today. I am a Co-Founder of Hilmar Cheese and 1 of its 12 family 

farm owners. Hilmar Cheese is the largest single site cheese and 

whey manufacturer in the world. I would like to say that I feel that 

we are in good hands today, particularly since my own Congressman, Dennis Cardoza, sits on this Committee. 

I have been a jersey dairy farmer my entire life and it is a privilege to be here today to talk about dairy policy, particularly milk, 

natures most perfect food. My perspective comes from being an active dairy farmer and processor in California under the state milk 

marketing system, and we are building a plant that will be opening, hopefully, in October in Dalhart, Texas. We will become part 

of the Federal Order System. 

Relationships between dairy manufacturers and dairy farmers 

have changed dramatically during the last couple of decades. 

Today, over 86 percent of the milk handled is handled by co-ops, 

dairy farmer-owned co-ops, as well as vast holdings owned by dairy 

farmer co-ops in the processing arena, as well as companies like 

Hilmar Cheese. The more seamless and more market-driven the relationship between processors and dairy farmers, the more prosperous the entire dairy sector will be. Furthermore, government expenditures will decrease dramatically because it will eliminate costly government programs. 

Acknowledge, for example, the cheese manufacturing plants 

going out of business, particularly in the Midwest. The elaborate 

government involvement in these markets and the distortion of 

market signals not based on contemporary markets has much to do 

with the reason dairy manufacturing plants cannot survive. We, as 

a dairy sector in general, would be better off without time-consuming, cumbersome and complicated Orders that are open for 

misinterpretation and bias, making it impossible to reflect the dynamic market changes. Why is it that we are denied forward contracting and revenue insurance tools as a safety net? And yet we 

have a CCC, Commodity Credit Corporation, that distorts and creates an oversupply of product at the time it purchases that product 

at the extreme low prices and then later, as prices begin to rise, 

put the product back on the market that continues low prices for 

an extended time into the future. In a sense, it is a double hindrance in establishing market values for the dairy products. 

Federal Order regulations and other dairy policies react very 

slowly to contemporary market signals. California, on the other 

hand, is much more responsive. By comparison, for example, 

50

USDA’s proposed make allowance update, that was requested on 

an emergency basis, has already taken more than a year. California, on the other hand, was able to get greater relief in a more 

timely response. As a matter of fact, it took them 4 months and 

they are already investigating and studying another make allowance proposal. This is just one example of why I don’t see any benefit for California to become part of the Federal Marketing Order 

System. 

We support programs that do not interrupt market signals. This 

is why we do not support the MILC Program. It stimulates production increases and mixes price signals. It also pits one dairy farmer 

against another, one region against another, and sometimes even 

one legislator against another. We should be focused on expanding 

the marketplace, both domestically and internationally. We also 

need help dealing with some other very pressing issues, such as 

labor and managing the cost of environmental regulations. Passage 

of the Ag Jobs Guest Worker Program is vitally important to dairy. 

Conservation-related direct payments, which could replace the 

MILC Program, could be a way to help farmers deal with environmental compliance and rising feed costs. 

I will end by saying that, like many others today, I support 

changes in the way that we approach the Federal Marketing Orders. We cannot rely on California’s system by merely adopting it. 

We need to solve other problems. I think the first step would be 

to form a blue ribbon commission that could evaluate. Many of the 

others have suggested that as well. I think it is a very important 

first step. I have got 17 seconds left and I want to tell you about 

milk. I am excited about milk. If you take a glass of milk and you 

look at it, it is so delicious to drink it just as it is, or you can flavor 

it with chocolate or strawberry and drink it. Or you can take it and 

you can shake it and make whipped cream out of it. You can churn 

it and make butter out of it. You can freeze it and make ice cream 

out of it. You can dry it in a powder form. You can add culture to 

it and make cheese. You can take the whey out of the cheese and 

make protein, the highest value food protein known to mankind, 

characteristics of milk that create weight loss. What a challenge we 

have. The solution to what we are talking about here today is adding value to the dairy supply, is expanding those markets both domestically and internationally. And I thank you in advance for the 

kinds of changes that you are implementing today. 

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

of the hearing:] 

Mr. BOSWELL. Thank you, Mr. Ahelm. I will get it straight sooner 

or later here. I appreciate your testimony and we would like to recognize Mr. Hitchell at this time. 

STATEMENT OF JOHN HITCHELL, GENERAL MANAGER, RAW 

MILK PROCUREMENT & REGULATIONS, KROGER COMPANY 

Mr. HITCHELL. Thank you, Mr. Chairman. As the last speaker on 

the panel today, Mr. Chairman, I would like to thank you for your 

patience and interest in the Federal Milk Marketing Orders. My 

name is John Hitchell. I am the General Manager of Raw Milk Procurement and Regulations for the Kroger Company, headquartered 

in Cincinnati, Ohio. Kroger operates 17 dairy plants in 14 states. 

51

They manufacture a variety of milk, ice cream and yogurt products 

that we sell in approximately 2,500 retail outlets in 31 states. I will 

keep my comments brief. 

After listening to all of the speakers today, I am sure the issues 

and challenges surrounding the Federal Order System are clear. 

Kroger has a special role on this panel, as we sell directly to consumers and believe this process, the marketing of milk and government regulations of the U.S. dairy industry, is intended to work for 

consumers as well as farmers. My comments today are shared with 

our customers in mind. 

As others have acknowledged, it is not an easy task for USDA 

to continue to operate a governmental milk pricing system that has 

grown more complex through the decades. I have to give USDA 

credit; they have tried to make the rulemaking process easier to 

understand and allow for more dialogue within the industry. For 

instance, as you have heard earlier, recently they held a pre-hearing workshop to discuss proposed changes to how milk that goes 

into cheese, nonfat dry milk and butter is priced. Even more important, the pre-hearing workshop allowed USDA to consider the proposed changes before deciding on whether to start the formal rulemaking process. USDA is required to base the decision to hold a 

hearing on whether the changes are needed to ensure an adequate 

supply of fluid milk and orderly marketing. So this type of workshop allowed all interested parties to help USDA understand the 

real-world impact of various proposals in a constructive, open and 

transparent dialogue. 

However, less than one week after the pre-hearing workshop, 

USDA commenced an emergency hearing on a separate issue to 

make changes to the Class I and II formulae. There was no prehearing session this time, which was of concern to Kroger Company 

because these changes would have a significant impact on the cost 

of the Class I and II products we process and the customers we 

serve. I am sharing this recent experience with you to point out the 

need to have more of an open process and predictable pattern before starting Federal Order rulemaking. It takes a lot of time and 

money to get through these hearings and they increasingly result 

in a more complex change to the government’s milk pricing rules. 

The bar on whether USDA should go to hearings should be consistent and set high. Federal Orders were designed to set a minimum price to ensure the orderly marketing of milk and an adequate supply, not to enhance farmer income. Whether you like 

them or not, other government programs, like MILC, are there to 

perform that task. And a thoughtful and judicious approach to Federal Order rulemaking would allow USDA adequate time to consider the potential impact on consumers as well. 

Even more than the effect on our business or on our milk suppliers, USDA needs to be the gatekeeper to make sure this system 

works for the people who are consuming milk and dairy products 

every day. In reality, they are the engine that is driving this train 

and our future prosperity demands heavily, and some might say exclusively, on their willingness to continue to consume dairy products. If we make this system too complicated or too costly to meet 

consumer demands, then they may go elsewhere to fulfill their nuVerDate 0ct 09 2002 12:53 Mar 05, 2009 Jkt 041481 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 I:\DOCS\110-13\41525.TXT HAG2 PsN: JAMIE
52

trition needs. And I can tell you, once you lose a customer, it is awfully hard to get them back. 

In the same way, we need to have an open and constructive dialogue in planning for the future of the Federal Order System, and 

we have to broaden our perspective to take into account the impact 

of Federal Order decisions on consumers. That is why I join others 

here today to urge you to put into place a blue ribbon commission 

to do just that in the farm bill. A commission will allow us to talk 

about important and complex Federal Order issues and the various 

proposals that have been considered to change the system. 

I would also suggest that one of the commission’s primary responsibilities be to ensure that the Federal Milk Marketing Order 

System serves the interests of milk and dairy product consumers 

as well as farmers and processors. We look forward to working with 

Members of the Subcommittee, USDA, dairy farmers and our fellow 

processors to achieve this goal. Thank you again, Mr. Chairman, 

for considering these issues. 

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

Mr. BOSWELL. Thank you, Mr. Hitchell. Normally, the chair asks 

the first questions in the rounds of questions, but due to circumstances, I am going to yield my round to Mr. Costa, then I will 

claim his as the turn comes. So at this time, I would recognize Mr. 

Costa for 5 minutes. 

OPENING STATEMENT OF HON. JIM COSTA, A 

REPRESENTATIVE IN CONGRESS FROM CALIFORNIA 

Mr. COSTA. Thank you very much, Mr. Chairman. I appreciate 

your efforts in holding this hearing and the important work that 

this Subcommittee is doing and it is something that I think we 

share in common, growing up in the dairy industry. And I know 

a couple of the witnesses firsthand and I appreciate the passion 

that Mr. Ahelm and his family share with milk and milk products. 

Certainly, they have done a great job in California and I have 

known the family for many years and actually went to school with 

some of his family members. 

A couple different questions: I am not going to get it all in 5 minutes, so I will have to submit them as we go. But as it relates to 

Mr. Reidy’s testimony, you spoke about the assessment program. 

You have 11 plants around the country, the largest producer of 

mozzarella cheese in the world, I believe. The assessment issue 

that has posed problems for the 2002 Farm Bill you made reference 

to in your testimony. Certainly the provisions created problems 

with regard to some of the trade issues in terms of compliance, but 

I also believe you believe that the assessment might harm our ability to export products. I would like you to explain in a little more 

detail why. 

Mr. REIDY. Thank you, Congressman. I believe the reason we articulated that in the testimony that was submitted is the fact that 

in the world trade environment that we are dealing with right now, 

to say that it is somewhat skittish is maybe an understatement. 

The opportunity exists for any country to retaliate with tariffs of 

its own. 

53

Mr. COSTA. How successful have you been in exporting your 

products abroad? 

Mr. REIDY. We have been very successful at this point in exporting our products abroad. We are the largest exporter of lactose into 

Japan and it is a very important market to us. And so consequently, we are very fearful of any retaliation. 

Mr. COSTA. Okay. It is about a quarter of the product you 

produce or more? 

Mr. REIDY. I am sorry, sir? 

Mr. COSTA. Do you estimate roughly that it is a quarter or more 

of the product you produce? 

Mr. REIDY. It would depend on different products, but some of 

the products it could be a quarter or more of the products we 

produce, yes. 

Mr. COSTA. The other quick question I want to give to a couple 

of the other witnesses. You commented about the problems with 

the Federal Order and the prohibition with regards to forward contracting and such. Do you really think this task force has the ability that some are recommending to try to start over, in essence? 

And if we got a recommendation from a blue ribbon panel, that we 

could try to even out the boom and bust cycles and deal with the 

challenges in California? 

Mr. REIDY. I do. Sir, I do believe there is an awful lot of very 

good ideas that are out in the marketplace being debated right now 

by producers and processors and I think if there were an opportunity for a commission to evaluate those ideas, I think they could 

come up with meaningful recommendations that would benefit both 

producers and processors. 

Mr. COSTA. Mr. Ahelm, you have direct experience with regards 

to the California Milk Pooling Program and made reference to it in 

your testimony. I too go back. I remember when our dairy contract 

wasn’t worth the paper it was written on prior to the 1968 Act. The 

McKinsey report came out recently that I believe you are familiar 

with. There was a big meeting last week in Modesto. I suspect you 

or your family were there. Do you think it has the beginning, combined with this effort of a blue ribbon task force to, for my colleagues who aren’t familiar with the McKinsey report, it was an effort to look at the problems with the California plan and to try to 

deal with some of the boom and bust cycles that we face in California and to figure out how we might improve it and how we deal 

with the problems of quota in California. It goes obviously on to a 

lot more detail, but it is getting some interest. I am just reminded, 

Mr. Ahelm, with your passion for milk, which I share, that one definition of insanity is continuing to do things the way you always 

did and expect different results. Could you give me your take on 

that? 

Mr. AHELM. I think you are absolutely right in terms of the 

McKinsey report. It was funded by the California Milk Advisory 

Board, so it is producer-funded. It is investigating several different 

options as we look into the future, the needs both from the processing side and manufacturing side and how we go about taking 

our products to market. I think a pressing need, however, is——

Mr. COSTA. Would you see that combined with this blue ribbon 

task force that is being recommended? 

54

Mr. AHELM. Yes, I think the investigation, though, for the blue 

ribbon task force needs to even be broader. Certainly, considering 

some of the things that we are considering in California——

Mr. COSTA. Forward marketing? 

Mr. AHELM. Yes, forward marketing, revenue insurance, eliminating some of the costly MILC Programs that send mixed signals 

to the marketplace, and support prices as well. But what we really 

need help with is on the conservation programs, because of our environmental costs that are skyrocketing something unbelievable 

and that is not only in California, that is clear across the United 

States. 

Mr. COSTA. Right. Well, our good friend Congressman Cardoza, 

and my time has run out, but as he is working with our colleagues 

on the EQUIP program in the 2007 reauthorization to create greater flexibility in some of the other conservation programs and I 

think there is bipartisan support to work on that and we will certainly continue to deal with that. My time has expired, but this is 

something, Mr. Chairman and my colleagues, that I think this Subcommittee is going to have to continue to work on. The situation 

in California, notwithstanding the advantages we think that exist 

in the pooling plan that has existed since 1968, is needing change 

and revision. Maybe this blue ribbon task force, on a nationwide 

basis, would allow us to step back and have all the parties come 

together with a set of recommendations that would really allow 

American dairymen to do what they do best, and that is as the finest producers with the highest quality and yields of milk products 

anywhere around the world. It is difficult because, regionally, we 

are stuck in our ways to some extent and I just want to leave you 

with this last anecdotal story. 

When I was Chairman of the Senate Agriculture and Water 

Committee back in the late 1990s, Congressman Cardoza tells the 

story because he had just become Chairman of the Assembly Ag 

Committee. We sat down with a panel for 10 months, with all of 

the dairy interests, and I think some of my friends remember this, 

with the notion that we would meet once a month to talk about reforms and that we wouldn’t want to kill the goose that laid the 

golden egg with regards to the pooling plan. I must tell you, after 

10 months of meeting religiously once a month, we were no further 

along at the end of the tenth month than we were on the first 

meeting in terms of the parties holding firm to their convictions 

and they weren’t going to change. Whether it was the producers or 

the processors or the handlers or the co-ops, it was the other fellow 

or folks that were wrong, wasn’t them, the other folks just needed 

to change. If we are going to make a difference here, I think we 

are going to have to have a better attitude than we had in our efforts there in California and I want to be a part of this effort and 

I know, with your leadership, we can make a difference here if we 

do it right. 

Mr. BOSWELL. Well, thank you very much. We will give it a try 

and thank you for staying and being able to participate. I know you 

have another requirement. At this time I would like to recognize 

Mr. Hayes. 

Mr. HAYES. Thank you, Mr. Chairman, gentlemen. Mr. Costa, 

thank you for the encouragement there, for the timely way in 

55

which you all solved all these problems. I want a volunteer and before I ask the question, you all can talk among yourselves. This is 

a volunteer. And it sort of follows up on what my friend from California just said. And I appreciate the frustration that processors 

and others feel with the Federal Milk Marketing Order System. 

What I don’t understand is why you are requesting that we establish a commission, blue ribbon or otherwise, to continue studying 

the inefficiencies in the system while you all are here with the expertise that you clearly bring. Would you volunteer to offer some 

recommendations and we could get out of the way before we form 

another commission? 

Mr. REIDY. Congressman, I might take a first pass at that. In 

terms of specific recommendations, I will just say the commission 

is one that we believe is important in trying to sort a number of 

contentious details but first and foremost, in terms of specific recommendations, we believe that there needs to be a safety net, but 

it needs to be a different safety net. The safety net right now is 

a composition of MILC payments and dairy products for payments 

and quite honestly, those work at odds with each other. 

A much better safety net is one that would potentially support 

direct payments. At times this could be used to support the environmental compliance costs that Mr. Ahelm referred to. It also 

could involve risk management tools, including revenue insurance 

and forward contracting. Those are very practical solutions that I 

think could be implemented. The blue ribbon commission we are 

looking at, ordinarily it is dealing with Federal Orders. But as we 

mentioned earlier, Federal Orders are only a part of the complex 

tapestry that is the dairy issue and it is really some of these other 

things that we think can be dealt with in the farm bill. 

Mr. HAYES. Well, again, I didn’t want to lose your expertise while 

you were here. I think you had a thought, Mr. Hitchell? 

Mr. HITCHELL. Well, I, too, believe that we need a safety net that 

gives us the opportunity of having forward contracting and revenue 

insurance. And so the greatest opportunity is looking at the marketplace. As we look at that marketplace, there is no reason why 

we shouldn’t be expanding the use of dairy products. As nature’s 

most perfect food, that is the direction and the signal we need to 

get out to the marketplace. We do that more directly in California 

because we have a responsive system that does react in a more 

timely basis to those signals. 

Mr. HAYES. Okay. That is very helpful. Mr. Hitchell, I was asking one of my folks why organic milk was so much more expensive 

than non-organic milk and one of the questions is, I don’t want to 

stir up a hornet’s nest here, Mr. Chairman. Why is the retail price 

of whole milk $3.32 a gallon and the producer is only getting $1.26? 

You are in the witness protection program. We won’t let them get 

you. 

Mr. HITCHELL. Mr. Chairman, we strive to provide good prices to 

our customers every day and to be competitive in the markets that 

we operate. However, my area of expertise relates to the Federal 

Milk Order Program and how we interact with USDA. I won’t be 

able to speak to any issues relating to retail pricing today, but I 

would be happy to work with you to get the answers to any questions that you may have. 

56

Mr. HAYES. Well, thank you. Along the same line, I think you 

said earlier that you want to be responsive to the cost issues based 

on consumer demand, we don’t want to price the product out of 

reach and lower the amount of consumption, but by the same 

token, I am amazed at the difference in the price in this organic 

milk. You get grandchildren, you notice those kind of things and 

the price of other mile, so there is selective ability to absorb what 

seems to be unusual prices versus normal prices. Any comment? 

Mr. HITCHELL. Well, sir, I can tell you a little bit about organic 

milk in the fact that the regulation that USDA sets up makes it 

a time consuming process for a dairy farmer to become regulated 

to become certified organic, plus all of the feed has to be certified 

organic and the cost of that is significantly higher, hence the cost 

of organic milk is significantly higher than the traditional milk 

that we have in our stores. 

Mr. HAYES. Need to put our marketing expert, Mr. Ahelm, on 

that. People know that they are willing to pay it. The same thing 

is true for milk, right, Mr. Ahelm? Mr. Chairman, I will let him 

go here. I yield back. 

Mr. BOSWELL. Thank you. Since I am a little bit out of order, I 

am going to go ahead and continue out of order and recognize my 

colleague from Iowa, Mr. King. Thank you for joining us. 

OPENING STATEMENT OF HON. STEVE KING, A 

REPRESENTATIVE IN CONGRESS FROM IOWA 

Mr. KING. Thank you, Mr. Chairman. I appreciate you holding 

this hearing and an opportunity to work together here as Iowans. 

So perhaps I will just turn my first inquiry to one of your constituents and that would be Mr. Erickson. If I could pose a question, 

in the district that Chairman Boswell represents, there is a newspaper there that published an article on forward contracting and 

milk not that long ago and although I turn to that paper for advice 

continually, I wonder if you could give me some advice in response 

to the implication in that story which would say that, by my reference, that the reason processors want the right to forward contract is because they want the right to pay below minimum price. 

It seemed to be the theme in that article. Would you care to respond to that, Mr. Erickson? 

Mr. ERICKSON. Representative King, Mr. Wells knows a little bit 

more about that, since he was involved in the pilot program, but 

I will tell you that our end result is not to—we need a joint relationship with the dairy farmer. Our end result isn’t to drive them 

out of business. Forward contracting enables them to have the expectation of what their product will garner and they can plan accordingly. If you took a long enough timeframe, you would show 

that the highs and the lows would even out and their average price 

would be the same under both systems. 

Mr. KING. I thank you. Mr. Wells. 

Mr. WELLS. Well, from our standpoint, we think the article got 

some things wrong. Generally, it was a good article, but there were 

a few things that were not quite correct in there. Forward contracting is not about procuring milk below the minimum price. 

Contracting is about stabilizing the milk price. And some of the 

questions earlier about the difference between the finished product 

57

and the raw product price, I don’t know that finished product 

prices are so high so much as they are so unstable; they fluctuate 

and raw milk prices do, too. 

So forward contracting is a huge business tool that is very effective in taking some of the peaks and valleys off those price variations over time and you work within a tighter range, have better 

control of your costs and it is a great business strategy. It is a proven winner and it works. The pilot program of 2000 to 2004 is a perfect example. It was very successful in Iowa. And we are asking for 

permanent, long-term authority to be able, for proprietary processors, such as ourselves, to be able to forward contract. 

Mr. KING. Thank you, Mr. Wells. Would it be fair to draw a conclusion that forward contracting is an important risk management 

tool throughout all agriculture production and that is a benefit to 

the producer, as well as a processor? 

Mr. WELLS. Yes, it would be. Absolutely. It is a good program all 

the way around. It finds win/win solutions versus well, the current 

system, which we don’t feel all the stakeholders are represented 

and do not have an opportunity to participate in the current system as fully as should be to find good long-term solutions. 

Mr. KING. And if I might ask you to speculate a little bit here, 

then. If we had had this forward contracting in place, let us just 

say for a generation so that it would have had an opportunity to 

mature, and the industry had had an opportunity to mature simultaneously. I talk sometimes about economic evolution, how things 

take place, because of the environment that you are in. If you go 

back and rewind, say, 25 years into an environment that had forward contracting, how would you speculate that the milk production and processing industry could look differently or would look 

differently today? 

Mr. WELLS. I would think it would be a much more stable system. I would think that it would be more satisfaction and less disagreement and controversy within the industry, itself. I think the 

industry would be more representative of consumer needs because, 

again, by allowing all stakeholders to participate in the solution to 

problems we can better focus on consumer needs. It seems like our 

current system is pretty well supply side focused and I think we 

need to represent and understand what do our consumers consider 

to be valuable and what do they want when they buy our products? 

How can we value-add our products in industry and by having the 

entire industry participating in solutions to our industry problems, 

we will be better consumer focused. I think we will be more stable, 

more consistent and I think it will be just a happier industry all 

the way around. 

Mr. KING. I thank you, Mr. Wells. I thank all the panelists. Mr. 

Chairman, I yield back. 

Mr. BOSWELL. Thank you very much. I guess many of you have 

discussed or made comment about having some kind of a commission to study this versus, perhaps, having us do it on this panel up 

here on this side, and I think there can be some merit to that. I 

am going to address this to you, Warren. How would you construct 

this commission? Who would be the participants in this commission? And I will let the rest of you join in as you lead off. 

58

Mr. ERICKSON. Mr. Chairman, I believe the commission should 

be as diverse as possible with respect to having some processors, 

some producers, USDA officials and experts in the industry so that 

we can get different perspectives. I think it should be regionally diverse, too, because we have talked about the divisiveness that can 

come with the different regions pitted against each other. 

Mr. BOSWELL. Well, you heard what Mr. Costa had to say before 

he left about their 11 month effort in California, which is a big operation out there, as we all know. 

Mr. ERICKSON. Yes. And while that was not heartening, I believe 

that we did find some consensus today in that the USDA framework that is in place is quite complex, archaic and unresponsive, 

so I think in that framework, if you put this commission together, 

perhaps if it is diverse enough, we could come to a better conclusion. 

Mr. BOSWELL. Thank you. Anybody else want to comment or add 

to? 

Mr. REIDY. Mr. Chairman, I might just add that I think you need 

to have the highest level of expertise in the industry on this commission, people who truly do thoroughly understand the challenges 

with these Federal Milk Marketing Orders. I think, as Mr. 

Erickson talked about, you do need the regional representation as 

well as across the industry in terms of just the diversity of the production operations that we have here at the panel. I think you need 

to take that into mind, too. Thank you. 

Mr. WELLS. From my perspective, Mr. Chairman, I would just 

add when the current system was put together, I don’t believe that 

cooperatives owned or operated processing plants. Today, through 

evolution of time, the cooperatives do own a number of processing 

plants and we find ourselves competing with them more than ever 

before. That is again why I advocate a broader, more representative role for the entire industry in the decision making process. Cooperatives today can forward contract. We think that is a competitive advantage that they have that we proprietary processors do 

not have and we would like to level the playing field. And we are 

hoping that that commission can do that. 

Mr. AHELM. Speaking of forward contracting, I think it needs to 

be clearly understood that it is an option, not a mandate, except 

we are denied the option currently. The blue ribbon committee is 

very important. I think it is essential that it not only reports back 

to Congress, but it reports also to the Secretary of Agriculture because certainly, the efforts on both venues are extremely important 

as far as the way it impacts dairy farmers and processors. 

Mr. HITCHELL. Mr. Chairman, in light of my earlier comments, 

I would also say that it would be a good idea if we could find some 

consumer groups to participate, as well, since as we have said, 

without them we don’t have an industry, so it would be helpful to 

have some consumers to be on this blue ribbon commission to let 

them know and have their input on how we price their milk and 

dairy products they consume every day. 

Mr. BOSWELL. Well, thank you very much. It has been a long 

morning, but it is past morning. We appreciate your taking the 

time and coming and talking to us and you pointed out, we have 

got some work to do. I think it is correct to say that back in the 

59

1985 Farm Bill a commission was established and just what came 

out of that I don’t know, but that doesn’t mean we can’t give that 

reconsideration. So I thank you for coming; I appreciate it very 

much and we will be keeping in touch with you and see if we can’t 

do something that is correct, so that will be our bill. By the rules 

of the Committee, the record for today’s hearing will remain open 

for 10 days to receive additional material and supplemental responses from witnesses. Any question posted by members of this 

panel? This hearing of the Subcommittee of Livestock, Dairy, and 

Poultry is adjourned. 

[Whereupon, at 1:20 p.m., the Subcommittee was adjourned.] 

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