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" ! COMMITTEE PRINT 109th Congress

2d Session

Print No.

2006

107–2

REVIEW THE STATE OF THE UPPER

MIDWEST DAIRY INDUSTRY

A FORUM

before the

SUBCOMMITTEE ON DEPARTMENT

OPERATIONS, OVERSIGHT, DAIRY,

NUTRITION, AND FORESTY

of the

COMMITTEE ON AGRICULTURE

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 31, 2006, WINONA, MN

www.agriculture.house.gov
COMMITTEE ON AGRICULTURE

BOB GOODLATTE, Virginia, Chairman

RICHARD W. POMBO, California

Vice Chairman

TERRY EVERETT, Alabama

FRANK D. LUCAS, Oklahoma

JERRY MORAN, Kansas

WILLIAM L. JENKINS, Tennessee

GIL GUTKNECHT, Minnesota

ROBIN HAYES, North Carolina

TIMOTHY V. JOHNSON, Illinois

TOM OSBORNE, Nebraska

MIKE PENCE, Indiana

SAM GRAVES, Missouri

JO BONNER, Alabama

MIKE ROGERS, Alabama

STEVE KING, Iowa

MARILYN N. MUSGRAVE, Colorado

RANDY NEUGEBAUER, Texas

CHARLES W. BOUSTANY, JR., Louisiana

JOHN J.H. ‘‘JOE’’ SCHWARZ, Michigan

JOHN R. ‘‘RANDY’’ KUHL, JR., New York

VIRGINIA FOXX, North Carolina

K. MICHAEL CONAWAY, Texas

JEFF FORTENBERRY, Nebraska

JEAN SCHMIDT, Ohio

MICHAEL E. SODREL, Indiana

COLLIN C. PETERSON, Minnesota,

Ranking Minority Member

TIM HOLDEN, Pennsylvania

MIKE MCINTYRE, North Carolina

BOB ETHERIDGE, North Carolina

JOE BACA, California

ED CASE, Hawaii

DENNIS A. CARDOZA, California

DAVID SCOTT, Georgia

JIM MARSHALL, Georgia

STEPHANIE HERSETH, South Dakota

G.K. BUTTERFIELD, North Carolina

HENRY CUELLAR, Texas

CHARLIE MELANCON, Louisiana

JIM COSTA, California

JOHN T. SALAZAR, Colorado

JOHN BARROW, Georgia

EARL POMEROY, North Dakota

LEONARD L. BOSWELL, Iowa

RICK LARSEN, Washington

LINCOLN DAVIS, Tennessee

BEN CHANDLER, Kentucky

PROFESSIONAL STAFF

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

KEVIN J. KRAMP, Chief Counsel

JOHN HAUGEN, Communications Director

ROBERT L. LAREW, Minority Staff Director

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

FORESTRY

GIL GUTKNECHT, Minnesota, Chairman

RICHARD W. POMBO, California

JERRY MORAN, Kansas

JO BONNER, Alabama

VIRGINIA FOXX, North Carolina

JEFF FORTENBERRY, Nebraska

JEAN SCHMIDT, Ohio

JOE BACA, California,

Ranking Minority Member

DENNIS A. CARDOZA, California

G.K. BUTTERFIELD, North Carolina

TIM HOLDEN, Pennsylvania

HENRY CUELLAR, Texas

JIM COSTA, California

BEN ANDERSON, Subcommittee Staff Director

(II)
(III)

C O N T E N T S

Page

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

WITNESSES

Allen, Dana, director, Minnesota Milk Producers Association, Eyota, MN ........ 17

Prepared statement .......................................................................................... 40

Clark, Mark, Delegate, Land O’Lakes, Rollingstone, MN .................................... 25

Prepared statement .......................................................................................... 47

Cropp, Robert A., professor emeritus, Agricultural and Applied Economics

Department, University of Wisconsin-Madison, Madison, WI ......................... 8

Prepared statement .......................................................................................... 72

Crow, Gordon, director of government and community affairs, the Schwan

Food Company, Marshall, MN ............................................................................ 34

Prepared statement .......................................................................................... 51

Davis, Mark, chief executive officer, Davisco Foods International, Inc., Le

Sueur, MN ............................................................................................................ 32

Prepared statement .......................................................................................... 43

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

of Agriculture ........................................................................................................ 4

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

Fall, Clint, president and chief executive officer, First District Association,

Litchfield, MN ...................................................................................................... 28

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

Green, James B., president and chief executive officer, Kemps LLC, St. Paul,

Minnesota ............................................................................................................. 30

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

Maas, Bruce, director, Associated Milk Producers Inc., Walnut Grove, MN ...... 20

Prepared statement .......................................................................................... 45

Vrieze, John, president, Wisconsin Dairy Business Association, Baldwin, WI .. 21

Prepared statement .......................................................................................... 52

SUBMITTED MATERIAL

Bruins, William C., president, Wisconsin Farm Bureau Federation, statement 55

Hugosen, Gene, commissioner, Minnesota Department of Agriculture, statement ...................................................................................................................... 56

Nilsestuen, Rod, secretary, Department of Agriculture, Trade, and Consumer

Protection, State of Wisconsin, statement ......................................................... 79

Petersen, Thom, Minnesota Farmers Union, statement ...................................... 59
(1)

PUBLIC FORUM TO REVIEW THE STATE OF

THE UPPER MIDWEST DAIRY INDUSTRY

WEDNESDAY, MAY 31, 2006

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON DEPARTMENT OPERATIONS,

OVERSIGHT, DAIRY, NUTRITION AND FORESTRY,

COMMITTEE ON AGRICULTURE,

Winona, MN.

The subcommittee met, pursuant to call, at 9:57 a.m., Kryzsko

Commons and College Center, Winona State University, 175 West

Mark Street, Winona, MN, Hon. Gil Gutknecht (chairman of the

subcommittee) presiding.

Mr. GUTKNECHT. If I could get everybody to take a seat. As some

of you know, that I am also licensed and bonded auctioneer. And

one of the things they teach you in auction college is to start on

time, and so it is 10 o’clock. And there probably will be people coming in and leaving throughout the meeting.

But before we really get started, I want to thank Dr. Judith

Ramaley. Dr. Ramaley is the president of the Winona State University. And the interesting irony of this, as many of you may know,

I also serve on the House Science Committee. In fact, now I’m the

vice chairman of the House Science Committee. And Dr. Ramaley

used to come up and testify very, very regularly, so I have actually

been working with Dr. Ramaley for probably at least 10 years. So

she wanted to at least extend a welcome. And, Judith, do you want

to come up here.

Ms. RAMALEY. Sure.

Mr. GUTKNECHT. I’ll even give you the mic, here.

Ms. RAMALEY. Congressman, it’s good to be back in a hearing

room with you. It’s a familiar feeling. The congressman was one of

the people in those hearings with the Science Committee who actually was paying attention. Most of your colleagues were busily preparing for the next event, and you were one of the few people I ever

noticed that actually was listening, so I think I can guarantee that

today he will listen to this very important information.

Winona State has, for a number of years, been very serious about

its relationship with the community. And we have, in the last couple of years, accelerated our interest in economic and community

development. And I’m particularly grateful to be here today, because my most recent presidential post was in Vermont.

Now, you all know that Vermont is particularly known for its

dairy industry. And any of you who like ice cream have probably

figured out that all they have are Holsteins, which is, by the way,
2

not true. They have other cows. But Ben & Jerry’s only uses Holsteins. And so I had been in Vermont about a month when I went

to the first county fair. Met up with the commissioner of agriculture, who proceeded to fill my head with statistics. And he told

me how many cows they were losing in Vermont, so I looked up to

see. And in Minnesota we’ve lost 166,000 dairy cows in the past 10

years. The decrease is a result in the loss of $235 million worth of

economic activity, and that sounded just like Vermont, which is

comparable.

So then we went to the cow barn where all the 4–H kids were

showing off their prize cows, and I had a cow identification lesson

from the commissioner of agriculture. And, now, those of you who

are in the dairy industry know that cow barns are noisy. And so

I’m standing there with the Commissioner of Agriculture, and I’m

saying to him, ‘‘How do you greet a cow?’’ You know, dogs you

scratch their ears, cats you rub their bellies, what do you do with

a cow? And he says, ‘‘By artificial insemination.’’ And I said, ‘‘Mr.

Commissioner, I said greet, not breed.’’

With that, I turn things back to the Congressman.

Mr. GUTKNECHT.1 We thank you for that welcome, Dr. Ramaley.

And she’s entirely too modest.

I need to mention one other thing about this beautiful campus,

and this is one of my favorite campuses. You can just see what a

wonderful place and what a great job they do of taking care of it.

But one other point she didn’t mention. This is the home of the

NCAA Division II basketball champs, and we were all incredibly

proud watching the team. In their last, what, 20 games in a row

they’ve won, and they did it in spite of some amazing obstacles

along the way, including a fractured leg with their point guard. So

it’s a great story.

And my congratulations to all the folks here in Winona on that

great championship.

Let me just begin with a few comments about my view of this

issue and the way we do business in my office and on my subcommittee. Let me just talk a little bit about the subcommittee. It

is, I’ll brag a bit, it is the most powerful subcommittee on the

House Agriculture Committee, because, No. 1, we have oversight

over the entire Department. And it is kind of nice when the Secretary is going to come up and testify before the full House Agriculture Committee, very often they will call me first and go

through the testimony they’re going to give and essentially say,

‘‘Does that sound all right to you?’’ And that’s kind of nice to have

that happen.

Many people don’t know, the Department of Agriculture is the

second largest department in the Federal Government, and what

we do is incredibly important for a whole variety of reasons. Also

on our department oversight, we have responsibility for the oversight of the national forests. And, again, this surprises people that

the national forests are under the purview of the Department of

Agriculture, and I always tell people there’s a reason for that.

Many years ago it was determined that trees are crops, and the Department of Agriculture should have something to say about how

those crops are managed. And at another hearing, perhaps, I’ll talk

about that.
3

We also have responsibility for all of the nutrition programs. And

we in the United States had decided a long time ago that no American should ever go to bed hungry, and so this year we will spend

about 40 billion of your taxpayer dollars making certain that no

American goes to bed hungry. And we think that’s important.

We also have responsibility for the oversight of the renewable energy programs. And I think that’s one of the most exciting things

that’s happening, not only in the United States, but especially here

in Minnesota, and particularly related to value-added agriculture

as it relates to ethanol and biodiesel and biomass and the other

things that we can produce. I believe strongly that renewable energy is going to play a very important role in making us more energy independent.

In fact, to that end, the subcommittee had a hearing last Monday

in Detroit, Michigan, and we invited some of the leadership of the

big three automakers. Well, I shouldn’t say big three. We had

DaimlerChrysler, we had Ford, and GM. We also had Volkswagen

came and testified. And let me just assure you that they take renewable energy very seriously, and, frankly, they essentially gave

an endorsement to my plan to increase the amount of renewable

energy in the gasoline supply to 10 percent within the next decade.

Finally, our subcommittee has responsibility for oversight for the

dairy programs. And of all the issues we deal with in agriculture,

dairy can be sometimes the most vexing, partly because since 1834

we’ve had a bifurcated, if you will, some might even call it a balkanized dairy policy.

The Federal Milk Marketing Order system, I understand there

are only three people in the Federal Government who completely

understand how it works, and, therefore, they can’t be on the same

plane at the same time. But for regional differences, for a lot of

other differences, dairy tends to be incredibly divisive. In fact, the

time that I’ve been in Congress when we passed a farm bill, usually the very last item that’s settled in the conference committee

is the dairy title, and there’s a reason for that.

The other thing I wanted to mention at the beginning of this

hearing is that we practice in my office and on my subcommittee

a fairly simple management model, and it is this. ‘‘Listen, learn,

help, and lead.’’ And we are currently in the first phase of that. We

are listening and we are learning. And we have had hearings

around the country, and I’ve been involved in meetings—first of all,

earlier this year—it was this year, wasn’t it, Ben? We went to New

Mexico and saw some pretty amazing things down there. It was

eye-opening for me to see how large and how quickly the dairy industry is growing in New Mexico.

Then we also had a meeting in Saint Paul, and some of you were

at that meeting. And at that meeting we had some experts from

New Zealand to talk about what’s going on, including the Ambassador from New Zealand, to talk about what’s happening with the

dairy programs and dairy policy and dairy economics on that little

island. Well, actually, two islands that make up New Zealand.

So we’re going to have more hearings like this, and we’re going

to be listening and learning. But at some point we’re going to have

to leave. And if I have anything to say about it, we will be at the

table when the agriculture, the next farm bill is put together. And
4

I’m a strong believer in value-added agriculture. I’m an even

stronger believer that dairy is, perhaps, one of the most important,

and, in fact, I would say the most important form of value-added

agriculture. And it’s no coincidence that we’re here in Winona, because the people here in Winona really do understand how important dairy and value-added agriculture are, and we’re going to be

recognizing a few folks at noon for what they do.

We’ve had field hearings of the full committee in North Carolina,

in Alabama, in California. I’m trying to remember where the other

places are. And we’ll have more hearings, because we want to hear

from real producers. But as I drove down here—I’ll finally just conclude by saying this. As I drove down here, I think all of you must

have had the same experience, and that is what a beautiful part

of the country this is, and how blessed we are.

Really, for every reason that I can imagine, this is the dairy center of North America.

And I want to make certain that we adopt policies at the Federal

level that allow and encourage that to continue. We have the

water. We have the resources. We can grow the alfalfa and the corn

silage. We don’t grow cotton seeds, but that’s relatively cheap to

buy from Texas, but just about everything else. We have the herdsmen. We have hardworking people. We have the infrastructure. We

have the cheese plants. We have everything we need here, except

sometimes Government policy. And so to that end, it’s not a coincidence that we’re here in Winona, Minnesota.

With that, I’ve probably spoken longer than I’m supposed to. I

would like to welcome our first panel of witnesses, and we are delighted. We have assembled today some experts, not only from

Washington, but locally about the dairy industry, and hopefully

have some very interesting observations about where we’ve been,

where we are, and hopefully where we will go. I would like to invite our first panel.

First we have Mr. Lloyd Day, who is the Administrator of the

Agricultural Marketing Service of the U.S. Department of Agriculture. He’s accompanied by Paul Kyburz, who is the Market Administrator for the Upper Midwest Milk Marketing Area, and Dr.

Bob Cropp, who is well known to many of the folks in this room.

He is a professor emeritus of the Agricultural and Applied Economics Department at the University of Wisconsin at Madison. And I

would first go to Mr. Day, and, again, welcome and thank you for

coming to beautiful southern Minnesota.

STATEMENT OF LLOYD DAY, ADMINISTRATOR, AGRICULTURAL MARKETING SERVICE, U.S. DEPARTMENT OF AGRICULTURE, ACCOMPANIED BY H. PAUL KYBURZ, MARKET ADMINISTRATOR, UPPER MIDWEST MILK MARKETING AREA,

MINNEAPOLIS, MN

Mr. DAY. Mr. Chairman, good morning, and thank you for the invitation to appear before the subcommittee today and in this beautiful part of the country. It’s my first visit here, and I must say,

it is beautiful, and the weather is certainly better than Washington, DC today. My remarks will briefly highlight the general economic conditions facing U.S. agriculture, and then focus on the

dairy industry here in the upper Midwest.
5

The general economy continues to be strong with growth rates in

2006 expected to be similar to 2005, but below 2004. Increased energy costs, rising interest rates, and high consumer debt loads are

expected to result in slower, but still strong, domestic expenditures

on food. U.S. exports, including agriculture products, are expected

to grow with the decline in the value of the dollar. On May 9 the

Department of Energy projected the 2006 diesel and national gas

prices will increase by 12 and 7 percent respectively, over the 2005

increases of 33 and 19 percent respectively. The costs of fertilizer,

planting, harvesting, and drying will increase and add about 5

cents per bushel to the cost of growing corn in 2006.

The dairy industry nationally has had 2 years of strong prices.

Milk production continues to increase in response to near record

milk prices in 2004 and 2005, restored availability of rBst, and improved forage conditions. Milk production is forecast to be up nearly 3 percent in 2006, following a 3.3 percent increase in 2005. The

production growth is coming primarily from the Western States on

larger herds; as the number of dairy operators continues to decline

nationally. This growth in production continues to exceed dairy

product demand. USDA’s May forecast estimated the all-milk price

to average between $12.35 and $12.85 per hundredweight in 2006,

down 15 percent from 2005.

Dairy production costs are expected to be higher in 2006 than in

2005, primarily due to increased energy and feed costs. Corn is expected to average about $2.40 per bushel, 40 cents higher per bushel over last year. While soybean prices are expected to be $170 per

ton, as compared to $175 in 2005.

USDA forecasts the 2007 milk production growth to be less than

1 percent, with farmers responding to higher feed costs and lower

milk prices in 2006. The 2007 all-milk price is forecast to increase

an average of between $12.85 and $13.85, up 6 percent over 2006,

as the result of lower production growth, coupled with a higher

growth rate in demand.

The Commodity Credit Corporation is currently purchasing nonfat dry milk from Western States. The USDA estimates net removals of about 110 million pounds in 2006 and 195 million pounds in

2007.

The Milk Income Loss Contract Program was extended for 2

years, through August 2007, by the Deficit Control Act of 2005. The

MILC Program was originally authorized in 2002 and generated

over $2 billion in direct payments to producers for fiscal year 2002

through fiscal year 2005 production.

In the United States, milk benefited in 2005 from tight world

supplies of dairy products and a relatively weak U.S. dollar. Reduced milk production in New Zealand, Australia, and the European Union limited supplies available for export, and coupled with

robust demand, 2005 international nonfat dry milk prices averaged

10 to 15 percent above 2004 levels. With world prices above the

price support rate, the United States significantly increased exports of commercial milk powders. On the import side, lower U.S.

butter and cheese prices resulted in import reductions of butter

and American-type cheese compared to 2004. Similar trade conditions are shaping up for 2006. Global demand for dairy products re-
6

mains firm, the U.S. dollar continues to be weak, and U.S. skim

milk powder prices are expected to be competitive.

Wisconsin and Minnesota milk production in 2005 was 31.1 billion pounds, about 18 percent of the 177 billion pounds of U.S. production. In the two States, 1.7 million cows represented 19 percent

of the U.S. dairy herd of 9 million cows. In 1995, Wisconsin and

Minnesota milk production was 32.4 billion pounds, about 21 percent of the U.S. milk production of 155.3 billion pounds. Wisconsin

and Minnesota total milk production has fallen by about 4 percent

since 1995, while U.S. production has increased by 14 percent.

Over one-quarter of the Nation’s dairy operations are located in

Minnesota and Wisconsin.

The Upper Midwest Federal Milk Marketing Order regulates the

processors and manufacturers who purchase a major share of Minnesota and Wisconsin milk, along with some milk from North Dakota and South Dakota, Iowa, and Illinois. In 2005, 22.4 billion

pounds of milk was pooled on the upper Midwest order, about 20

percent of the milk marketed through all ten Federal orders. Twothirds of the upper Midwest milk was used in cheese, while about

20 percent was used for fluid milk products.

Cheese will continue to be the major use of milk in the upper

Midwest. However, growth in western milk production and commodity cheese making capacity is shifting incentives for the upper

Midwest towards artisan cheeses and other value-added forms of

dairy product production. The Wisconsin Specialty Cheese Institute

and the Wisconsin Dairy Business Innovation Center are helping

the shift in that direction.

Finally, I would like to speak to you briefly about two programs

of the Agricultural Marketing Service. The Federal Milk Marketing

Order Program is one that continually changes to reflect relevant

marketing conditions in the dairy industry. Several regulatory decisions are in various stages of completion that relate to the upper

Midwest. These are the Fluid Milk Product Definition Recommended Decision affecting all 10 orders that was issued this last

month. The issue of class III and class IV manufacturing allowance

levels used to calculate the value of milk was heard at a national

hearing in January of this year. And then there were several hearings held in the upper Midwest, Mideast, and Central orders to address pooling and re-pooling issues. Interim rules and recommended decisions have been issued. Recommended decisions

were due April 24 for all three orders, and final decisions are being

prepared.

The Federal order rulemaking process has received significant

attention recently by all sectors of the industry regarding the

length of time involved to complete regulatory actions. AMS undertook an extensive internal review of the process and has developed

several new rulemaking initiatives and customer service standards.

Our goal is to improve the timeliness and transparency, while at

the same time maintaining the opportunity for public involvement

that currently exists. Through this initiative, AMS expects to improve non-emergency rulemaking timeliness by reducing the time

required to complete regulatory actions by over one-third.

AMS also oversees the operations of the National Dairy Promotion and Research Program and the National Fluid Milk Proc-
7

essor Promotion Program. As per capita consumption of fluid milk

products continues to decline, these programs are proving to be

very positive forces in the development of new markets for milk

and dairy products. Among the most important is the effort to provide products that the consumers demand. One such effort, the promotion of the single-serve milk in plastic bottles for schools and

restaurants is expected to add over a billion pounds of fluid milk

sales.

Dairy Management, Inc. has become partners with several restaurant chains to increase their sales of fluid milk. Thus far, during the initial launch in 20,000 restaurants, combined weekly average milk sales have grown exponentially. And to put it in numbers,

it’s gone from about 600,000 units to over 2 million units in just

one restaurant. More restaurants will have a national rollout of the

single-serve containers in June.

In addition to milk, the National Dairy Promotion Program is

partnering with a fast-food chain to test and market a 7-ounce

strawberry yogurt cup that is now a permanent menu option. This

introduction helped lead to a 7 million-pound increase in annual

milk used through that food service.

In conclusion, although the U.S. dairy industry is experiencing a

year of reduced prices after 2 years of all-milk prices averaging

about $15.45 per hundredweight, prices are forecast to increase in

2007. Milk prices in the upper Midwest are moving with U.S.

prices. The MILC Program has been extended and will provide payments to farmers up to the 2.4 million-pound production cap. The

demand for milk continues to be strong domestically and for exports of skim milk powders. The upper Midwest dairy industry continues to be a major supplier of milk and dairy products to U.S.

consumers and a major positive factor in the region’s economy.

This concludes my statements, Mr. Chairman. I’d be pleased to

respond to any questions.

Mr. GUTKNECHT. Thank you, Mr. Day.

We’ll come back and ask you a couple questions, but first we’ll

go to Mr. Kyburz, and tell us what’s happening in the Midwest.

Mr. KYBURZ. Well, good morning, Mr. Chairman. My name is

Paul Kyburz, and as earlier mentioned, I’m the market administrator for the upper Midwest order, Federal Milk Order 30, which

is one——

Mr. GUTKNECHT. So you’re one of the people that actually understands how this formula works?

Mr. KYBURZ. Yes. I’m headquartered in Minneapolis. I’m the administrator for the upper Midwest order, which is one of 10 orders

in the country, and the order which operates in this part of the

country. I do not have a prepared statement this morning, but I’m

here to accompany Mr. Day and to serve as a resource person on

issues relating to the Federal orders, and particularly the upper

Midwest order.

Mr. GUTKNECHT. Thank you, Mr. Kyburz.

Mr. DAY. He’s here to answer the tough questions.

Mr. GUTKNECHT. That’s why I’ve been here. In fact, there are

probably a couple people I should introduce that are both here. And

for those of you who don’t know Ben Anderson, he is one of the

sharpest administrators that a subcommittee chairman could have
8

on the House Agriculture Committee. He’s from Minnesota. He understands Minnesota agriculture, and I couldn’t do what I do every

day without people like Ben, and I want to thank him.

I also want to acknowledge Malachi McNeilus. For those of you

who are from Minnesota, he does a marvelous job of keeping up to

date on all the agricultural and a lot of the things we’re working

on, whether it’s renewable fuel or wind energy, whatever, Malachi

does a great job.

I also want to acknowledge a couple of very important people in

my life. First of all, Steve Wenzel. I see him back there. Steve is,

he’s the State director of rural development here in Minnesota, and

we’ve been working with him on just a number of projects. One of

the things we did in the last farm bill that, really, a lot of people

don’t know is we put an awful lot of money into rural development,

essentially to try and encourage more value-added agriculture. And

if there’s anybody who cares more about rural development in the

United States than Steve Wenzel, I haven’t met him.

I also want to acknowledge John Monson. I see John back there.

Do you want to stand up, John. John’s our State director of FSA,

and, again, we are just so lucky to have people like John in that

job. It’s a tough job, but he administers most of the programs that

you folks deal with on a regular basis. And he’s got a great team,

and I know that there are several of them that are here.

Finally, one other person I want to acknowledge is State Senator

Bob Kierlin. Bob, do you want to stand up. Bob has been a good

friend and an incredibly good public servant for the people here in

the Winona area. Unfortunately, he has so much talent and so

much ability that he’s going to apply it to different tasks, and he’s

going to leave the State Senate at the end of his term. And, Bob,

I want to thank you publicly for your service to the people here in

this part of the world in the State Senate, and I want to thank you

for coming, because I think it demonstrates, even though you’re a

lame duck right now, you’re still interested in issues that affect the

folks in this part of the world, so thank you for coming.

With that, I’d go to Dr. Bob Cropp. As I say, no stranger to most

of the people in this room. One of the distinguished experts on

dairy economics at the University of Wisconsin. And we just want

to thank you so much for joining us today, Dr. Cropp.

STATEMENT OF ROBERT A. CROPP, PROFESSOR EMERITUS,

AGRICULTURAL AND APPLIED ECONOMICS DEPARTMENT,

UNIVERSITY OF WISCONSIN-MADISON, MADISON, WI

Mr. CROPP. Thank you, Mr. Chairman, for the opportunity to

talk about the upper Midwest dairy industry. I have testimony

written out, and I won’t spend the whole record, but I’ll highlight

some of the tables in there. I don’t have to repeat all of it.

But somebody asked me how long I’ve been working with this

stuff, and I said this is my 40th year at the University messing

around with dairy and whatever, but it’s a long time.

Commenting on the upper Midwest dairy industry, it’s undergoing a lot of change, not unlike what’s going on with the industry

as a whole. And that’s going on both at the farm level structure

and at the plant level. And I think it’s important to examine the
9

structure of our dairy farms, and that will reflect somewhat what’s

going to happen down the road and reflect that policy.

Now, I’m using the time period, a 10-year period of 1996 through

2005, and mainly looking at three States; Iowa, Minnesota and

Wisconsin. All three of those States have relatively small dairy

herds. If you look at those three States in table 1, 10 to 20 percent

of the herds have less than 30 milk cows. We have another 22 to

37 percent between 30 and 49 milk cows. About a third are 50 to

99 cows. We just have 10 to 16 percent that have 100 to 199 cows,

and 1 to 5 percent, 200 plus. And this comes from USDA dairy

farm structure.

During this past 10-year period, all size groups experienced substantial declines, and of those smaller groups, 50 to 60 percent decline in 10 years. The 200 plus herds, however, experienced increases in farm numbers. The 200 plus herds, that’s a fair amount

of increase in Minnesota of 77 percent, 157 percent increase in Wisconsin. The total number of herds, of course, during this 10-year

period declined 45 percent, and that’s a little bit more than the national decline of about 40 percent. Yet, after that kind of change,

the average herd size is still only 80 cows in the upper Midwest,

compared to about 115 nationally.

Table 2 breaks down the production a little bit finer, and also

shows the percent of milk that’s produced by each farm structure.

In Iowa they have 1.2 percent of the herds that have 500 or more

cows, but that 1.2 percent counts for 21 percent of the milk. In

Minnesota that size group represents about 1 percent, but almost

15 percent of the milk.

And for Wisconsin, 1.3 percent of the herds’ 500 plus cows, 16

percent. This compared to U.S., about 3.9 percent of the herds over

500 cows, with 49.5 percent of the milk. If you drop it down to 200

plus cows in the upper Midwest, that’s still only 5 percent of the

herds, but about a third of the milk is produced by herds over 200

cows. This compared to 10 percent of the herds in the United

States of that size producing 65 percent of the milk.

Table 3 shows what has happened to milk cow numbers in the

upper Midwest as compared to U.S. The decline in cow numbers,

of course, is less than the decline in the number of farms, reflecting

the growth of the size of the herds. But during this 10-year period,

both Iowa and Minnesota experienced decline of cow numbers of

more than 22 percent, compared to about a 15 percent decline in

Wisconsin, and only 3.5 percent in the United States.

Table 4 shows the total milk production in the upper Midwest

compared to U.S. in this 10-year period. During this 10-year time

period, Iowa and Wisconsin had a small increase in total production, 5.1 to 2.3 percent respectively. However, Minnesota experienced a 13.2 percent decline in milk production. The Nation’s milk

production increased 14.9 percent during this period. The decline

in milk production for Iowa and Wisconsin appears to have ceased

somewhat with new dairy farm investments starting to produce a

slow increase in milk production.

In fact, Mr. Day indicated, I think, Wisconsin started to experience an increase in cow numbers during 2005, and that hasn’t occurred for about 20 years, and had a 3.5 percent increase in milk

production. Iowa had a 4.4 percent increase in production, there’s
10

a few more cows and stronger production per cow. Even Minnesota

had a 3.4 percent increase, even though their cow numbers were

down about 1 percent, but a 2.2 percent increase in production per

cow.

What’s going on is that dairy development initiatives in Iowa appear to have a positive impact, bringing about a change in the

dairy industry. The Wisconsin State legislature has been very positive for dairy development; including funds for dairy expansion

planning, investment tax credit, low interest loans for adding cows,

funds to support grazing, and a recent citing legislation that will

greatly improve the process for dairy farmers wanting to expand

their dairy operations. The State of Minnesota has been made

aware of and is trying to pass a similar type of legislation. It’s in

the process right now.

The lack of a growing milk supply in the upper Midwest has led

to a very strong competition between dairy cooperatives and other

milk processors for milk to fill their processing plants and to meet

consumer needs for cheese and other dairy products.

The upper Midwest dairy cooperatives and other milk processors

pay dairy farmer substantial premiums above regulated Federal

Milk Order minimums. Similar premiums are not paid by milk

processors to dairy farmers in the growing milk production regions

of the West. Further, California is not part of the Federal Milk

Marketing Order system.

The State milk pricing system sets minimum dairy producer

prices for milk going into butter, milk powder, and cheese below

that of Federal Milk Marketing Order minimum prices. The result

is mailbox prices paid by dairy cooperatives and other milk processors to upper Midwest dairy producers more than a dollar per

hundredweight higher than what is paid in California and other

Western States. While these higher mailbox prices are beneficial to

upper Midwest dairy producers, these higher premiums are not

sustainable in the long run. This difference in milk cost to upper

Midwest cheese plants makes it difficult for them to compete pricewise against California and other western cheese plants in marketing cheese to a competitive national market.

The upper Midwest dairy cooperatives and other milk processors

need to generate sufficient net plant margins for capital investment

in plant and equipment if they wish to maintain modern and more

efficient processing technology required to be competitive with the

new and larger processing plants recently built and being built in

the West.

The chart below shows the average mailbox prices for selected

States in the last 2 years. You’ll see substantial differences between the West and the upper Midwest, and even very competitive

in the North, Northeast.

The competitiveness of the national cheese market and tight

margins has forced consolidations of cheese and other manufacturing milk plants in the upper Midwest. Any major new cheese plant

has not been constructed in more than 18 years, in Wisconsin, that

is.

Table 4 shows the change in the upper Midwest cheese plants

during the 10-year period. The number of cheese plants declined by

18 percent in Wisconsin, 31 percent in Minnesota, no change in
11

Iowa. This compared to only a half percent decline of cheese plants

in the United States.

With the upper Midwest dairy industry characterized by more

than 40 percent of their dairy herds having fewer than 50 cows,

they will continue to experience a rather rapid decline in dairy

farm numbers. Most of these smaller herds have outdated facilities

in need of repair and updating, and are operated by older farmers

who will be retiring. In most instances, these small dairies are not

large enough to support an adequate family living. Yet, the upper

Midwest will continue to have a relatively large number of small

dairy farms that can be profitable and sustainable. These are dairy

farms that have adopted to low inputs through grazing or producing milk for growing niche markets such as organic or BsT free

milk. Make note here that the organic plants are paying $22 per

hundredweight minimum price right now for milk. That’s their

minimum price for the year.

Some are hooked up with supplying smaller cheese plants that

are making higher margin specialty cheeses. In fact, the specialty

cheese business that grew 7 percent in Wisconsin last year now accounts for 15 percent of the cheese production in Wisconsin. It’s

their high number products. And others have entered into on-farm

production and sales of beverage milk, cheese, yogurt, some are

successful at that. These examples are fine for those who wish to

remain small and have the associated lifestyle, but they will continue to account for a relatively small share of the U.S. total milk

production.

But, if the upper Midwest is to slow or to stop the decline in the

number of milk cows and total production, there needs to be more

larger herds, 500 to 1,000 cows, and even larger dairy operations.

Wisconsin’s recently implemented citing rules to help make this

possible. But, also, the number of dairy farms in this 50 to 90 cow

range need to modernize and to grow their dairy operation to a size

that will support two or more families. This is because 40 percent

of the upper Midwest herds are in this 50 to 90 cow size and account for about a third of the total milk production. Without this

type of herd expansion, it may not be possible to offset the exiting

of smaller herds, and to grow, let alone maintain, its dairy industry

entirely from additional 1,000 plus cow herds.

There are a number of these 50 to 90 cow farms that have already expanded, modernized, and now serve as models for others

to follow. Many have used the old dairy facility to put in a low-cost

labor-saving milking parlor and built a free-stall barn for better

cow comfort and reduced labor time to feed and care for the cows.

Many of these have expanded their herds to 125 to 250 or more

cows. Cost data shows that these farms can be very competitive

with larger cow operations from a per hundredweight cost of milk

production comparison. And maybe even more important, they provide a favorable lifestyle that allows families to have some free

time, to take a vacation, and engage in more family activities and

the like. Planning grants, investment tax credit, low interest rate

loans to add cows previously mentioned are examples of programs

in Wisconsin that are assisting the dairy farmers to expand and

modernize.
12

The upper Midwest, as indicated, has the land resources, the climate, and existing infrastructure and market access for a competitive and profitable dairying. But, it needs to recognize that the

dairy industry is a national market for milk and dairy products,

and it’s becoming more international. The upper Midwest dairy

farmers, cheese plants, and other milk processors need to compete

with the best in this national market, and yet be profitable. This

requires the dairy herd modernization and expansion as mentioned.

State programs, as described, can help foster this needed adjustment. But, since milk and dairy product prices are determined by

national and international market factors, there is a need for effective Federal dairy policy. Dairy farmers often take on substantial

debt when they modernize and expand. If upon completion of a

modernization project, the dairy experience a long period of depressed milk prices, they can experience considerable financial

stress and even financial failure. Federal dairy policy is needed to

provide dairy farmers with a safety net for these low milk prices.

The existing Milk Income Loss Contract Program has provided

an effective safety net to upper Midwest dairy farmers. The program is not perfect. The $16.94 class I Boston price is well above market clearing levels the majority of the time. Thus, the program could be argued as

price enhancement, rather than price risk protection, at least for

those dairy farmers that have seen both payments under the program. And some argue, of course, that the 2.4 million annual payment discriminates against larger dairy farms and regions of the

United States with mainly large herds. Yet, some type of program

like this, a counter-cyclical program, could be very effective, providing dairy farmers with an appropriate safety net and at a reasonable Federal budget exposure level.

Some of our preliminary analysis we have done shows that a tar- get price of manufacturing milk in the range of $10 to $11 per hundredweight would not be burdensome to the Federal budget and

would provide a much more effective safety net to dairy farmers

than this existing $9.80 support price.

That’s a 31⁄2 butter fat test, by itself. For one thing, $9.80 support price by itself is too low of a safety net to be much help to

the dairy farmers, and it definitely is not a floor.

During the depressed milk prices of 2000, the class III milk

price, milk used for cheese, was below support 7 of the 12 months

and fell to as low as $8.57 in November. Then in 2002, the class

III price was below support for 3 of the 12 months, in 2003 for 6

of the 12 months. Currently, the Support Program works fairly well

for the CCC in purchasing nonfat dry milk during surplus milk periods, but it does not work very well for supporting cheese prices

and, in turn, class III prices for several reasons.

There are proposals by USDA and the National Milk Producers

Federation and others to make changes in the CCC Purchase Program to make it a better floor price. But, due to how the dairy industry now operates in the manufacture and marketing of cheese,

I question if the proposed changes would correct the deficiencies of

the CCC Purchase Program. Plus, the $9.80 price support program

does not score very well under existing WTO rules, in fact, to

argue, could be maintained in the long run.
13

So I would encourage Congress to consider in the 2007 farm bill,

to give serious consideration to some type of counter-cyclical payment. Thank you.

Mr. GUTKNECHT. Thank you, Dr. Cropp. Insightful as always.

I don’t really know where to start, but I do want to start with

you, because, first, and before I say anything else, we want to work

with you and others like you, because you mentioned at the end of

your testimony the WTO, because that’s one of the parameters.

That’s one of the things that is going to put pressure on us as we

go forward with any kind of a farm program, and especially on

dairy. What kind of pushback do you expect to see from some of

our trading partners and competitors? Can you talk a little bit

about that.

Mr. CROPP. OK. What’s the——

Mr. GUTKNECHT. Pushback in terms of what we do, and how

much are they going to push back as this market becomes more

international.

Mr. CROPP. Oh. Well, I think from an international standpoint,

we saw this last year, I think, an increase in international trading,

which they probably reflect on it. And we actually increased on a

total basis, and I think that’s trade surplus, rather than to compensate. And part of it is due to what happened on the world market with New Zealand and Australia, the powder milk prices came

up.

International market opportunities are going to be there. I don’t

see it as a major share of the industry. It’s a very competitive

thing. Because what happens at WTO, who knows how this final

outcome is going to play out here, but it’s going to be a long time

to phase in, so our prices will be higher than the world market

prices. We’re competitive on whey, maybe. On nonfat dry milk, I

think there’s optimistic little sell there. When it comes to cheese,

butter probably higher, but there’s opportunity of growth there in

some of the specialty cheeses.

I think we’ve got to recognize those international forces, but also

the national markets here that some will argue we use the price

support program as a safety net, that’s totally not effective. To

make it effective, you would have to increase the purchase prices

of these products, which makes us less competitive on the international market. And even question then whether or not it would

work effectively, based on how cheese is marketed today and a lot

of prearranged sales by cheese processors and such.

So one advantage of having the target price program somewhere

in that $10 to $11 range would not be, I don’t think, burdensome

to the Federal budget, simply because it takes about an average

manufactured milk price around $12, an average whole milk price

$13.50 to $13.75 to supply the milk we need for the market.

Even higher prices than average, which we saw in 2004–05, will

lead to cow expansion. The lower prices, we had that long dry spell

in 2000–03. Cow numbers went down. We went 2 years without

any increase in production. International markets opened up. We

cleaned out the cupboard for nonfat dry milk and had very nice

prices, so there’s a lot of volatility to the market. It’s not out of line

to pay too much or too little. So I think we need some kind of safe-
14

ty net, but I think we should allow the markets to work, both domestically and internationally.

Mr. GUTKNECHT. You also talked about, and I’m really interested

in what you talked about with what’s happening in terms of the

States, and I’m not—we can’t get into State policy that much, but

you did indicate that there are things that the States can do. And

I am concerned about the loss of cow numbers and milk production

here in Minnesota and throughout the upper Midwest. Are there

specific things we can do at the Federal level that would encourage

more younger farmers to consider getting into the dairy industry,

No. 1, and, No. 2, to encourage more of them to upgrade their facilities? And maybe a more specific question would be, if you had

a grandson who was 22 years old, would you encourage him to go

into the dairy business in the upper Midwest?

Mr. CROPP. Well, I would encourage it as much here as any

place, because I think there’s some real, real advantages if they

came here. And, in fact, we’ve had farmers reallocate from California to Wisconsin. There’s one in Brodhead, Wisconsin. He’s got a

herd in California, a herd in Illinois, and Wisconsin. He would pick

Wisconsin. He’d like to have built another operation in Wisconsin

now, with even more cows, but because of resistance by local townships, farmers, he didn’t do so.

And the reason being is that with the type of climate we’ve got

here, I mentioned the corn silage, OK. Yes, it rains, it affects the

quality when it’s well, but I think California lost most of their first

crop made because it rained out there too, so we effect the weather

thing, but it’s a place that cows do very, very well. And the fact

is that we’re located pretty good from a marketing standpoint.

We’ve got the infrastructure here, we need the milk supply.

From a marketing standpoint, it’s a nice location. Where out

West they have to market, even though transportation cost is not

prohibitive, but with increased energy it’s more costly. But we’re in

a nice position to produce the milk, to process and manufacture it,

so it’s a good place.

Milk price-wise, most of our milk goes to manufacturing, but

that’s what’s happening nationwide is that cheese counts for about

40 percent of the milk utilization. You’re going to have very competitive pay prices here. I indicated you get in trouble when you

say it, but our plants pay too much for milk up here, in a way, because of the competition, and it affects the bottom line. Recognizing

that we have to look at a national market, and so premium structures come down.

So if you look at what’s going on, even in the last 5 years, look

at mailbox prices.

They’re coming much closer together. Yes, the Southeast will be

higher, because that’s a high cost production area, not a growth

area. It will be a little higher in the Northeast. But the differences

in milk prices come closely together, simply because milk moves,

dairy products move. It’s a national market. And our prices will

probably average, maybe 50 cents higher than it will in the West,

simply because of our location of marketing and some other competitive advantages.

So the resources are here. It’s a good place to produce the milk,

a good place for cow environment, what have you, and that’s why
15

I see, perhaps—we believe that’s why State legislature is trying to

foster some of this change. We should not be doing this if we didn’t

think we could be competitive. We have enough examples now.

Look at cost production for farmers. We’re as competitive here as

they are the best in the West.

Mr. GUTKNECHT. Well, I tend to agree with you. I think there is

a future for dairy in the upper Midwest, and I think if we pursue

this on the right—it the right way. So you’d like to see—just to

summarize what you’ve told us, you’d like to see some kind of

counter-cyclical program. OK. You haven’t been real specific about

that, but——

Mr. CROPP. One reason I think we need a safety net is because,

look at what the international factors do up there last year, very

positive what happened in the international market if the price is

higher, it’s up. We can withstand probably about a 1.5 percent

growth of production here, somewhere around there, based on

what’s happening on the demand. Well, it depends how well cows

milk. If you go more than that, then we have prices that drop $3

per hundredweight. The less that goes to the other extreme, a lot

of volatility.

I’m a firm believer in price risk management concepts the farmers could use to try to manage some of that, but since these prices

are determined by national market conditions and international

conditions and the sensitivity prices, I think we need some safety

net. I indicated, farmers, when they make substantial financial investments, get that thing going a couple years and hit bad timing

with low prices, it’s very stressful, and we need some protection on

that. So State programs, I think, would be very effective to help encourage some of this innovation and modernization where we need

Federal.

What I like about a counter-cyclical payment is that it lets the

markets work, and the farmers get the difference when the market

it below that. We’d probably have to put some payment limitation

on it, what have you, but it lets the markets work. Where the current Purchase Program has basically been a nonfat dry milk purchase program, and why not take powder and sell it to Government, that’s pretty good. If we didn’t have that, yes, right now

probably more milk would be going into cheese. It might lower our

cheese price in the long run. It may stimulate more innovation in

milk protein, some of these things here.

So I’d make some arguments on Federal orders and price support

programs, some provisions of those might interfere with innovation

in the industry. That we’d be all better off in the long run, both,

again, look at international markets and domestic markets.

Mr. GUTKNECHT. In a rare moment of candor, we were in California not—well, it was about a year-and-a-half ago, and I asked

them, ‘‘Why don’t you guys produce milk protein concentrate here’’.

And they kind of looked at each other, and finally one said, ‘‘Well,

if we can make powder and sell it back to you guys, and we’re

guaranteed a profit,’’ and that is part of the problem. And I think

we’ve got to figure out how we can encourage people to look at

some of these new markets, because what I learned in New Zealand is—or what I learned from some of the folks in New Zealand,
16

and even from Ireland, they see a big world market out there for

some of these new products that, you know——

Mr. CROPP. I was just going to say, you’ve got to—I mean, Federal budget deficit is a reality, what we’re going to be able to

spend. But I think with a lot of work with whatever comes from

policies or are existing ourselves, if you even took this last 5 years

and take a target price, that 10 to $11 range in manufacturing

price, yes, it’s higher than $9.90. It would be a much more effective

safety net to farmers. And even in those cases, you may run up to

$600 million even cost, most of the times less than that, because

in any time period you’re going to have to average about a $12

manufacturing milk price. And that’s what it’s going to be with the

volatility we have, but it’s not something that would be burdensome on the Federal budget, so.

Mr. GUTKNECHT. Thank you.

Mr. Day, I apologize, I’ve spent a lot of time with Mr. Cropp, but

I want to come back to you. I would be remiss in my duties, because I hear a lot from dairy farmers about the Dairy Export Enhancement Program, and you alluded to exports. Can I get you to

maybe say something about the DEEP Program and how we could

make better use of it as we go forward.

Mr. DAY. Well, the DEEP Program isn’t being used right now,

because the prices have gone down so much that they don’t need

it, because they’re competitive on the world market. I know it was

used in the past to some degree. That was really run under the

Foreign Agricultural Service.

I think there’s a lot of forces, and Dr. Crop alluded to some of

them, that’s going to impact you and your colleagues as you look

to write the new farm bill. You have the Federal budget situation,

which is in a difficult state. You have the Doha Round. We’re not

exactly sure where that’s going to go. But if it does have an ambitious outcome, there is going to be significant pressures on any

kind of a program that would support exports, such as an export

subsidy, or any kind of domestic support payment or safety net.

And then you just have the general competition among the American agriculture for funds.

And with all that combined, you talk about New Zealand and

Australia, and how they’ve become a real competitive force in the

world. And you’ve been out there to see how a lot of them are very

small dairy farmers, and working in a cooperative way to market

their product in the international market. And I’ve been approached by several dairy industry specialists. Some of those five

or six people like Dr. Cropp that understands what’s going on. And

they’re very bullish about the Asian markets. They’re very bullish

about the United States being a producer that can sell milk products into that market with the growth of those products. Sure it’s

going to have some competitive edge being a little bit closer, but

a lot of those firms are starting to invest here, and I think the New

Mexico firm that you visited is one of those firms. And there’s also

a lot of European investment in the Ohio region, and you have a

massive investment in the Texas region.

So I think there’s a bullishness about the future of dairy in the

United States, and also the prospects of international exports. And

I’m not sure whether a payment like DEEP is going to stand the
17

tests of our trading partners. Whereas just the general competitiveness of American agriculture and the ability to be flexible in the

competitive market in this way, I think, is probably the direction

things will go.

Mr. GUTKNECHT. Well, Mr. Day, you said it better than I do. I

was somewhat surprised at the dairy industry, dairy farmers in

places like New Zealand. Relatively small countries like New Zealand and Ireland are investing significant amounts in the United

States, in agriculture and dairy programs and dairy production facilities and so forth here. And I sometimes wonder if maybe they

have more confidence in our dairy industry than we do.

With that, though, I do want to dismiss you, and thank you all

for coming today to testify. Hopefully you’ll stick around, because

you might find it instructive to listen to some of the other panels,

so thank you very much.

I’ll call up the second panel. We will have with us Dr. Dana

Allen, who is—the title she wears is director of the Minnesota Milk

Producers Association. She is from Eyota, Minnesota. Mr. Bruce

Maas, who is the director for Associated Milk Producers, from Walnut Grove, Minnesota. Mr. John Vrieze, president of the Wisconsin

Dairy Business Association, from Baldwin, Wisconsin. And Mr.

Mark Clark, who’s a delegate for Land O’Lakes, from just not too

far from where we sit right now, in Rollingstone, Minnesota. So if

you folks will all come up.

Let me first of all say I have known Dr. Dana Allen for a number

of years now. She actually worked for us for awhile, and is an expert in her own right in many areas of dairy production, particularly in dairy nutrition. She now works with her dad and her

brother on a significant dairy operation just outside of Eyota. When

you drive down Interstate 90, you can see it from the car.

Dr. Allen, welcome.

STATEMENT OF DANA ALLEN, DIRECTOR, MINNESOTA MILK

PRODUCERS ASSOCIATION, EYOTA, MN

Ms. ALLEN. Thank you, Chairman Gutknecht. As you mentioned,

I own and operate a dairy farm with my parents and my brother

south of Eyota, which is just about 50 miles west of here, and I’m

proud to say that I’m a fourth generation dairy producer.

In addition to operating a dairy, I also serve on the board of directors for the Minnesota Milk Producers Association, the voice of

Minnesota’s dairy industry. Minnesota Milk, as we are known, has

a growing membership of over 1,800 dairy producer members. We

combine dairy producer leadership with over 250 associate members, and as I said, we do consider ourselves the voice of Minnesota’s dairy industry. Our strength comes from working together

with industry partners to create more opportunity for dairy producers. We focus on educational programs, as well as mobilize grass

roots efforts to help set policy that will help shape our future.

Again, I want to thank you for inviting us to testify and give you

some of our thoughts from Minnesota Milk’s perspective.

The southeast portion of Minnesota has a longstanding tradition

of being a strong, progressive dairy area. Our terrain of rolling hillsides provides many opportunities for forage production and envi-
18

ronmental sustainability. Dairy farming lends it hands to such opportunities.

Our 5,126 dairy farms have an average size of about 74 cows, one

of the smallest averages in the country. While we can celebrate the

fact that dairy producers in this part of the country have been able

to make a living on fewer cows than our counterparts elsewhere,

we must continue to get better, and that sometimes means increasing the pounds of milk produced, either by adding cows or increasing the pounds of milk per cow. It could also mean adding more

value to our products, cutting costs of production per pound produced, or any combination of the above.

In addition, consumers continue to demand low cost, high quality

food. Consolidation is occurring all around us. Look at the explosion in major food retailers such as Wal-Mart and Costco, and the

current purchase of Albertson’s by SuperValu. As producers, we are

continuing to adjust to the changes in the retail food industry. This

phenomenon continues to put pressure on the processing and production side of all industries, including dairy farming.

Coupled with that, we have a new generation of dairy producers,

like myself, who do want free time. I have chosen dairy farming as

my career, because I love to work with the animals. I know, a little

bit sappy, but that’s the truth. There is nothing better than helping

to deliver a newborn heifer calf, or having the fourth highest milk

production per cow in the State of Minnesota. But there are also

business realities that much be faced. Consolidation is one reality.

The need to hire additional labor is another. If not addressed, Minnesota’s industry will be stagnant, and the incentive for young people to come back and farm will continue to decline.

I share this with you to give you a better understanding of the

dairy producer’s perspective. Every dairy producer’s dream is to

own and operate a profitable and success business, while enjoying

a wholesome, balanced life.

Overall, Minnesota’s dairy industry has been able to maintain

itself the last several years, which is an improvement from previous decades. In fact, we’ve even had some signs of strengthening.

It has started with the resolve of dairy producers in Minnesota.

We’ve been able to communicate our message to leaders at all levels to create policies that encourage a healthy and vibrant industry.

In particular, we have faced many State issues—or focus on

many State issues in the past years. Governor Tim Pawlenty, his

administration, and several State legislators have played a major

role and deserve our thanks. With their help, we have reduced the

number of farm losses and steadied milk production. However, we

still have a long ways to go.

As we continue to stabilize and potentially increase milk production in Minnesota, our cooperatives and other processors must also

be looking at ways to increase production or processing capacity.

They must look into adding more value to what we produce on the

farm. The adaptation of new technologies and improvements in efficiencies are needed not only at the farm level, but also at the processor level.

Milk assembly costs from the farm to the plant are unacceptable.

While they have made great strides over the recent years, our proc-
19

essors must continue to work together, much more than they are

now, to bring about increased deficiencies in milk assembly. They

also must be constantly reinvesting in processing procedures that

add efficiencies to the system and value to our product. We will

continue to work cooperatively with our processors to make these

internal improvements in our industry.

There are a couple policies that I would like to touch on briefly

while I have the microphone. One of them is that we would request

a price safety net that works effectively within the market, as Dr.

Cropp has just recently spoke about.

Our current system limits marketing innovation. Minnesota Milk

believes a possible solution is to design a price support system that

would work in combination with the counter-cyclical program, like

the MILC Program.

In addition, environmental regulations in Minnesota are among

the most stringent in the country. We are not complaining. In fact,

we believe the responsibility of environmental protection should lie

with the people who make a living off the land, and we openly accept that responsibility. But, we would like to have other States

step up and follow through on enforcing the Clean Water Act, as

it is related to livestock operations. Consistent administration of

environmental regulations across the country is fair and responsible.

To help dairy producers across the country comply with the

Clean Water Act, Congress enacted the Environmental Quality Incentives Program, EQIP, as it’s known. It is one of the most valuable and reliable programs Congress has enacted. We ask that you

continue funding at the current level or higher. Minnesota dairy

producers understand the environmental rules, and have grown to

look at EQIP as a vital element in providing assistance needed to

enhance their stewardship practices. We appreciate the 75 percent

cost share limit established in statute. Unfortunately, in Minnesota, the administrators will only allow 50 percent cost share of

practices.

Minnesota’s State conservationist, Bill Hunt, is doing a fine job

administering many aspects of the various conservation programs.

However, this is one area that we would like to see immediate administrative changes. Environmental improvements on the farms

can be quite expensive; increasing the cost share percentage to a

number higher than 50 percent would benefit those that Congress

intended the program to benefit.

In closing, Minnesota Milk asks that Congress continue to have

an eye for the future. As I mentioned at my onset, my generation

is the future of the dairy industry. We must learn from challenges

of the past to reform and enact policies that will help cultivate

profitable dairy producers who continue to care for the environment and their community. I believe the items laid out in my testimony and the other distinguished panelists help direct this vision.

Chairman Gutknecht, on behalf of Minnesota’s dairy producers,

I thank you for the opportunity to share our thoughts and ideas.

Mr. GUTKNECHT. Thank you, Dana. That was wonderful.

Mr. Maas.
20

STATEMENT OF BRUCE MAAS, DIRECTOR, ASSOCIATED MILK

PRODUCERS, INC., WALNUT GROVE, MN

Mr. MAAS. Chairman Gutknecht, I appreciate your invitation to

present my views and those of the 4,000 dairy farmer members of

Associated Milk Producers, Incorporated, AMPI. My name is Bruce

Maas, and I am a dairy producer from Walnut Grove, Minnesota,

and a member of the AMPI board of directors. In my 25 years of

dairy, I’ve also held elective positions in various other dairy-related

organizations.

Today I will share a brief snapshot of my perspective of the Midwest dairy industry. The picture has changed significantly in 25

years; fewer dairy producers, fewer cows, fewer manufacturing

plants. This region has lost market share to our western counterparts. Though overall market share isn’t growing, we’re slowly reinvesting in the industry infrastructure.

A look at our own family farm, it reveals an image similar to

many across our region.

My wife, Maydra, and I have added a parlor, a free-stall barn,

and more cows. More important, our son, Jared, has joined the operation, and that’s a sign that we are optimistic about the future

of dairy in the Midwest.

Our milk is manufactured into dairy products and marketed

through AMPI. Our cooperative has closed a small number of our

plants in the past 25 years, but we have increased capacity in others to gain efficiencies.

As a producer, I’m willing to invest in my farm and dairy cooperative if there’s an adequate dairy price safety net. Establishing

that safety net is, in fact, AMPI’s dairy policy priority for the 2007

farm bill. Let me share four ideas for crafting a strong safety net.

Number 1, increase the support price. The current $9.90 dairy

support price is inadequate, unchanged since the 1980’s.

Number 2, make it realistic. The USDA’s Commodity Credit Corporation, CCC, must increase the milk price equivalent it’s paying

to remove dairy products from the open market. Because of increased manufacturing costs, the support program today gives

dairy producers about a dollar less than Congress intended when

enacting the support program.

Number 3, provide a counter-cyclical payment. AMPI and other

members of the Midwest Dairy Coalition believe that MILC is

needed to further strengthen the overall safety net. The Dairy

Price Support Program alone is inadequate and results in much

less than the intended $9.90 level. When combining the MILC Program with the Dairy Price Support Program, producers are supported on their first 2.4 million pounds of annual production.

And, No. 4, manage imports. The CCC shouldn’t be buying the

world’s milk surplus. By closing trade loopholes, foreign dairy protein wouldn’t enter the United States and displace domestically

produced milk.

I believe a strong safety net should not result in high dairy

prices, but it should prevent the collapse of milk prices to a level

that can’t financially sustain the operation of an average dairy

farm.
21

As Midwest dairy producers, we don’t expect special treatment.

We do want a fair chance to have a level playing field with the rest

of the dairy industry. Right now we don’t have that.

The Midwest dairy industry is primarily a processing industry.

AMPI and other dairy co-ops take raw milk and manufacture it

into products like cheese, butter, and nonfat dry milk. This is an

energy intensive process, and rising energy costs have left us

handicapped.

AMPI is one of several cooperatives that requested the January

2006 Federal Milk Marketing Order hearing to review make allowances in the class III and class IV formulas. The formulas were set

in 1998 with fixed costs, and do not allow for sharp increases in

energy and other costs associated with manufacturing dairy products. As a result, the formulas place dairy product manufacturing

cooperatives in financial peril and at a distinct competitive disadvantage to those that sell most of their milk into the fluid market.

Testimony presented at that January hearing overwhelmingly

supported the need for emergency action on this issue. Increasing

make allowances is crucial for the long-term economic health of the

Midwest dairy industry, its co-ops, and their producers. With more

than 85 percent of Midwest milk marketed through dairy cooperatives, this issue is critical. We’re still awaiting word from the

USDA about how it will deal with this emergency request: Please

hurry.

As a producer and cooperative member, I fully understand the

three points I’ve raised today are tightly interwoven. I hope today’s

committee hearing will engage policymakers and industry stakeholders in an open debate and discussion about the Midwest dairy

industry, dairy price support structure, and the regional disadvantage through the Federal order make allowances. The challenge

will be transforming today’s words into ideas and action.

Mr. Chairman, I want to thank you for hosting this field hearing

and allowing me to testify. I’ll be happy to answer any questions

you might have.

Mr. GUTKNECHT. Mr. Maas, thank you, and before I forget, I

want to thank you and the AMPI board members for reopening

that butter plant in New Ulm, Minnesota. For a whole lot of reasons, I was very concerned that, perhaps, that plant would not reopen, and I’m delighted that it is reopened. It has a huge economic

impact throughout southern Minnesota, so I want to thank you and

all the board members. Please share that with them, will you,

please.

Mr. MAAS. I will do that.

Mr. GUTKNECHT. Thank you, Mr. Maas.

Next we’ll turn to Mr. Vrieze. Welcome.

STATEMENT OF JOHN VRIEZE, PRESIDENT, WISCONSIN DAIRY

BUSINESS ASSOCIATION, BALDWIN, WI

Mr. VRIEZE. Thanks for asking me.

I’ll introduce myself quickly. My family and I have about a 13

or 1,400 cow dairy in Baldwin, Wisconsin, just 19 miles from your

border. A friend of mine and I also own another dairy about 9 miles

away in Elmwood, Wisconsin. It has around 15 or 1,600 cows, so
22

total we have around 2,900 to 3,000 cows in central St. Croix County.

But I’m here today representing the Wisconsin Dairy Business

Association. We’re not a producer organization, we’re an industry

organization, in that half of our revenues and half of our members

are producers, and the other half of the members and the other

half of the revenue comes from the infrastructure that supports the

lenders, the feed dealers, the processors. So we think we’ve got a

really nice mix on the industry, and we think we have a little different perspective, maybe, on the milk industry than if we were

just a producer organization or just a corporate organization.

You’ve got my prepared remarks, but I’d like to just give you

some comments off the cuff. We believe that the Federal order system in place today is an unworkable system. We think it’s been

tweaked to death and still isn’t working.

To Mr. Maas’, remarks here about the emergency hearing in January still hasn’t been implemented that they want. Processors are

bleeding red right now, all the cheese plants here in the Midwest

are.

With the new make allowance, it will further distance my milk

being sold to fluid milk by about 30 cents a hundredweight. And

we believe milk is milk, and milk ought to be marketed to its highest value, so we’re advocating the elimination of the Federal Milk

Marketing order system, or at least going down to one order system.

We think the Midwest can compete with the rest of the United

States and, in fact, the world, but we think milk ought to be made

where it can most economically be made, and then transported to

the end user, and that’s not happening now.

I’d like to make an analogy. It would be like the States of Wisconsin and Minnesota putting together a Federal citrus marketing

order where we have the artificial board put up not to let Florida

citrus come in our State, and somehow create a greenhouse industry to raise my oranges. That’s as irrational as a system that we

have in place today with the Federal Milk Marketing Orders. My

milk, or the milk in the United States ought to be made here in

the Midwest and flown to Florida. Citrus ought to be made in Florida and traveled back to the Midwest.

There shouldn’t be marketing orders to limit where those products can be moved to.

The second one is a classified pricing system. We believe that

milk should flow to its highest value. If Mr. Clark’s company would

like to buy that milk and put it in a bottle today, he ought to be

able to do that. If Mr. Maas’ company wants to buy that milk today

and put it in butter, he ought to do that. There shouldn’t be this

four-class system on pricing. Here in the Midwest, most of my milk

gets priced on class III.

Another analogy, in my long history in the dairy industry, I

spent 16 years in the auction business where we travel coast to

coast selling registered dairy cattle. We would bring a commodity,

which is a dairy cow, into the auction ring. We would have a price

setting system, which was a lively auction bidding amongst the

farmers there. When that cow came in and we started bidding, we

didn’t stop the auction just before we slammed the gavel down to
23

say, ‘‘Well, wait a minute, now. Mr. Farmer, are you going to use

that cow for seed stock? Then you ought to pay this price. Or if

you’re going to use it just for milk production, then maybe you can

pay a less price. Or if you’re going to buy her for beef, then you

can pay a lower price.’’ That’s what our classified system is doing

today, the way we’ve got it.

The farmer, which is the end consumer in that situation, bought

that animal, and let him decide what he wants to use that animal

for, whether it’s seed stock or milk production or beef production.

Why should some artificial agency tell him that he has to pay X

amount more for that raw product, just because he has a different

use in mind for it. So we think we should get rid of the classified

system and let the market dictate where that raw milk goes to

today.

We’ve also got a layer of bureaucracy. Mr. Kyburz was up here

earlier representing milk marketing. And we’d rather see the industry hire him to figure out new innovative products and where

in the world we ought to be marketing those products, instead of

paper shuffling milk around the United States through these milk

marketing orders.

We’ve also got a layer of bureaucracy, quite frankly, in our processors that do the same thing. Well, let me see once, if I can send

a load of milk to Kentucky, and then on paper can I move eight

more loads to Kentucky out of this milk marketing order and then

we gain some kind of a value. I mean, I’ve tried to study the Federal Milk Marketing Order and the classified system. Not only do

I find it really boring reading, but it’s really an irrational system

that really discourages you about this business. It was put in place

60 to 70 years ago for good reasons at that time. Those reasons are

no longer there. I believe, again, that here in the Midwest we can

compete with anybody in the world, and that’s what we ought to

do.

We started talking about the world trade organization and how

they look at our price supports, and how that’s going to affect world

trade. We think that money spent today would be better spent on

letting us meet the environmental challenges that we have, as well

as you talked earlier about the renewable energy things that are

happening from the big three automakers.

For instance, if you took the other stuff that comes out of the

back end of the cow that we’re talking about today and turn that

into biogas, you would only have to get that from about 15 percent

of the cows in the State of Wisconsin. We’d produce as many BTU’s

of energy as all the ethanol plants in the State of Wisconsin today.

If we took that biogas and turned it into natural gas, we can actually create somewhere between 10 and 15 percent of all the natural

gas used in the State of Wisconsin today. You scrub the carbon dioxide and hydrogen sulfide out of the biogas and you have a natural gas. So we think it’s a great new market.

We all talked about anaerobic digestion to make electricity.

There’s other markets out there besides electricity. If we think the

price of unleaded gas is going to be a dollar for the rest of our lives,

we shouldn’t even be wasting our time talking about renewable energy. If we believe that the price of gas is going to sustain where

it is or even go higher, that would be a great way to divert the
24

money into animal agriculture, and we have another value-added

product, which we’ve all been talking about. But when we talk

about value-added, we only talk about the milk product. We ought

to be talking about the energy that can be created out of animal

livestock as well.

We talked about, Mr. Day, I think it was, the cost of energy and

how that’s affecting the plants earlier today. Well, we have an

economist that looks at our books and networks with other large

dairies in the Midwest. He said first quarter costs this year are

about 8 percent higher. And it’s not the diesel fuel that went in the

barrel to run the Skid Steers, it’s every product that comes on our

farms, and that’s where the cost is. He expects second quarter costs

to be about 12 percent higher than they were a year ago. Mostly

related, that’s when the fertilizer hits the books for most of us

dairy farmers. So we’re having the same problems as producers as

the processors are having with this.

But, again, we need to get into a free market system, because the

Federal Milk Marketing Orders have not flattened out the price of

milk. If anything, right now, there’s more disparity than there ever

was, so we have some other suggestions on MILC.

We like the counter-cyclical program. We think it’s less cost to

the Federal Government.

We also need to encourage the California colleagues that we have

to come into the Federal system, if there’s one, or to get rid of their

system all together. I believe with the amount of congressmen from

that State, we would be crazy to look at only Vermont, and hold

hands with them. I think we better be holding hands with the guys

in California, because they’ve got a lot more votes in Congress.

They also produce most of the milk in the nation.

They’ve got three concerns that need to be met. One of them is,

we talked about that class IV manufacturing rates has encouraged

powder plant construction out there. Those plants really need to

move out of making all powder. You’ve got the Davis family right

here in Le Sueur, Minnesota, that’s really doing neat and creative

things by way of protein and so on. That’s what they ought to be

making innovative, and we wouldn’t need to be importing New Zealand whey and concentrates. We could be doing it ourselves. So

we’ve got to figure out how to morph those plants in California out

of making those dry powders into some innovative products.

The second thing, there’s some folks there that over the years

have bought fluid quota in the State of California, the dairymen.

Those are on those balance sheets out there. We need to figure out

a way to morph those folks, because I’ve got friends that have a

half-million dollars on their balance sheet at the bank because they

bought fluid quota contracts the past years. We’ve got to figure out

a way to get them out of that.

And the other things is, the California dairymen have a different

amount of milk protein solids that they’ve got in their fluid milk.

They think the taste of the milk is better. It actually uses more

dairy products. I tend to agree with them. That’s another concern

they have.

So I think those are all things that we can come to a common

ground with the guys in California, but, again, I think we, in the

Midwest, because we export much more of our production than we
25

use by our citizenry in these two States, look much more like the

western dairymen than, let’s say, that we do than the eastern

dairymen. Although the size of our farms might look more like the

eastern dairymen, our industry as a whole looks much more like

the West. Thank you.

Mr. GUTKNECHT. Thank you, Mr. Vrieze.

Mr. Clark.

STATEMENT OF MARK CLARK, DELEGATE, LAND O’LAKES,

ROLLINGSTONE, MN

Mr. CLARK. Hi. I’d like to express my appreciation for being invited here to speak. I live just a few miles up the road, right up

in the hills, and my son and I milk about 370 cows near

Rollingstone, Minnesota. I am a delegate in my dairy cooperative,

which is Land O’Lakes. As a delegate, I’m elected by my neighbors

to participate in the cooperative’s governance system and represent

their interests.

As upper Midwest producers, we face some challenges, and not

all these challenges can be solved by the Federal Government. But

I do want to outline the challenges that I see, because I think it’s

important for you to keep them in mind as you move forward with

the policy initiatives in Washington, DC.

One of the most difficult problems we face is market volatility.

In recent years, we’ve seen milk prices fluctuate over a wide range.

Peaks are higher than they used to be, and valleys are frightening

low. We do have some tools that can help producers survive this

period of low milk prices.

The Dairy Support Program has been the foundation of our national dairy policy for decades, and it still plays an important role

in providing a stabilizing influence when milk prices sink. But,

frankly, a $9.90 support price is not an adequate safety net.

One of the most important things that has occurred since the

passage of the last farm bill is that more producers are learning

how to use a futures market to protect themselves from extreme

price fluctuations.

Another component of the milk price safety net has been the

Milk Income Loss Contract for the milk. While support for milk has

been controversial, for upper Midwest producers it has generally

been a positive program. To the extent that Congress may consider

some kind of counter-cyclical payment as part of the dairy program,

we certainly would urge the following three basic principles: It

should not discriminate between producers based on size; it should

not discriminate between producers based on geography; and it

should not result in distorting market signals by encouraging production at a time when milk supply is excessive.

For many producers, an exciting development over the past few

years has been the creation of the CWT Program, Cooperatives

Working Together. CWT is a modest attempt by the industry to exercise some degree of self-help. Through a voluntary 5 cents per

hundredweight contribution, producers, through our cooperatives,

have tools for influencing market volatility.

CWT will not be able to control extreme milk price and volatility

all by itself. But that’s my real point. A $9.90 support price can’t

succeed by itself, and neither can risk management programs, and
26

neither can MILC. As we look towards the new farm bill and the

future of dairy policy, it seems likely that the solution will require

a combination of approaches. There likely won’t be a one-size-fitsall dairy program.

While price volatility is one of the most challenging problems

that currently face producers, from a Midwest perspective, one of

the least visible problems that’s emerging is the change in the

dairy marketplace. We are seeing other regions emerge as even

more intense competitors in the market for manufactured dairy

products. This will have a dramatic impact on our upper Midwest

cheese industry.

Part of the solution is to adopt new policies at the State and local

level that encourage the growth of milk production in the upper

Midwest.

We have to redefine public attitudes about modern milk production practices, and focus on creation of jobs and economic development. We must find ways to add value to existing milk production.

This will require new, creative approaches to milk marketing.

One promising approach is to encourage the production and marketing of specialty cheeses.

The second strategy for sustaining Midwest milk production is

achieving greater efficiency within our dairy manufacturing infrastructure. Finally, there are opportunities for Midwest producers to

supply fluid milk to the class I market in areas where the local

supply is inadequate.

In order for this to work, the Federal Milk Marketing Orders

have to be flexible and adoptable enough to facilitate movement of

milk to milk deficient regions. We do want to be able to supply

high-value class I markets when the local supply is inadequate,

and milk marketing orders should not inhibit that from occurring.

We have the resources, experience, and capability to be a leader

in our national dairy industry. But it will take hard work on the

part of producers, cooperatives, and Federal policymakers to realize

our full potential. As lawmakers, we simply ask that you support

public policies that give us a level playing field and tools to help

ourselves build a promising and prosperous future. Thank you.

Mr. GUTKNECHT. Thank you, Mr. Clark. Are we going to visit his

farm? We’re going to a farm near Rollingstone. Thank you for coming.

We’re running short on time. I’m not going to ask as many questions. I want to bring up the third panel. But Mr. Vrieze offered

a rather sober, and some might say fairly harsh, observation about

the current milk marketing order system, classification system.

Would you care to respond to his comments, Dana?

Ms. ALLEN. Thank you, Chairman Gutknecht. We certainly agree

with points that.

Mr. Vrieze has raised. The system is antiquated and probably——

Mr. GUTKNECHT. So things have changed since 1934.

Ms. ALLEN. Certainly things have changed. We’d transport cold

milk to Florida, if need be. Minnesota Milk would like to see a uniform class I utilization rate across the country. Right now we feel

that the upper Midwest is set at a disadvantage.
27

Mr. GUTKNECHT. And you would agree that California has to be

part of the final solution.

Ms. ALLEN. I would like to see California as part of the solution.

Mr. GUTKNECHT. And he is correct. They have 54 Congressmen,

so we do pay attention.

Ms. ALLEN. And I know a fair number of them are also on your

subcommittee. But we also feel that it’s important to maintain a

classing system, whether that incorporates milk protein concentrate somewhere in there, it doesn’t quite provide the incentive

to produce nonfat dry milk, but allows us to adapt to new technologies. But we believe that would maintain the structure and

order within the pricing system. And it might become just as complicated to figure out what my price of milk would be if I have no

idea what it’s going to be used for.

Mr. GUTKNECHT. So you’re saying we should have a class V.

Ms. ALLEN. Maybe we should have a class V. Thank you.

Mr. GUTKNECHT. Mr. Maas.

Mr. MAAS. I think we need to remember that the Federal order

system, initially its main purpose was to provide an adequate supply of dairy products to all areas of the United States. And I don’t

think we can lose sight of that fact, and I think that’s why we need

it. Yes, maybe it needs some tweaking from time to time, but most

things do. And I’d really—I think especially for the Midwest and

the processing area up here, it’s definitely needed.

Mr. GUTKNECHT. Mr. Clark, do you want to add anything? You’re

sort of in between the two sides, representing a fairy sizable coop.

Mr. CLARK. I know it’s an awfully complicated system. It would

be nice if even I could fully understand the system before, say we

should keep it or get rid of it. I wish you’d come up with something

just a little simpler.

Mr. GUTKNECHT. So do I. Listen, I’m going to dismiss you, because we’ve got another great panel. And I want to thank all of

you, but I think this panel probably really represents the differences on this whole issue, and we are in that phase right now

of listening and learning, and hopefully these aren’t irreconcilable

differences. Let me just say this. That many people, if we don’t always agree with some groups, people say we’re not listening. No,

we’re listening, but we’re listening to lots of different folks about

what’s going on. And what ultimately we hope to determine is what

is best for the dairy industry in the United States, and what is best

for me, what’s best for the dairy industry here in the upper Midwest. So I want to thank you all, and we look forward to continuing

this discussion and dialogue as we begin to get closer to actually

drafting the next farm bill. Thank you very much.

Next we’re going to call up our third panel. We first have Mr.

Clint Fall, who is the president and CEO of the First District Association, from Litchfield, Minnesota. Mr. Jim Green, who is the

president and CEO of Kemps, from Saint Paul, Minnesota. And as

already referenced, Mr. Mark Davis, who is the president and CEO

of Davisco Foods International, from Le Sueur, Minnesota. And Mr.

Gordon Crow, who is the director of Government and Community

Relations, or what we used to think of as a little ice cream company in Marshall, Minnesota, Schwan, but they are much, much

more than that. They are a huge consumer of dairy products all
28

over the United States. And we thank all of you for coming today,

and your comments, both written and oral, will be made part of the

official record.

Mr. Fall.

STATEMENT OF CLINT FALL, PRESIDENT AND CHIEF EXECUTIVE OFFICER, FIRST DISTRICT ASSOCIATION, LITCHFIELD,

MN

Mr. FALL. Well, thank you very, Chairman Gutknecht, for this

opportunity. My name is Clint Fall, and I’m the president and CEO

of First District Association in Litchfield, Minnesota. Thank you for

this opportunity to testify today regarding the status of the upper

Midwest dairy industry.

First District Association is a dairy farmer-owned cooperative

based in Litchfield, Minnesota. The farmer-members of First District produce 1.7 billion pounds of milk per year, over 120 million

pounds of cheese each year, over 22 million pounds of various

forms of whey protein concentrate, and 32 million pounds of lactose

on an annual basis. Our single cheese processing plant in Litchfield

is one of the largest and most modern dairy processing facilities

east of the Mississippi River, and one of the few processing plants

with the technical capability of extracting dairy calcium.

Farmer-owned cooperatives such as First District Association are

critical in the dairy processing sector, not only in the upper Midwest, but in the Nation as a whole. In Minnesota and Wisconsin,

about 85 percent of the milk is marketed through cooperatives. It

is estimated that 60 to 65 percent of cheese, and nearly 100 percent

of butter and milk powder in Minnesota and Wisconsin are processed by cooperatives.

As a member of the Midwest Dairy Coalition and the National

Milk Producers Federation, we are also active in supporting Federal dairy policies that are beneficial to dairy farmers of the upper

Midwest and the Nation as a whole. The structure of Federal dairy

policy has always played a significant role in the status of the

upper Midwest dairy industry, although not always for the better.

Whether it is the ongoing structure of the Federal Milk Marketing

Order system or past experiments with regional dairy compacts,

Federal dairy policy has often placed the upper Midwest at a competitive disadvantage by artificially inflating class I prices and putting downward pressure on manufactured milk prices. Since about

85 percent of the milk in the upper Midwest is manufactured into

cheese, butter, and powder, such policies are detrimental to our region.

Therefore, one of the clear policy objectives has been to promote

policies that treat producers in the upper Midwest equitably, and

to reform or eliminate those policies that discriminate against our

region.

As we move into the debate over the structure of the next farm

bill, I would like to make several points about policies that are important to the upper Midwest dairy industry.

Number 1, the Milk Price Support Program. Without a doubt, the

Milk Price Support Program is an important program that should

be continued. But it is also in great need of reform.
29

The current price support level of $9.90 per hundredweight has

proven to be a porous and ineffective floor. Between January 2000

and February 2003, the class III price fell below the support in 12

of the 37 months, falling as low as $8.57 in November 2000.

The central premise of the program is that dairy product manufacturers will sell dairy products to the Commodity Credit Corporation whenever markets fall below the product purchase price as established by USDA. Yet, manufacturers are reluctant to sell product, particularly cheese, to the Commodity Credit Corporation,

CCC. One of the key reasons for this is that the costs of selling to

the CCC are higher than the costs of selling to the commercial

market. To more adequately reflect the unique and added costs associated with selling to the CCC, we support a proposal by National Milk Producers Federation to increase the purchase prices

for cheese, nonfat dry milk, and butter.

Number 2, the Milk Income Loss Contract Program. Because of

the inadequacy of the Milk Price Support Program, First District

Association and the upper Midwest Coalition argued during the

last farm bill debate for an additional program to provide a more

credible safety net for dairy producers. Fortunately, others agreed.

The counter-cyclical Milk Income Loss Contract Program that

emerged out of the 2002 farm bill is working and has proven to be

a very effective safety net for farmers in the upper Midwest, as

well as throughout the country.

Because of the counter-cyclical nature of MILC, assistance is only

provided to producers when market prices fall below a certain target level. Indeed, the MILC Program was dormant for much of

2004 and 2005. However, when prices do fall to low levels, as they

did in 2002 and the first half of 2003, and as we are currently seeing, the assistance provided by the MILC Program is critical.

Congress also sought to limit the taxpayer costs of the MILC Program by placing a volume cap to limit the benefits to the first 2.4

million pounds of production per operation. Roughly equivalent to

the production from 135 cows. All producers are eligible for benefits, but not beyond the 2.4 million-pound annual cap. Over 83 percent of all dairy farmers—or dairy farms in the Nation receive full

benefits of the MILC Program and are fully covered under this cap.

Yet, even those that exceed the cap receive great benefits.

The MILC Program has proven to be beneficial to a vast majority

of dairy farms in the Nation. And for the upper Midwest specifically, there is no doubt that the program has helped maintain a

productive capacity during low milk price cycles. In that context,

it is worth noting that dairy cow numbers in Wisconsin increased

in 2005. This is the first time since 1994 that January through December dairy cow numbers in Wisconsin have not shown a reduction. Arguably, the MILC Program is one of the factors helping to

stabilize dairy production in our region.

As we move into the next farm bill debate, it is critical for our

dairy industry and our rural communities that MILC or a similar

type of counter-cyclical safety net program be continued.

Number 3, trade policies. It is critical that we review our trade

policies and those of our trading partners to assure that we have

consistent and rational policies as we move into the future. Specifically, during the Uruguay Round of WTO trade negotiations, tariff
30

rate quotas were placed on imports of traditional dairy import

product classes such as cheese, butter, and nonfat dry milk. However, we failed to recognize emerging trends in international trade,

particularly with regard to milk protein concentrates, and we failed

to create tariff rate quotas on those milk protein products consistent with butter and dairy product classes. As a result, we have

seen instances during which MPC imports into the United States

have surged.

In March 2001, the General Accounting Office study determined

that MPC imports increased 56-fold from 1990 to 1999, with a near

doubling of the MPC imports in 1999 alone. Not only do these import surges affect farmers’ milk prices domestically, they also have

a significant cost to taxpayers. In May 2004, a study by the International Trade Commission, it was determined that 35 percent of

the CCC stock buildup of nonfat dry milk between 1996 and 2002

was attributable to the displacement of domestically produced nonfat dry milk by imported milk protein products.

MPC imports are once again increasing. It is critical that we

modify our tariff schedules to place tariff rate quotas on MPCs and

casein, as proposed in H.R. 521, introduced by Congressmen Obey

and Sherwood. This legislation would place commonsense limits to

assure that the United States does not experience major surges of

MPC imports again, as we did in the 1990’s. It is time for us to

push for more consistency in our tariff schedules and to fully recognize and respond to our own market vulnerabilities.

The upper Midwest dairy industry is in the process of becoming

more competitive. Our region will continue to enjoy more comparative advantages in dairy production and processing. However, we

must work together to achieve necessary efficiencies to remain

competitive, especially with the West and the Southwest. This will

likely require modifications in traditional premium structures, as

well as efforts to reduce the milk assembly and transportation

costs. These changes will occur independent of Federal Government

action. However, a Federal dairy policy will continue to play a role

in the future dairy production and processing in our region. It is

our job to insist on policies that treat our region fairly. Thank you

very much for this opportunity.

Mr. GUTKNECHT. Thank you, Mr. Fall.

Mr. Green, first before I introduce you as the president of

Kemps, I just want to say that we now have a rule in our house

that we have to keep that new light ice cream in our freezer at all

times, and so it is a fabulous new product, and I promote it everywhere I can. Thank you and Welcome.

STATEMENT OF JAMES B. GREEN, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, KEMPS LLC, ST. PAUL, MN

Mr. GREEN. Well, thank you, Mr. Chairman. Thank you for that

nice comment, and we think it’s a great product too, and it’s doing

well in the marketplace.

Mr. Chairman, as you mentioned, my name is Jim Green. I’m

president and CEO of Kemps, LLC, a Saint Paul-based dairy company that manufactures and markets a wide variety of dairy products; including fluid milk, cottage cheese, sour cream, dips, and yo-
31

gurt. Kemps is a wholly-owned subsidiary of the H.P. Hood Company, one of the largest dairy companies in America.

I also serve, have the pleasure to serve as the chairman of the

International Dairy Foods Association, as well as the chair of the

International Ice Cream Association. So we appreciate very much

the opportunity to provide a Minnesota perspective on dairy policy.

The dairy industry faces some unique challenges in the Midwest,

but we share a national belief that the U.S. dairy industry is the

best in the world. I would like to focus first on the Federal Milk

Marketing Order Program, and then suggest some guiding principles that can be used when you write the next farm bill. Bring

some, I think, some Minnesota commonsense to the complex maze

of dairy regulations.

In many respects, classified pricing is the root of many of the industry’s problems, particularly in this part of the country. The Federal Milk Marketing Program has been around since the Great Depression. Almost as long as Kemps. Unfortunately, the system has

not kept pace with the changing nature of the dairy industry. The

complexity of classified pricing and the stagnation of the Federal

Milk Marketing Orders, which aren’t like any other commodity programs in America, have created a system of milk price regulation

that often stands in the way of milk moving to its highest valued

use, and milk moving from the highest, most efficient production

areas.

In Minnesota, the classified pricing scheme of the orders has

caused regional price distortions that raise serious long-term issues

concerning sustainability and fairness for both dairy farmers and

processors alike. As a result, the Federal Milk Marketing Orders

keep us at a competitive disadvantage in today’s marketplace.

Seventy years ago, milk was the beverage of choice for most

Americans. Today, milk competes directly with a wide variety of

other beverages; including bottled water, fruit juices, and carbonated soft drinks, none of which are subject to Government-run classified pricing schemes.

Globally, only America and Canada still maintain rigid milk

price setting regulations, while our competitors, like New Zealand

and Australia, have no such regulations. Even emerging international dairy markets like Russia and India and China have

avoided the American model, sending clear signals that we need to

change the way we do dairy in America.

Beyond the complex web of Federal Milk Marketing Orders, the

United States has two countervailing dairy subsidy programs that

USDA found in 2004 to do little to help the dairy farmer. The Milk

Income Loss Contract Program, MILC, and the Dairy Price Support

Program are at odds with one another. MILC stimulates overproduction, depressing prices, and causing great price instability in

the marketplace. While the Dairy Price Support Program makes

the Government an active, willing buyer of dairy products, preventing markets from clearing properly when products are in surplus,

and artificially interfering with the commercial marketplace.

Unfortunately, we cannot fix all the problems with the Federal

dairy policies overnight, but we can initiate a transition from a

multiple, divisive, and costly subsidies, to a single, national dairy

farmer safety net. We can create a more level playing field for all
32

producers and processors so that we can compete fairly and equitably. The next farm bill provides a historic opportunity for Congress to begin this process to ensure that the U.S. dairy industry

will be more prosperous in the future.

We can accomplish this goal if we work together and come to a

consensus on the basic principles for a more modern, market-oriented national dairy policy.

First, it’s important that policies allow market signals to work so

that our products can be the most competitive and innovative in

bringing consumers what they want and what they’re willing to

buy. Second, while there are certain regional differences in our industry, it’s important that Federal dairy policies be national in

scope, recognizing national and even global markets for our products. Third, policies should be designed to minimize Federal Government expenditures. And, fourth, there should be a single national safety net for dairy farmers that minimizes market interference as much as possible, is consistent with our trade policies

and objectives, and yet still provides critical assistance when it’s

needed.

The dairy processing industry is committed to these principles

and believe they are the foundation for our future; providing producers and processors the greatest opportunity for strong growth

and future prosperity.

I commend you for holding this hearing and gathering a diverse

group of industry representatives together to share our differing

opinions, and I appreciate the opportunity to testify very much.

Mr. GUTKNECHT. Thank you, Mr. Green.

Mr. GUTKNECHT. Next we’re going to hear from Mark Davis of

Davisco in Le Sueur, Minnesota. Welcome.

STATEMENT OF MARK DAVIS, CHIEF EXECUTIVE OFFICER,

DAVISCO FOODS INTERNATIONAL, INC., LE SUEUR, MN

Mr. DAVIS. Thank you, Mr. Chairman, and thanks for allowing

me to testify. Let me premise my remarks by saying that after listening to most of this testimony, that it would be my considerable

judgment that the upper Midwest has the potential to be the best

place to produce milk in the country.

Having said that, and by way of introduction, I represent the second generation in our three-generation family manufacturing business. We have factories in Idaho, South Dakota, and Minnesota.

We have recently invested with a grain farmer and a dairy farm

in southern Minnesota, and on that farm we practice some of the

things Mr. Vrieze alluded to with anaerobic digestion and making

our own electricity, and I would tell you there’s more about cows

that I wish I ever knew, but now know.

We have done a good share of research and innovation on the

whey side or the byproduct side of our cheese business. We have

sales offices in Mexico City, Geneva, Switzerland, and recently

opened an office with a staff of two in Shanghai, China, because

of the opportunities we see on the whey side of the business. And

I think from our experience on the whey side, that creates my frustration with the milk side. And having lived under the order system as a private company, has had it’s moments, but it’s also been

inspirational as you try to figure out how to fight the system.
33

And I would tell you that I don’t want to give an insane suggestion, but when I listen to all of the possible suggested cures for the

order system, why don’t we try the marketplace. Why don’t we just

do our business and sell our products as other industries do. I just

cannot believe that our dairymen, having established in various

parts of the country what they have, won’t be able to compete in

that type of marketplace.

Now, particularly as to the Support Program and the MILC Program, when you consider that MILC is capped, as has been stated

here, at 2.4 million pounds, and yet evidence seems to say that the

people that live with the cap and are entitled to the full subsidy

are the people that are growing their part of the industry. They’re

growing in milk production. I think that says something.

I think milk flies somewhat in the face of the Support Program

in that it encourages people to quit producing. It encourages people—or discourages them from having price be an incentive to

change their practices, to invest in technology, and that’s both on

the producer side and the manufacturing side.

I can tell you from our experience that the Midwest manufacturing sector is at a disadvantage under this system. That those manufacturers that are comfortable and secure in the fact they can invest in bigger and larger plants with new processes are doing that.

And with a declining number of dairy farmers in the Midwest and

declining milk supply, you have to be somewhat reluctant to

present some kind of a financing proposal to your banker. It’s just

not confidence building and a very delicate place to invest in new

factories.

The Support Program dictates economically that we should

produce cheese, butter, and nonfat milk. In our world, we found

that whey, with no regulations and with an open marketplace and

prices that are determined in the marketplace, has proven to be an

opportunity. And not only that, whey protein, which is the natural

byproduct of cheese-making, offers many, many benefits that were

intended to raise a calf and can be used for human purposes in nutrition, weight loss, muscle building, any number of areas that are

healthy and nutritious for people.

When the Government does accumulate supplies of nonfat milk

and build that up to the level where they have to release them,

those releases dramatically affect the price of dairy proteins and

distort the marketplace.

People have suggested raising the support price. I don’t think we

need a support price. Our industry has the capability to be dynamic at the producer level, and certainly at the manufacturing

level, to respond to the prices as they’re presented in the marketplace. Oftentimes good judgment is dictated not by what a market

is telling you, but by what a Federal policy does to your economics,

and I think that’s unwieldy.

And, finally, we previously had a program that allowed folks like

us to offer futures contracting to our milk producers. Now, having

had experience on the dairy producer side where we have a dairy

farm and have utilized that service, we find that to be most beneficial and most helpful in making long-range planning. If you can

lock in a price on your product and be comfortable, you’re going to
34

have those economics, at least to a large degree, throughout the

year. It opens many more options and opportunities for you.

So I would encourage your committee and you encourage the

Government that a program that worked for 5 years with no distortion, no negative impact on Federal orders, should be reinstituted.

And as a private family business, we’d be offered the same opportunities to forward contract as a cooperative would have. So with

that, I appreciate very much the opportunity to be here and look

forward to your findings.

Mr. GUTKNECHT. Well, thank you very much, Mr. Davis.

I want to thank you for the little plug for the Futures Program.

I was the chief author of that, so——

Mr. DAVIS. I knew that and I should have said that.

Mr. GUTKNECHT. Well, ideally children are brilliant when they’re

your own, or I should say ideally grandchildren now are brilliant

when they’re your own, but I want to thank you for that. I also

want to thank you for helping to educate me about, you were really

a pioneer when a lot of other dairy co-ops and dairy processors and

manufacturing plants around the country were literally flushing

down the drain value in these whey products. You were the first

to really recognize the value, and you have really opened up a

whole new marketplace for things that we used to throw away, and

I want to congratulate you and your family for that.

Next we’re going to go to Gordon Crow, and before I introduce

him, let me tell you a little bit about their little company. Probably

because they’re a privately held company, people know very little

about Schwans. They see the trucks. They don’t realize how much

dairy product they buy every day. And I think I’m right in this,

Gordon, you have a pizza plant down in Kansas that consumes

more cheese than all of the dairy cows in the State of Kansas can

produce. It gives you some idea of how much cheese and pizza you

folks sell. So, Mr. Crow, we want to welcome you and thank you

for joining us here today.

STATEMENT OF GORDON CROW, DIRECTOR, GOVERNMENT

AND COMMUNITY AFFAIRS, THE SCHWAN FOOD COMPANY,

MARSHALL, MN

Mr. CROW. Thank you, Mr. Chairman. I was heartened to come

here and excited to learn that you have ordered that the Kemps ice

cream be kept in your freezer. I’m assuming by extension you’re extracting the Schwan product and consuming it.

Mr. GUTKNECHT. That was a faux pas on my part. We always

keep Schwan’s drumsticks available, but I haven’t seen you have

a light product, and for those of us who are getting paunchy in our

middle age, we do like the lighter product.

Mr. CROW. I will quickly and severely follow up on that, because

we do have a few of those, and most of them made with Davisco

cheese, I might mention.

Chairman Gutknecht, as you’ve introduced, my name is Gordon

Crow. I’m the director of Government and Community Affairs for

the Schwan Food Company. We’re based in Marshall, Minnesota.

I want to thank you for holding this timely hearing in Minnesota

and inviting Schwan to testify on the many important dairy policies affecting our industry today.
35

The story of Schwan exemplifies the spirit of American entrepreneurship. Marvin Schwan started selling and delivering ice cream

to rural homes in southwest Minnesota, it’s about 300 miles west

of here, in March 1952 out of the back of a dilapidated 1946 Dodge

panel van. At the time, Mr. Schwan and his parents ran a small

dairy that was struggling, due to, ironically, Government price controls on milk.

Today the Schwan Food Company is one of the largest branded

frozen food companies in the world. It is a multi-billion dollar international corporation, with major manufacturing operations in eight

States, and three countries in Europe. Schwan employs about

22,000 people worldwide. Our brands can be found in more than 50

countries. Schwan’s products can be found in homes, supermarkets,

convenience stores, public and private schools, military dining facilities, hospitals, universities, and many restaurants and entertainment venues. Seven out of the 10 school lunchrooms carry our

products, and about three-quarters of the frozen pies sold in America are manufactured by Schwan. It is reasonable to assert that

Schwan is a local company that competes in a global market.

Mr. Chairman, as you know, the Federal dairy policy rules of

today were laid out even before Schwan existed; before interstate

highways; before dependable refrigerated hauling. Most of the policies, as it was mentioned earlier, were created during the Great

Depression, when the factors of trade in America and internationally were dramatically different. A tremendous opportunity exists

for the U.S. dairy industry in today’s marketplace. While I do not

buy and sell commodities for Schwan, I have consulted with our

commodity group and can tell you, in order to take advantage of

this opportunity, we must look to our vast number of commodities

that are succeeding without layers of subsidies. We must adopt a

coordinated Federal dairy policy that is flexible, market-oriented,

and environmentally sound.

Let me illustrate my point. At Schwan, frozen pizza is one of our

signature products. To make pizza, we need dough, sauce, cheese,

and toppings. I’m here to tell you that no other industry we deal

with in the making of frozen pizzas face the same challenges as the

dairy industry.

The Government does not tell the flour mill from which we buy

wheat what they must pay their wheat farmers, or the tomato

paste manufacturer what it must pay tomato farmers for their perishable product, or the pepperoni company what it must pay the

beef rancher. Equally confounding, with each of these ingredient

providers, we have the opportunity to contract for a specific amount

of product at a mutually agreed upon price, which is always a fair

price. We are prohibited from forward contracting for our dairy ingredients based on the unfounded fear that dairy farmers would in

some way be harmed if we were allowed to voluntarily negotiate a

fair price for the dairy products we buy.

No other commodity has regulated prices like dairy. Wheat growers and other program crops, for that matter, have a safety net

that allows them to preserve farmer income while at the same time

clearing the market of surplus. Tomato producers do not have a

Federal safety net. They rely on forward contracting, and it’s working well for them. Moreover, cattlemen, free from the restrictions
36

of dairy-like pricing regulations, have been, and continue to, develop a variety of products that the consumer wants; whether it’s

lean beef, naturally produced, certified Angus, aged beef, guaranteed tender, or so forth, they have that free.

My point is, Congress needs to take action by overhauling our

current dairy policy so that the companies like Schwan can remain

competitive in local, national, and international markets. While a

lot has changed since the 1950’s at Schwan, the same cannot be

said for the policies and regulations for milk and dairy products.

These have our markets in a stranglehold, it is our opinion. Let me

suggest a new policy direction for dairy should address two key

changes from the current antiquated system.

First, we need to change existing subsidy programs that weigh

us down. As you have already heard in testimony from across the

country, the Milk Income Loss Contract Program and Dairy Price

Support Programs simply work against each other. They create a

heavy financial burden for our Government and interfere in the

marketplace. In fact, as many have expressed, these inefficient programs work at cross-purposes and distort dairy market signals. We

need to make sure that any new system affords assistance to the

entire dairy industry, while letting markets dictate production.

Mr. Chairman, Schwan supports the existence of a safety net for

dairy farmers. However, we support one that allows markets to operate unobstructed, while still providing critical support for farmers. We cannot continue to suffer under two conflicting subsidy programs like the wheat industry did some years ago.

Second, we need to open dairy markets at home and abroad.

Trade restrictions on items such as MPCs, milk protein concentrates, caseins, and caseinates, or import assessments on similar products are simply bad ideas from the past. There are companies now making these highly refined dairy proteins in this country

every day, and, I might add, doing so successfully without having

to rely on support programs, Government subsidies, or regulated

minimum prices. And restricting access to imported ingredients

hurts our trade credibility and our Minnesota businesses. American

policy must set the standard for increased market access and efficient production, both at home and abroad.

The Federal Dairy Price Support Program is the main reason

that the United States is not a world leader in the production of

value-added dairy proteins, because the program makes it more

profitable for companies to sell nonfat dry milk powder to USDA

than to invest in technology to make MPCs demanded by the market. I know you’re familiar, Mr. Chairman, with the International

Trade Commission Report that concluded that U.S. production of

specialized milk proteins is limited and likely to remain limited so

long as the current Federal Milk Marketing Order and Dairy Price

Support Program remain in effect. The market needs these proteins, and we need these proteins for our dairy industry to grow,

so it’s up to Congress to reduce the policy obstacles which stand in

the way.

America’s dairy industry must maintain its strong global position. In fact, the combination of the Doha Development Agenda in

the WTO, U.S. free trade agreements, and the farm bill renewal

process are all aligned to provide us with a historic opportunity.
37

We now sit on the verge of arguably the best opportunity we’ve had

in decades to get our policy cards put together in a way that gives

the United States the best hand at the table among major dairy

producers in the world. We must not waste it. We should also not

sit in a defensive policy crouch, blame others, and squander this

chance to build a better policy platform that encourages our already enormous efficiencies and resources to grow even more.

However, Mr. Chairman, with or without an agreement out of

Doha, it’s imperative that we remain committed as a Nation to see

that commerce, not Government regulations, guide the investments

and production decisions companies like Schwan make every day.

Mr. Chairman, the Schwan Food Company prides itself on making products with the highest quality dairy ingredients. It is a

pride that can be shared by all American dairy farmers. Farmers

and processors are involved collaboratively in today’s business environment, and we must do the same on the policies. Let us work together to maintain that standard of quality and address these

pressing issues. I am confident we can rise to the challenge so that

our next generation of Schwan employees worldwide can continue

the rich tradition established by Marvin Schwan 54 years ago.

Schwan and the dairy industry stand ready to help you in this endeavor.

Again, thank you for this opportunity to testify. I appreciate your

leadership.

Mr. GUTKNECHT. Thank you, Gordon, and, again, thanks to what

your company does every day in terms of moving enormous, in fact,

mountains of dairy product around the country and around the

planet, literally.

You talked a little bit about foreign markets, and I know you’ve

opened a big plant in Germany, and you’re doing some interesting

things there. Can you talk a little bit about that, where you see

that going in terms of expanded markets. I know you sell an awful

lot of pizza, even in Central and South America.

Mr. CROW. Oh, I think, the same thing that Mr. Davis talked

about, Mr. Green talked about, other manufacturers here, is we are

looking to world markets more and more, and as you know, some

of the steps and actions we’ve taken with the Government here

have proved problematic in those areas. We have manufacturing facilities, two in England, one in France, one in Germany. We actually dominate the frozen pizza market in Europe today, and we

have other branded foods over there. But the big challenge is the

protectionist policies, or what they see as protectionist policies for

U.S. types of produced and grown and manufactured things. It may

have little or nothing to do with what we’re meeting here today

about, but it’s still some hurdles and some obstacles that are put

in our place that damage our reputation or our credibility on a national level.

Interestingly, on the previous panel, we heard people talking not

about protecting America businesses and producers, but down to

regions. Now we have different agreements for different regions of

our own company. I will agree with Mr. Davis that we need to bust

down our own—we need to clean up our own house first, through

either one policy or a simplified policy or something like that, and

then send the same signal out to the rest of the world.
38

We are, incidentally, which you’re aware of, we have recently

moved into Central and we’re moving into South America with our

products, so all of this is very timely to us in our plans for growth

internationally.

Mr. GUTKNECHT. Mr. Davis, you mentioned China, and you’ve

opened an office in Shanghai, I believe.

Mr. DAVIS. Yes.

Mr. GUTKNECHT. Can you talk a little more about that, because

I’m fascinated, because we’ve begun to discover that even though

50 percent of Asians are lactose intolerant, if you turn it into

cheese or whey products, there’s a tremendous market over there.

Mr. DAVIS. I don’t think the Chinese know they’re lactose intolerant. That’s an American newspaper——

Mr. GUTKNECHT. Is it a myth?

Mr. DAVIS. I don’t know if it’s a myth either, until you get some

consumption there.

Mr. CROW. Let’s not tell them. Let’s see what happens.

Mr. DAVIS. Just see what happens. But it’s a very exciting place.

We think if we have 74 cows, it’s small in Minnesota. Well, China

probably has an average of six, if you take the country as a whole.

If you try their products in the supermarket, they’re terrible.

They’re worst tasting than, sorry, Jim, UHT milk, but it’s just the

place to be. It’s going to happen.

When they’re consuming the low volume per person that they’re

consuming, it’s a huge opportunity, and they lack the technology,

they lack the sophistication and knowledge of our producers over

the European producers. If they double, and they only go up to 6

pounds, it could take our entire surplus of products in those years

we have it, just like that, and still need New Zealand and Australia.

They’re just anxious and aggressive about getting what we’ve

got. That’s the best I can say about it. I don’t have any technical

knowledge about what they’re doing, but, boy, there’s opportunity

over there.

Mr. GUTKNECHT. Mr. Green, you talked a little bit about growth

opportunities for this industry. You want to expand on any of that?

Mr. GREEN. Well, from Kemps’ perspective, we see tremendous

opportunities in terms of growth, not only within Minnesota, not

only within the upper Midwest, but also interregionally and going

to other parts of America. One of our strategic intents as a company is to grow outside of the upper Midwest and to explore new

markets, particularly in frozen deserts and cultured products, so

Kemps is all about innovation. You mentioned a new product that

we have, but there’s many more to come. But as we innovate, we

also need efficiency relative to our plants, but then we also need

to be able to buy and purchase dairy products from efficient producers. And that’s some of the points that I made in terms of my

testimony was from the perspective of two countervailing policies

that work against one another and, unfortunately, it creates a distortion in our markets and provides the wrong trigger points relative to the marketplace, so, yes, we see an awful lot of future and

an awful lot of promise relative to innovation, but we need efficient

markets to operate as well.
39

Mr. GUTKNECHT. Mr. Fall, my staff doesn’t like it when I do this

to them, but I have a rule that we don’t use the word safety net

in our office, and there’s a specific reason for that. I think taking

it in today’s world, it has the wrong kind of connotation. The term

that we use is a shock absorber. And I like that term better, because I think it really speaks to what I think we do need to do.

I mean, there has to be some Federal shock absorber under this—

and you talked about volatility of the market. Do you think it’s possible that we may be able to craft something that takes, perhaps,

the best elements of the MILC Program and the other minimum

price programs and so forth, is there a way we—do you think

there’s a way we might be able to come up with a simpler, fairer,

more understandable system in this next farm bill.

Mr. FALL. I guess I’ll answer that, Chairman Gutknecht, by saying, yes, I do believe that there are opportunities. I maybe am not

in total agreement that the current price support program and the

counter-cyclical program that we call MILC conflict each other. In

fact, I think, quite frankly, they somewhat compliment each other.

They work a little bit differently. The Support Program, or the

Shock Absorber Program, whatever you want to call it, the safety

net, it basically functions as a clearinghouse for commodities that

are produced in the country. There are problems with the program,

as we mentioned, that it’s become very complex to use it, with the

exception of moving nonfat dry milk into that marketplace.

On the other hand, the counter-cyclical program has been a very

effective program. When the market drops below a certain level, it’s

dollars that go directly to the dairy producer. It bypasses the processors. Whether the processors are in cooperative or whether

they’re private, it’s money that goes directly to that producer, because the price dropped below a certain level, and it provides them

with that needed income.

My experience, quite frankly, and I’m very close to the farm side,

First District has 1,300 members, and my experience in the last

several years has just been very positive from the standpoint of

seeing some enthusiasm, finally, in this region of the country, and

I’ve worked in all regions of the country. And with the advent of

the counter-cyclical program, we’ve seen some additional dollars be

put into the pockets of people who are feeling more comfortable

with reinvesting and modernizing.

I think we all agree that we need an industry that has modern

facilities and efficient facilities, but the unfortunate part about it

in the upper Midwest is our producers have not had the luxury of

selling real estate in certain areas of the country at hundreds of

thousands of dollars an acre to reinvest in dairy operations. So we

have to take it at a little bit different approach, and the countercyclical program has functioned very well in this part of the country, as I think in other areas as well.

Mr. GUTKNECHT. Mr. Fall, I want to thank you for—and unfortunately you brought that up at the very last minute. I mean, that

is a growing concern that we have, is that you’ve got producers in

California that can sell their operations for huge amounts of

money, and they can go to New Mexico, or even as was indicated

earlier, some are coming back here to the upper Midwest and look-
40

ing at expanding dairy operations. That is an interesting and, albeit, very difficult thing for me to unravel, how that all effects.

Let me close this down, because one of my goals was to start on

time and finish on time, and we’re a little bit late. I want to thank

all the people who have testified today. I want to thank our staff

who have done a marvelous job in helping put this together.

Let me just say in conclusion that as we go forward and have

more of these kinds of meetings, both here and around the country,

I will say this, and I want everybody to understand, I’m not going

to be a party to pulling the rug out from under our dairy farmers.

I mean, first and foremost, they are, in some respects they are the

mortar that hold the bricks of rural America together, and so the

dairy industry is extremely important.

Having said that, I think we have to be cognizant of the fact, and

part of the reason we’ve got folks from Kemps and Schwans and

Davisco here, is because we have to understand that they’re important to our future as well. And I think some of the things that

they’ve said today cannot be ignored. We have to come up, in my

judgement, with a simpler system that’s both fair, and that is rational in terms of meeting market demands. And so we’ve got a

very difficult future ahead in terms of dairy policy, and how do we

bring these various conflicting regions and viewpoints together and

come up with a rational policy that allows dairy farmers to flourish, particularly here in the upper Midwest, and allows us to compete in what I believe will be a growing international marketplace

for the things we can produce here in the United States.

And as I mentioned earlier, it surprises me sometimes that dairy

industry officials from small countries like Ireland and New Zealand seem to have more faith and confidence in the future of the

dairy industry here in the United States, sometimes, then even we

do, and we’re trying to explore that and get to the bottom of that.

With that, I will close the formal portion of this meeting, and

we’re going to be around here. And I think later this afternoon

we’re going to be doing a few tours of dairy farms here in this part

of the world. But, again, thanks to all of you for coming out today.

I will declare this forum adjourned. Thank you.

[Whereupon, at 12:05 p.m., the subcommittee was adjourned.]

[Material submitted for inclusion in the record follows:]

STATEMENT OF DANA ALLEN

Mr. Chairman, and members of the subcommittee, my name is Dana Allen. I own

and operate a dairy with my parents and brother south of Eyota, Minnesota, which

is about 50 miles west of where we are today. I am proud to be a fourth generation

dairy producer.

In addition to operating a dairy, I also serve on the board of directors for the Minnesota Milk Producers Association, the Voice of Minnesota’s Dairy Industry. Minnesota Milk, as we are known, has a growing membership of over 1,800 dairy producer members. We combine dairy producer leadership with over 250 associate

members and we are ‘‘The Voice of Minnesota’s Dairy Industry’’. Our strength comes

from working together with industry partners to create more opportunity for dairy

producers. We focus on educational programs as well as mobilize grass roots efforts

to help set policy that will shape our future.

First, I want to thank Chairman Gutknecht, my Congressman, for holding this

field hearing in our area. As Congressman Gutknecht knows, the southeast portion

of Minnesota has a long standing tradition of being a strong, progressive dairy area.

Our terrain of rolling hillsides provides many opportunities for forage production
41

and environmental sustainability. Dairy farming lends its hand to such opportunities.

However, over the last 30 years, Minnesota’s dairy industry has faced many challenges. I sit before you today as a true minority in the dairy industry, a female.

And, also as a representative for the next generation—the future of Minnesota’s

dairy industry. I am not interested in talking about the problems of the past, rather,

I want to talk about what we have learned from these challenges and transform

them into opportunities for our future.

Our 5,126 Minnesota dairy farms have an average herd size of about 74 cows, one

of the smallest averages in the Country. While we can celebrate the fact that dairy

producers in this part of the Country have been able to make a living on fewer cows

than our counterparts elsewhere, we must continue to get better and that sometimes means increasing the pounds of milk produced, either by adding cows or increasing pounds of milk per cow. It could also mean adding more value to our product, cutting costs of production per pound produced, or any combination thereof.

In addition, consumers continue to demand low cost, high quality food. Consolidation is occurring all around us. Look at the explosion in major food retailers such

as Walmart, Costco, et cetera, and the current purchase of Albertson’s by SuperValue. As producers, we are continuing to adjust to the changes in the retail food

industry. This trend continues to put pressure on the processing and production side

of all industries, including dairy.

Coupled with that, we have a new generation of dairy producers coming up, like

myself, who do want free time. I have chosen dairy farming as my career because

I love the animals. There is nothing better than helping to deliver a newborn heifer

calf or having the 4fourth highest milk production per cow in the State of Minnesota. But there are also business realities that must be faced. Consolidation is one

reality, the need to hire additional labor is another. If not addressed, Minnesota’s

industry will continue its decay and the incentive for young people to come back to

farm will soon disappear.

I share this with you to give you a better understanding of the dairy producer

perspective. Every dairy producer’s dream is to own and operate a profitable and

successful business while enjoying a wholesome lifestyle.

Overall, Minnesota’s dairy industry has been able to maintain itself the last several years, which is an improvement from previous decades. In fact, we have even

had some signs of strengthening. It has started with the resolve of dairy producers

in Minnesota. We have been able to communicate our message to leaders at all levels to create policies that encourage a healthy and vibrant dairy industry.

Governor Tim Pawlenty, his administration, and several state legislators have

played a major role in our effort and deserve our thanks. With their help, we have

reduced the number of farm losses and steadied milk production. However, we still

have a long way to go.

As we continue to stabilize and potentially increase milk production in Minnesota,

our cooperatives and other processors must be looking at ways to increase processing capacity. They must also look into adding more value to what we produce on

the farm. The adaptation of new technologies and improvements in efficiency are

needed not only at the farm level, but also at the processor level.

Milk assembly costs from the farm to the plant are unacceptable. While they have

made great strides over recent years, our processors must continue to work together

much more than they are now to bring about increased efficiencies in milk assembly. They must also be constantly re-investing in processing procedures that add efficiencies to the system and value to our product. We will continue to work cooperatively with our processors to make these internal improvements in our industry.

There are several policies that need to be reformed and improved at a Federal

level as well.

Policies are needed to help ensure that we have a quality rural labor force. For

years, our best and brightest youth have been leaving rural areas. The supply of

quality people is sometimes scarce. We have found that people of Hispanic origins

share our values of family and work ethic. They provide a quality, trusted and hardworking workforce. We greatly value their contribution to our dairy and to our community.

We encourage Congress to pass comprehensive immigration reform that strengthens our borders, ensures national security, and provides opportunity for the United

States to continue in its tradition as a melting pot of hardworking immigrants.

We request a price safety net that effectively sets a price floor higher than $9.90

per hundredweight. The safety net must work effectively within the market. Our

current system tends to limit marketing innovation. Processors just produce products and sell them to the Commodity Credit Corporation when the market price for
42

our product is at the price floor rather than encouraging dynamic marketing innovation.

Minnesota Milk believes a possible solution is to design a price support system

that would work in combination with a counter cyclical program like the Milk Income Loss Contract (MILC) program.

The MILC program has provided enormous benefit to Minnesota producers. We

strongly encourage Congress to continue some type of counter cyclical program. And,

we remain open to possible changes in the system to reduce regional disparities.

Minnesota Milk also encourages Congress to continue to reform the Federal Milk

Marketing Order system. The current system is antiquated and complex. We urge

you to significantly reduce the number of Marketing Orders. Ultimately, we believe

one marketing order is all that is needed. We believe the best solution is to create

a system that incorporates one uniform Class I utilization across the country. Transportation has improved significantly since the inception of the currently reformed

system. Cold milk can be efficiently transported across the country, thus eliminating

the fear of having fluid milk shortages.

This reformed system would also encourage responsible dairy production in environmentally suitable areas of the country. It would also preserve orderly pricing and

marketing of dairy products.

Additionally, we must have a domestic pricing structure that encourages the production of dairy products that consumers demand, in particular, milk protein concentrates. The current price support system and order system does not encourage

balanced domestic production of proteins. For many reasons, it makes sense to ensure a domestic supply of a wide variety of natural proteins extracted from our cows’

milk.

We encourage Congress to play an important role in WTO negotiations by not allowing other nations to export their subsidized dairy protein products into the

United States. The bottom line is that United States producers can profitably compete with the best when we are on a level playing field. We encourage Congress to

utilize Tariff Rate Quotas and other tools available to ensure we do not give away

entry to our Country at the expense of the best dairy producers in the world—the

U.S. dairy producer.

These changes can and must be made in such a way that maintains the integrity

of the wholesome product our cows produce. Minnesota Milk encourages Congress

and FDA to maintain a definition of milk, ice cream and other products that does

not threaten the strong consumer confidence developed over the years which could

be lost in the rush to sell dairy-like byproducts and imported substitutes in place

of quality dairy products.

Environmental regulations in Minnesota are among the most stringent in the

country. We are not complaining. In fact, we believe the responsibility of environmental protection should lie with the people who make a living off the land and we

openly accept the responsibility. But, what we would like is to have other states step

up and follow through on enforcing the Clean Water Act as it is related to livestock

operations.

Consistent administration of environmental regulations across the country is fair

and responsible. The current administration of the Clean Water Act puts producers

in Minnesota at a competitive disadvantage because we are unable to reap the benefits of our high level of environmental stewardship from the marketplace. Instead,

the current administration of the Clean Water Act should put Minnesota dairy producers at a competitive advantage—because of our special care for the environment.

To help dairy producers across the country comply with the Clean Water Act,

Congress enacted the Environmental Quality Incentives Program (EQIP). It is one

of the most valuable and reliable programs Congress has enacted. We ask that you

continue funding EQIP at the current level or higher. Minnesota dairy producers

understand the environmental rules and have grown to look at EQIP as a vital element in providing assistance needed to enhance their stewardship practices. We appreciate the 75 percent cost share limit established in statute. Unfortunately, in

Minnesota, the administrators only allow 50 percent cost share of practices. Minnesota’s State Conservationist, Bill Hunt, is doing a fine job of administering many

aspects of the various conservation programs. However, this is one area that we

would like to see immediate administrative changes. Environmental improvements

on the farm can be quite expensive; increasing the cost share percentage to a number higher than 50 percent would benefit those that Congress intended the program

to benefit.

Additionally, the EQIP program helps to prepare dairy producers for easy entrance into programs such as the Conservation Security Program (CSP). We ask

that you consider continued, responsible development of a program like CSP that

rewards producers for incorporating best management practices. The current CSP
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program holds promise for the future. However, there are still several questions associated with CSP before it becomes a truly effective and reliable program. We ask

Congress to continue serious dialogue specifically with dairy farmers on how to best

reform and implement the program before moving forward.

We encourage more cooperation between Federal conservation programs and voluntary, industry led programs like Minnesota Milk’s Environmental Quality Assurance (EQA) program. The EQA program has received high praise from Minnesota

officials like the Minnesota Pollution Control Agency Commissioner Sheryl

Corrigan, Minnesota Department of Agriculture Commissioner Gene Hugoson and

other state agency heads and environmental groups. These voluntary industry led

programs help to extend Federal dollars farther and more efficiently. This is one

particular area where Bill Hunt has seen opportunity. Bill and his staff continue

to find innovative ways of cooperating and we thank him for his leadership in this

area.

We encourage Congress to extend and expand renewable energy incentives not

only for ethanol and biodiesel production, but also for on farm biogas production,

in particular methane digesters. Minnesota is a leader in both biodiesel and ethanol

production. Minnesota is also the home to dairy producer and Minnesota Milk Director, Dennis Haubenschild, who many consider a pioneer in creating renewable energy from cow manure. On farm biogas production holds promise as a key component for a stable, long term, domestically produced energy supply.

Lastly, Minnesota Milk supports and encourages continued development of a safe,

secure and reliable animal identification program. Consumers are rightfully requesting traceability of food produced. The industry should be proactive by implementing

an animal I.D. program. We ask that Congress consider the tremendous costs of implementing such a program. And request that these costs are not borne solely by

producers, but rather consumers who gain from increased traceability of food products.

In closing, Minnesota Milk asks that Congress continue to have an eye for the

future. As I mentioned at the outset, my generation is the future of the dairy industry. We must learn from the challenges of the past to reform and enact policies that

will help cultivate profitable dairy producers who continue to care for the environment, and their communities. I believe the items laid out in my testimony and that

of the other distinguished panelists help direct this vision.

Chairman Gutknecht, distinguished committee members, on behalf of Minnesota’s

dairy producers I thank you again for the opportunity to share our thoughts and

ideas.

STATEMENT OF MARK DAVIS

Mr. Chairman, thank you for the opportunity to testify today. members of the

committee, welcome to Minnesota. And thank you for coming.

My name is Mark Davis and I’ve been in the dairy manufacturing business my

whole life.

I was born into it. Growing up, my Dad was in the business. And my first job

out of high school was driving a can milk pick up route.

I am now the President of Davisco Foods, a family owned company formed by the

merger of the St. Peter Creamery and the Le Sueur Cheese Company in 1969. Our

present headquarters is in Le Sueur, Minnesota. Davisco has cheese factories in

Le Sueur, Jerome, Idaho and Lake Norden, South Dakota. With ingredient spray

drying facilities in Le Sueur, Nicollet, Minnesota and Lake Norden, South Dakota.

As our dairy manufacturing business has grown and evolved we’ve established

sales offices in Mexico City, Geneva, Switzerland and, just recently, in Shanghai,

China. We’ve worked with Japanese dairy processors for over 20 years.

When I was driving that milk pick-up route, I never dreamed milk production in

Minnesota would drop more than 20 percent like it has between then and now.

So I want to take this opportunity to put some of those changes in context—especially with regard to Federal dairy programs, which haven’t changed that much

since I started in the business.

Let me comment first about one of the newest dairy programs:

MILC, or the Milk Income Loss Contract program.

Now, I know this thing is politically popular in the Midwest, but I have to call

it like I see it. It is making dairy policy totally schizophrenic. It distorts the market

signals.

It is the ‘‘Dr. Jekyll’’ program to the price support’s ‘‘Mr. Hyde.’’
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MILC is partially tied to production, but, only up to certain level of production.

Many of the expanding dairy producers in the rapidly growing areas of the country

are capped as to the volume of milk they can have subsidized.

MILC distorts the marketplace signals to the producers. They don’t have to make

economic and competitive enhancing investments, and, institute practices that increase their production efficiencies. One of the results being that Minnesota dairy

farm production is not economically competitive with other growing production regions of the country. And soon neither will our manufacturing sector be competitive.

Thus, as prices recover, we, in the Midwest, will continue to lose dairy farms, and,

discourage investment in what was once the premier dairy manufacturing region of

this country.

So much for the market, and we manufacturers trying to make products and sell

them.

MILC just makes a bad situation worse. Even without it, the price support program is causing serious problems in the marketplace.

Under the price support program handlers are essentially forced to make cheese,

butter or powder. Why? If you try to make a derivative of one of those, the economics won’t flow.

With this system, you are better off making nonfat milk, selling it to the government, and having the taxpayers supporting it. That whole system frustrates the

marketing and the modernization of the U.S. dairy industry.

The bottom line is this: Federal dairy programs are not flexible enough to keep

up with market innovation. And market innovation is what sells more milk.

Whether it is for a manufacturer, or a producer.

Now let me tell you about an area where we have done some innovation: in whey.

‘‘Necessity is truly the Mother of Invention;’’ in this case ‘‘innovation.’’

And there are two reasons why we moved into whey production: first and foremost, because there are no price regulations to restrict us.

Secondly, because there’s a demand, and, we had ever increasing volumes.

Whey protein naturally makes up about 20 percent of the total protein in milk.

Whey proteins are quickly and easily digested, can aid in weight loss or muscle

gain, and they are easily dissolved in water.

Besides various dairy products and bakery products, whey proteins are used in

nutritional supplements, meat bindings, and even those little film strips that freshen your breath.

In other words, whey proteins expand the utilization of milk. Through innovation,

and through market development.

But price supports even have an impact on the whey business.

Government warehouses, through the price support program, offer the best return

on non-fat dry milk. And when the government buys milk powder week after week,

month after month, year after year at prices way above their market value, we’re

ensured surpluses hanging over the market.

Liquidating those surpluses—no matter how carefully it is attempted to be structured—hits the dairy protein market.

In 2002, the USDA started giving away surplus milk powder for livestock feed in

drought areas. Guess what, the more powder that came out of government storage—

even though it was supposed to go to livestock feed—the more prices in the whey

market were undermined.

My point is this: the Federal Government is acting as a willing buyer and seller

of dairy products, and it is disrupting the normal commercial markets.

And, it sure disrupts the normal commercial markets when the government sets

up all different kinds of pricing rules.

Although Davisco is one company, with one bottom line, we have three plants that

are forced to operate under three sets of rules in buying milk

• In Le Sueur, we buy milk from independent farmers, and operate inside the

Federal milk marketing order. So we have to pay a minimum price under the order.

• In Lake Norden, South Dakota, we buy milk from a cooperative, who can originate milk under another set of unique rules—they are allowed to forward contract

with producers. But get this, we are not allowed to forward contract with the coop.

• In Jerome, Idaho, we buy milk from independent farmers operating outside the

Federal milk marketing order. We forward contract with them.

Three plants, three different sets of Federal rules about how we buy milk. If we

were in the grain business, or the meat business, we wouldn’t face that.

We also had an important business tool taken away from us by Congress just recently: forward contracting with all our suppliers. Which we still do in Idaho, and

which we also did quite successfully in Minnesota.
45

Our program was a big success here in Minnesota. We don’t have the ability to

offer that service anymore because Congress let the Federal program that allowed

us to forward contract expire. Being in the business as long as we have, we know

a fair amount about the economics of milk.

We buy milk in three states: inside the order, outside of the order, and from a

co-op.

My son Mitch, who runs a farm, has learned a lot about the economics of producing milk.

So, when Congress allowed independent dairy plants to forward contract with

farmers from 2000–2004, his brother—my other son Jon . packaged together that

knowledge as a service to our suppliers, and allowed them to forward contract their

milk, and lock in a margin, just like farmers who supply a co-operative.

We really need to get back the opportunity to offer forward contracting inside the

Federal order just like cooperatives do—because our producers are requesting it.

And Mr. Chairman, I thank you for your leadership on this issue.

Forward contracting is a fair, effective tool that allows both the producer and the

handler to manage price volatility.

Producers can service debt, they can expand, they can guarantee a profit—you are

not going to go out of business when you have locked in a profit on every gallon

of milk.

Manufacturers can do the same things too, and by managing input costs they can

dedicate some resources to product innovation and development.

Cash flow is ‘‘Business 101’’—and that’s what forward contracts help manage for

both producer and manufacturer. That is why the cooperatives use it.

And that is why our suppliers outside the Federal Order system in Idaho use it.

You don’t have to just take my word for it. USDA conducted a study on forward

contracting during the pilot program period it was allowed: from late 2000 through

2004.

USDA concluded it was a good tool to reduce price volatility.

And most interestingly, . participation was highest where there was more than

one buyer competing for milk.

Another example that the marketplace works. Competition works!

Our producers did not have to contract with us but if we were offering a competitive price, they did.

It is next to impossible to grow a business without tools like forward contracting—

which are available to every business from supercomputers to jelly beans.

And today it is available to some dairy producers.

I’m not sure of the public policy goals of letting some producers use this tool, and

not letting others use it.

To sum up this testimony, and a life time of experience in the dairy business, I

want to sum up and underscore a few points: • First, innovation and product development spell success in the dairy business.

• Second, current Federal dairy policy strangles and chokes out innovation and

product development. • Third, having two dairy subsidy programs is just plain crazy—there only needs

to be one and it needs to get out of the way of markets.

Not a pretty picture, but the facts as I see them after nearly 50 years.

I want my sons and my grandchildren to have a future in this business, and I

hope they can work with the sons and daughters and grandkids of our current suppliers—and new farmers who see an opportunity in dairying.

Because Davisco is not going to be making cheese and whey protein products if

there is not a stable supply of milk,

But for all of our grandkids—manufacturer and producer— to have a future, we

need to reform dairy policy. NOW.

The first step to real, equitable, and meaningful reform simply is not that complicated.

Just allow proprietary handlers and independent producers to enter into private,

buy/sell, business contracts, that provide for cash forward sales.

All that would do is bring some fairness and business options to all producers and

processors.

Locking in a profit is basic principle of economics, and fairness under the law it

is a basic principal of America.

STATEMENT OF BRUCE MAAS

Mr. Chairman and members of the committee, I appreciate your invitation to

present my views and those of the 4,000 dairy farmer members of Associated Milk
46

Producers Inc. (AMPI). My name is Bruce Maas and I am a dairy producer from

Walnut Grove, MN., and a member of the AMPI Board of Directors.

As the owner of a family farm and stakeholder in a leading Midwest dairy cooperative, my perspective on the state of the Midwest dairy industry is drawn from more

than 25 years of experience in this industry. Today I will share that perspective,

providing a Midwest dairy industry snapshot, AMPI’s policy priority for the 2007

farm bill and, finally, the competitive disadvantage shared by most of this region’s

dairy producers.

First, an industry snapshot. The picture has changed significantly in 25 years.

There are fewer cows, fewer dairy producers and fewer manufacturing plants. This

region has lost market share to our western counterparts. But don’t think we’re

ready to board up parlors and plants. Though overall market share isn’t growing,

we’re slowly reinvesting in our industry infrastructure.

A look at a picture of my family dairy reveals an image similar to many across

the region. My wife Maydra and I have added a parlor, free-stall barn and more

cows. Most important, our son Jared has joined the family farm. That’s a sign we’re

optimistic about producing milk.

Our milk is manufactured into dairy products and marketed through AMPI. Our

cooperative has closed a small number of our plants in the past 25 years, but added

as much capacity to other facilities which enable us to make products with a higher

dollar return.

As a producer, I’m willing to invest in my farm and dairy cooperative if there’s

an adequate dairy price safety net. Establishing that safety net is, in fact, AMPI’s

dairy policy priority for the 2007 Farm Bill. Let me share four ideas for crafting

a strong safety net:

1. Increase the support price. The current $9.90 dairy support price is inadequate,

unchanged since the 1980’s.

2. Make it realistic. The USDA’s Commodity Credit Corporation (CCC) must increase the milk price equivalent it’s paying to remove dairy products from the open

market. Because of increased manufacturing costs, the support program today gives

dairy producers about $1 dollar less than Congress intended when enacting the support program.

3. Provide a countercyclical payment. AMPI and other members of the Midwest

Dairy Coalition believe the Milk Income Loss Contract (MILC) is needed to further

strengthen the overall safety net. The dairy price support program alone is inadequate and results in much less than the intended $9.90 level. When combining the

MILC program with the dairy price support program, producers are supported on

their first 2.4 million pounds of annual production.

4. Manage imports. The CCC shouldn’t be buying the world’s milk surplus. By

closing trade loopholes, unrestricted dairy protein wouldn’t enter the United States

and displace domestically produced milk. AMPI has worked closely with the Midwest Dairy Coalition and the National Milk Producers Federation to close the loopholes through legislative action.

A strong safety net should not result in price enhancement, providing economic

incentive for dairy producers to expand their businesses. It should prevent the collapse of milk prices to a level that can’t financially sustain the operation of an average dairy farm. The dairy price support program should provide long-term, marketbased income.

As Midwest dairy producers we don’t expect special treatment. We just want a

fair chance to walk the economic tight rope. To do that, we need a safety net and

a level playing field with the rest of the dairy industry. Right now we don’t have

that.

There’s a regional disadvantage shared by nearly all dairy producers in the Midwest and many who manufacture dairy products throughout the nation.

Since most Midwest milk marketing cooperatives take raw milk and manufacture

it into products like cheese, butter and nonfat dry milk, we are dealing with rapidly

rising energy costs. Though we’re trimming energy expenses, there are factors we

can’t address on our own.

Under its Federal Milk Marketing Order system, the United States Department

of Agriculture must increase the permitted manufacturing make allowance.

AMPI is one of several cooperatives that requested the January 2006 hearing to

review make allowances in the Federal order Class III and IV formulas. The formulas continue to use data from 1998, which does not account for sharp increases

in energy and other costs associated with manufacturing dairy products. As a result,

the formulas place dairy product manufacturing cooperatives in financial peril and

at a competitive disadvantage to those that sell most their milk into the fluid market.
47

Testimony presented at the January hearing overwhelmingly supported the need

for emergency action on this issue. Increasing make allowances is crucial for the

long-term economic health of cooperatives and their dairy farmer owners. If manufacturing cooperatives aren’t profitable, this region’s manufacturing infrastructure

and producers’ return on investment are at risk. With more than 85 percent of Midwest milk marketed through dairy cooperatives, this is a big deal.

We’re still awaiting word from the USDA about how it will deal with this emergency request. This issue demands immediate attention and should not take a back

seat to politics. Midwest milk manufacturing cooperatives are at a growing disadvantage.

As a producer and cooperative member, I fully understand the three points I’ve

raised today are tightly intertwined. I hope today’s committee hearing will engage

policy makers and industry stakeholders in an important debate and discussion

about the Midwest dairy industry, dairy price support structure and a regional disadvantage through the Federal order make allowances.

The challenge will be transforming today’s words into ideas and action. Mr. Chairman, I want to thank the Committee for hosting this field hearing and allowing me

to testify. I will be happy to answer any questions you might have.

STATEMENT OF MARK CLARK

I wish to express my appreciation to Rep. Gutknecht and the members of the subcommittee for this opportunity to express my views on the state of the dairy industry in the upper Midwest. My name is Mark Clark. My son and I milk about 370

cows in the rolling hills near Rollingstone, Minnesota. I am a delegate in my dairy

cooperative which is Land O’Lakes. As a delegate, I am elected by my neighbors to

participate in the cooperative’s governance system and represent their interests. I

also have served on Land O’Lakes Policies & Resolutions Committee, which develops our cooperative’s positions on public policy issues that affect dairy farmers, cooperatives, and the U.S. dairy industry.

Personally, I’m optimistic about the Upper Midwest dairy industry. We have a lot

of built-in advantages in this region. We have good soils and we generally have

ample rainfall, which means we’re able to produce good crops of high-quality hay.

Our close proximity to the grain-producing regions of the country provides us with

ready access to feed ingredients. Historically, milk production has been a mainstay

of farmers in this region.

Traditionally, milk produced in the Upper Midwest has primarily been used for

processing, and in recent years, cheese has been our primary product. As a result,

there’s generally strong competition for the milk that’s produced here. But as producers, we need to be careful that we don’t become complacent and take our strong

markets for granted.

While I’m generally optimistic, as Upper Midwest producers, we do face some

challenges. Not all of these challenges can be solved by the Federal Government.

But I do want to outline the challenges that I see because I think it’s important

for you to keep them in mind as you move forward with policy initiatives in Washington, DC.

One of the most difficult problems we face is market volatility. In recent years,

we’ve seen milk prices fluctuate over a wide range. The peaks are higher than we

used to see, and valleys are frighteningly low. We are just coming off of a period

of very strong milk prices. During that period of time, we saw producers nationally

expand their herds and increase productivity. Milk supply is up, and even though

the economy is solid and demand is strong, the increased milk supply is depressing

milk prices.

I don’t think we’re going to see a prolonged downturn in prices like we did in

2002–2003. But milk prices will go low enough to serve as a wake-up call to producers. We do have some tools that can help producers survive this period of low milk

prices.

The Dairy Price Support Program has been the foundation of our national dairy

policy for decades. It still plays an important role in providing a stabilizing influence

when milk prices sink. But frankly, a $9.90 support price is not an adequate safety

net. During the prolonged downturn of 2002–2003, when milk prices hovered near

the support level for months, it became clearly evident that we cannot rely solely

on the support price program to stabilize milk prices.

One of the most important things that’s occurred since the passage of the last

farm bill is that more and more producers are learning how to use the futures market to protect themselves from extreme price fluctuations. This has been a good educational experience for producers to gain some knowledge and experience about
48

using risk management tools. To the extent that Congress may consider enhancing

risk management as a strategy in the next farm bill, I think that dairy farmers will

be much more knowledgeable in their evaluation of different approaches because of

the experience we’ve had in the past several years.

Another component of the milk price safety net has been the Milk Income Loss

Contract program. MILC has generated a lot of controversy since it was included

in the last farm bill. My cooperative, Land O’Lakes, did support the extension of

MILC through the end of the current farm bill. This was a decision that reflected

a balance of interests of our co-op members, large and small, from one region to the

next. While support for MILC has been controversial, for Upper Midwest producers,

it has generally been a positive program. During the period of time that milk prices

were extremely depressed, it provided producers with some breathing room to decide

what to do about the future. To the extent that Congress may consider some kind

of counter-cyclical payment as part of the dairy program, we certainly would urge

following three basic principles—it should not discriminate between producers based

on size; it should not discriminate between producers based on geography; and it

should not result in distorting market signals or encourage production at a time

when milk supply is excessive.

For many producers, one of the most exciting developments in the past few years

has been the creation of the CWT program—Cooperatives Working Together. CWT

is a modest attempt by the industry to exercise some degree of self-help. Through

a voluntary, five-cent per hundredweight contribution, producers through our cooperatives have two tools for influencing market volatility. First, we can influence

supply through a herd retirement program. Second, we can try to prevent supply

from depressing markets through an export program. I’m very pleased that my cooperative, Land O’Lakes, is one of the largest participants in the CWT export program.

After two years of operation, producers are satisfied enough with the results of

CWT to seriously consider increasing the program from a nickel to a dime. Land

O’Lakes does support the increased commitment. We’re realistic enough to admit

that even at 10-cents per hundredweight, CWT will not be able to control extreme

milk price volatility all by itself. But that’s my real point. A $9.90 support price

can’t succeed by itself. Neither can risk management programs, and neither can

MILC. As we look to the new farm bill and the future of dairy policy, it seems likely

that the solution will require a combination of approaches. There likely won’t be a

‘one-size-fits-all’ dairy program.

While price volatility is one of the most challenging problems that currently faces

producers, from a Midwest perspective, one of the least visible problems that’s

emerging is the change in the dairy marketplace. I mentioned early in my statement

that it’s easy for Midwest producers to become complacent about our markets. But

the indications are that the marketplace is changing.

In the Midwest, our milk plants are being squeezed on both ends. In order to keep

the plant full and operate at efficient levels, our plants have to bid up the price of

milk. But at some point, the marketplace will not sustain the price that our Midwest plants must pay. This is especially true because of the ability of manufacturing

plants in other regions to procure milk at a lower cost than the Midwest. The symptom of this trend is when our Midwest manufacturing plants cannot operate at profitable levels.

For many years, California was the major source of competition for cheese and

other manufactured dairy products. California still is a strong competitor. But we

are seeing other regions emerge as even more intense competitors in the market for

manufactured dairy products.

Last fall, Southwest Cheese Inc. began processing cheese at a huge new facility

in New Mexico. And over the winter, Hilmar Cheese Co. announced plans to build

a cheese facility in west Texas. Together, these two facilities, if ultimately developed

to operate at planned capacity, would produce 15 percent of the American-style

cheese in the country.

This will have a dramatic impact on our Upper Midwest cheese industry. Our

plants are older and generally smaller. We will have a difficult time maintaining

our market share with California, New Mexico, Texas and any other new, emerging

region with rapidly growing milk supplies.

Part of the solution is a state and local concern. We have to adopt new policies

at the state and local level that encourage the growth of milk production in the

Upper Midwest. We have to redefine public attitudes about modern milk production

practices to focus on creation of jobs and economic development. Minnesota and Wisconsin are trying hard to accomplish that task. Both states have either implemented, or are considering, new policies and incentives to reverse the trends and

reinvigorate milk production in the Upper Midwest. If we are successful, then long
49

term, I predict that we will see reinvestment in our milk processing industry as

well.

But this will take time. Meanwhile, we have to adopt new strategies to sustain

our Upper Midwest dairy industry while it grows. We must find ways to add value

to existing milk production. This will require new, creative approaches to milk marketing. One promising approach is to encourage the production and marketing of

specialty cheeses. Earlier this month, the Wisconsin Department of Agriculture,

Trade, and Consumer Protection reported that Wisconsin leads the Nation in the

production of specialty cheeses. If we cannot compete for the high-volume, commodity cheese market, we should be able to defend a niche market of producing highvalue, specialty cheese.

The second strategy for sustaining Midwest milk producers is achieving greater

efficiency within our dairy manufacturing infrastructure. Nationally, Cooperatives

Working Together has been an effective self-help program for milk supply and export marketing. In the Midwest, we need a regional ‘CWT’ spirit of cooperation to

eliminate duplication in milk procurement and transportation.

Finally, I believe there are opportunities for Midwest producers to supply fluid

milk to the Class I market in areas where the local supply is inadequate. In many

areas of the Northeast and Southeast, population growth limits the ability of the

dairy industry to expand and meet local Class I needs. With modern transportation

capabilities, we can feasibly service those markets from the Midwest more efficiently

than from the Western states.

In order for this to work, the Federal milk marketing orders have to be flexible

enough and adaptable enough to facilitate movement of milk to milk deficit regions.

Our Midwest perspective is that we do not want to manipulate the milk marketing

orders to the detriment of producers in the East or South. But we do want to be

able to supply high-value Class I markets when the local supply is inadequate, and

the milk marketing orders should not inhibit that from occurring.

At the beginning of my testimony, I said that I was basically optimistic about the

future of the Midwest dairy industry. I believe we have the resources, experience,

and capability to be a leader in our national dairy industry. But it will take hard

work on the part of producers, cooperatives, and Federal policymakers to realize our

full potential.

As lawmakers, we simply ask you to support public policies that give us a level

playing field and the tools to help ourselves build a promising and prosperous future. Thank you for listening to my comments.

STATEMENT OF JIM GREEN

Mr. Chairman and members of the Subcommittee, my name is Jim Green and I

am the President & CEO of Kemps LLC, a Saint Paul-based company that makes

and markets a wide variety of dairy products, including milk, ice cream, cottage

cheese, sour cream, dips and yogurt. Kemps is a wholly-owned subsidiary of H.P.

Hood, LLC, one of the largest dairy companies in America.

I have been in this business my entire life, starting with a family owned dairy

operation in York, Pennsylvania. Today, I have the privilege of working at Kemps

and chairing the International Dairy Foods Association (IDFA) and the International Ice Cream Association (IICA).

A lot has changed since 1914 when Kemps started making and delivering milk

and ice cream. We now have 1,450 employees, most of whom work in five milk

plants in Minnesota, South Dakota and Wisconsin, a cultured dairy products plant

in Minnesota and two ice cream facilities in Minnesota and Connecticut.

Thank you for the opportunity to provide a Minnesota perspective on dairy policy

as you plan to draft the next Farm Bill. The dairy industry faces some unique challenges in the Upper Midwest, but we share a national belief that America has the

best dairy industry in the world.

Nationally, our farmers produce an abundant and growing supply of milk and our

healthy dairy processing sector makes foods and beverages enjoyed around the

globe. But, if our present set of dairy policies is left unchanged, then our ability to

be competitive here in Minnesota and abroad will be diminished greatly.

As we approach the next Farm Bill, now is the right time to have a serious discussion about the need to strip away outdated farm policies and put in place programs

that promote innovation and growth.

While others on this panel will undoubtedly focus on the urgent need to address

problems with our costly and complicated dairy subsidy programs, I would like to

focus first on the Federal Milk Marketing Order program and then suggest to you
50

guiding principles that can be used when you write the next Farm Bill to bring common sense to the maze of our dairy regulations.

In many respects, classified pricing is at the root of many of the industry’s problems, particularly in this part of the country.

The milk marketing program has been around since the Great Depression—nearly

as long as Kemps. Since then, my company and other dairy processors like us have

modernized our operations to take advantage of advances in refrigeration, distribution, telecommunications and other business innovations.

Unfortunately, the Federal milk marketing order system has not kept pace with

the demands of a changing dairy industry. Just as it did decades ago, the Federal

Government still sets the base price of milk that Kemps and other processors must

pay to cooperatives and dairy farmers.

The government still operates a complex system of pricing milk based on how the

milk is used, with higher prices paid for milk used for beverages (Class I) and successively lower prices for milk used in yogurt, ice cream, soft products (Class II),

cheese (Class III) and butter and dry milk products (Class IV). Regulated milk

prices are different, too, based on ‘‘where’’ the milk is used—not just what products

the milk is used in.

The complexity and stagnation of the Federal milk marketing orders, which are

unlike any other commodity program, have created a system of milk price regulation

that often stands in the way of milk moving to its highest value use from the most

efficient production areas. As a result, we have a system that causes regional price

distortions and has grown so cumbersome that even the simplest changes take years

to make.

In Minnesota, where our milk supply has been declining steadily, these regional

price concerns raise serious long-term questions of sustainability and fairness for

dairy farming and processing.

The Federal milk marketing orders keep us at a competitive disadvantage in today’s marketplace. Seventy years ago, milk was unrivaled as the beverage of choice

for American consumers. Today, milk competes directly with bottled water, fruit

juices and soft drinks, none of which are subject to government-run classified pricing schemes. Globally, only America and Canada still maintain rigid milk price setting regulations while our competitors, like New Zealand and Australia, have no

such regulations. Even emerging international dairy markets, such as Russia, China

and India have avoided the ‘‘American model.’’ Ironically, these socialist countries

have freer dairy markets than we do. These are all clear indications that we need

to change the way we do business in America.

Beyond the complex web of Federal milk marketing orders, the U.S. has two countervailing dairy subsidy programs that USDA found in 2004 do very little to help

dairy farmers. The Milk Income Loss Contract Program (MILC) and the dairy price

support program are at odds with one another. MILC stimulates over production,

depressing prices and causing greater price instability in the market place. While

the dairy price support program makes the government an active, willing buyer of

dairy products—preventing markets from clearing properly when products are too

plentiful and artificially interfering with the commercial marketplace.

The Federal Government also spends billions of dollars on a host of beneficial conservation and animal health programs, disaster relief efforts and rural development

that are all designed to assist our farmers, including dairy farmers. All of these programs should be examined carefully and only the ones that stimulate growth and

innovation should remain.

Unfortunately, we cannot fix all of the problems with Federal dairy policies that

have accumulated over the last seventy years. However, we can take small, meaningful steps that will put us on the right track to future success. We can make the

Federal milk marketing order process more flexible and responsive. We can initiate

a transition from multiple, divisive and costly subsidy programs to a single, national

dairy farmer safety net. We can create a more level playing field for all producers

and processors to compete fairly and equitably. The next Farm Bill provides an historic opportunity for Congress to begin this process to ensure that the U.S. dairy

industry will be more prosperous in the future.

We can accomplish all of these goals if we work together and come to a consensus

on the basic principles for a more modern, market-oriented set of national dairy

policies.

First, it is important that policies allow market signals to work so that our products can be the most cost competitive and innovative in bringing consumers what

they want and will buy.

Second, while there are certainly regional differences in our industry structure,

it is important that Federal dairy policies be national in scope, recognizing national

and even global markets for our products.
51

Third, policies should be designed to allow market signals to operate naturally

and minimize Federal Government expenditures.

Fourth, there should be a single, national program to provide a safety net for

dairy farmers that minimizes market interferences as much as possible, is consistent with our trade objectives and policies, and yet still provides critical assistance

when it is needed.

The dairy processing industry is committed to these principles and believe they

are the foundation for our future; providing producers and processors the greatest

opportunity for strong growth and prosperity.

I commend you for holding this hearing and gathering a diverse group of dairy

industry representatives together to share our ideas. The outcome of the farm bill

is important to my business, important to Minnesota, and important to the ultimate

success of the U.S. dairy industry.

STATEMENT OF GORDON CROW

Thank you, Mr. Chairman and members of the committee. My name is Gordon

Crow. I am the director of government and community affairs for The Schwan Food

Company based in Marshall, Minnesota. I want to thank the Chairman (Mr. Gutknecht) for holding this timely hearing in Minnesota and inviting Schwan to testify

on the many important dairy policy issues affecting the industry today.

The story of Schwan exemplifies the spirit of American entrepreneurship. Marvin

Schwan started selling and delivering ice cream to rural homes in Southwest Minnesota-about 300 miles west of here-in March of 1952, out of the back of a dilapidated 1946 Dodge panel van. At the time, Mr. Schwan and his parents ran a small

dairy that was-ironically-struggling due to government price controls on milk.

Today, The Schwan Food Company is one of the largest branded frozen food companies in the world. It is a multi-billion dollar, international corporation, with major

manufacturing operations in eight states, and three countries in Europe. Schwan

employs about 22,000 people worldwide. Our brands can be found in more than 50

countries. Schwan products can be found in homes, supermarkets, convenience

stores, public and private schools, military dining facilities, hospitals, universities,

and many restaurants and entertainment venues. Seven out of 10 school

lunchrooms carry our products, and about three-quarters of the frozen pies sold in

America are manufactured by Schwan. It is reasonable to assert that Schwan is a

local company that competes in a global market.

Mr. Chairman, as you know, the Federal dairy policy rules of today were laid out

before Schwan; before interstate highways; before dependable refrigerated hauling.

Most of the policies under which we labor today were created during the Great Depression, when the factors of trade in America and, needless to say internationally,

were dramatically different. A tremendous opportunity exists for the U.S. dairy industry in today’s marketplace. While I do not buy and sell commodities for Schwan,

I have consulted with our commodity group and can tell you, in order to take advantage of this opportunity, we must look to the vast number of other commodities that

are succeeding without layers of subsidies. We must adopt a coordinated Federal

dairy policy that is flexible, market-oriented, and environmentally sound.

Let me illustrate my point. At Schwan, frozen pizza is one of our signature products. To make pizza, you need dough, sauce, cheese and toppings. I’m here to tell

you that none of the other industries we deal with in the making of frozen pizzas

face the same challenges as the dairy industry.

The Government does not tell the flour mill from which we buy product what they

must pay their wheat farmers, or the tomato paste manufacturer what it must pay

tomato farmers for their perishable product, or the pepperoni company what it must

pay the beef rancher. Equally confounding, with each of these ingredient providers,

we have the opportunity to contract for a specific amount of product at mutually

agreed upon, fair price. We are prohibited from forward contracting for our dairy

ingredients based on the unfounded fear that dairy farmers would in some way be

harmed if we were allowed to voluntarily negotiate a fair price for the dairy products we buy.

No other commodity has regulated prices like dairy. Wheat growers—and other

program crops, for that matter—have a safety net that allows them to preserve

farmer income while at the same time clearing the market of surplus. Tomato producers do not have a Federal safety net program. They rely on forward contracting

... and it is working well for them. Moreover, cattlemen, free from the restrictions

of dairy-like pricing regulations, have been, and continue to, develop a variety of

products that the consumer wants: whether it is lean beef, naturally produced, certified Angus, aged beef, guaranteed tender, or so forth.
52

My point is Congress needs to take action by overhauling our current dairy policy

so that companies like Schwan can remain competitive in local, national and international markets. While a lot has changed since the 1950’s at Schwan, the same

cannot be said for the policies and regulations for milk and dairy products, which

have our markets in a stranglehold.

Let me suggest that a new policy direction for dairy should address two key

changes from the current antiquated system.

First, we need to change existing subsidy programs that weigh us down. As you

have heard in testimony from across the country, the Milk Income Loss Contract

(MILC) and dairy price support programs simply work against each other. They create a heavy financial burden for our government and interfere in the marketplace.

In fact, as many have expressed, these inefficient programs work at cross-purposes

and distort dairy market signals. We need to make sure that any new system affords assistance to the entire dairy industry while letting markets dictate production. Mr. Chairman, Schwan supports the existence of a safety net for dairy farmers.

But, one that allows markets to operate unobstructed while still providing critical

support for farmers. We cannot continue to suffer under two conflicting subsidy programs like the wheat industry did years ago.

Second, we need to open dairy markets at home and abroad. Trade restrictions

on items such as milk protein concentrates, caseins and caseinates, or import assessments on similar products are simply bad ideas from the past. There are companies now making these highly refined dairy proteins in this country every day and,

I might add, doing so successfully without having to rely on support programs, government subsidies or regulated minimum prices. And, restricting access to imported

ingredients hurts our trade credibility, and our Minnesota businesses. American policy must set the standard for increased market access and efficient production ...

both at home and abroad.

The Federal dairy price support program is the main reason that the U.S. is not

a world leader in the production of value-added dairy proteins because the program

makes it more profitable for companies to sell nonfat dry milk powder to USDA

than to invest in technology to make milk proteins demanded by the market. I know

you are familiar, Mr. Chairman, with the International Trade Commission report

that concluded that U.S. production of specialized milk proteins is ‘‘limited, and likely to remain limited, so long as the current Federal Milk Marketing Order and

Dairy Price Support Program remain in effect.’’ The market needs these proteins,

and we need these proteins for our dairy industry to grow, so it is up to Congress

to reduce the policy obstacles, which stand in the way.

America’s dairy industry must maintain its strong global position. In fact, the

combination of the Doha Development Agenda in the WTO, U.S. free trade agreements and the Farm Bill renewal process are all aligned to provide us an historic

opportunity. We now sit on the verge of arguably the best opportunity we have had

in decades to get our policy cards put together in a way that gives the U.S. the best

hand at the table among major dairy producers in the world. We must not waste

it. We should also not sit in a defensive policy crouch, blame others, and squander

this chance to build a better policy platform that encourages our already enormous

efficiencies and resources to grow even more. However, Mr. Chairman, with or without an agreement out of Doha, it is imperative that we remain committed, as a nation, to see that commerce, not government regulations, guide the investment and

production decisions companies like Schwan make every day.

Mr. Chairman, The Schwan Food Company prides itself on making products with

the highest quality dairy ingredients. It is a pride that can be shared by all American dairy farmers. Farmers and processors are involved collaboratively in today’s

business environment and we must do the same on policies. Let us work together

to maintain that standard of quality and address these pressing issues. I am confident we can rise to the challenge so that our next generation of Schwan employees

worldwide can continue the rich tradition established by Marvin Schwan fifty-four

years ago. Schwan and the dairy industry stand ready to help you in this endeavor.

Again, thank you for the opportunity to testify today. I look forward to your questions.

STATEMENT OF JOHN VRIEZE

Mr. Chairman and members of the Committee, thank you for inviting me to join

this distinguished group of dairy experts and industry leaders as you and your colleagues in Washington prepare to consider reauthorization of the 2002 Farm Bill.

My name is John Vrieze. I am the President of the 400 member Wisconsin Dairy
53

Business Association. I am also a third-generation dairy farmer from Emerald, Wisconsin were I milk nearly 3,000 cows.

I would like to accomplish these things during my brief testimony. First, I would

like to introduce you to the Wisconsin Dairy Business Association. Secondly, I will

offer a general reaction to the many flaws in our existing portfolio of Federal dairy

programs. I will conclude my presentation by sharing with you some recommendations as you begin to develop the next dairy title of the new farm bill.

The Wisconsin Dairy Business Association was created in 2000 to provide a louder

voice for the dairy farm families, processing entities, cooperatives, agricultural lenders, and rural leaders who believe in growing and modernizing the Wisconsin Dairy

Industry. As one of the co-founders of the organization, I am particularly proud of

the great depth and breadth of our membership. As our name indicates, we are

truly an organization that represents all aspects of the dairy business sector. Since

inception, DBA has focused a tremendous amount of effort towards ensuring state

legislation and regulations help drive competitiveness and include common sense

approaches to positioning our dairy families to compete in the national and international market.

Our organization worked with the Wisconsin legislature to pass a series of key

measures all of which are geared towards ensuring our state and region are positioned to be competitive and viable well into the future. Specifically, we worked to

pass a Dairy Investment Tax Credit program that has helped generate more than

$120 million in new investments made by dairy farmers—helping to ensure their

operations are modern, efficient, and competitive. Recently, we worked with the legislature to adopt a landmark livestock-siting bill that provides a common-sense

roadmap for producers and local officials looking to expand livestock operations.

This legislation will no doubt be the model for other states as they struggle with

inconsistent zoning requirements and the difficult task of balancing the demands of

various land-use planners.

Because we recognize that the dairy industry is increasingly changing and becoming a greater national and international market, DBA has decided that it is time

to become active contributors to the dialogue involving existing and new Federal

programs. We do not pretend to have all the answers, or believe we can solve all

the problems facing the industry. However, we do believe we can offer a lot to the

discussion and this hearing is one excellent way to begin the conversation.

Today’s U.S. Federal dairy policy is far from perfect. In fact, I would say only a

handful of dairy producers here in this room actually completely understand how

our milk is priced. Class one differentials, make-allowances, butter-powder tilts, and

the list goes on may make sense to my good friend Dr. Bob Cropp and the hard

working USDA employees and economists. However, I am pretty sure you would be

hard pressed to find a dozen dairy producers who can explain the system to you.

Not only is our current system cumbersome and complex, but the current composition and layers of policies actually prohibits us from properly responding to true

market demands and signals.

The core component of our milk pricing system, the Federal milk marketing order

system, is a hodgepodge of outdated rules and regulations that have divided the

major milk producing regions of our country for years. A four class pricing system,

combined with various pricing differentials and complex blend price formula’s have

long outlived the original purpose of making sure Americans had access to enough

bottled milk. The existing structure has stifled the innovation and market creativity

we need to carry this industry forward. Given the makeup of the order system, milk

is not being produced where it can be done most efficiently, and to make matters

worse the classified pricing structure is preventing milk from flowing into products

that have the highest value and greatest consumer demand.

The order system, with the various amendments which have been passed over the

years have encouraged not true competition or innovation but rather bureaucratic

paper pooling practices that serve no function in the market place. Making matters

worse, and this is in no way a criticism to the hard working, professional and responsive USDA employees—but taxpayers and dairy producers alike are being

asked to support this structure through assessments, and in some cases increased

prices on the shelf.

Rather than learn new gimmicks to outsmart the order system, our industry leaders, and those who you have asked to testify here this morning should be tackling

the many vital issues facing our industry like decreased demand and an alarming

increase in competition with other beverage choices like soft drinks. Our marketing

experts and product developers need to explore new uses of milk products and we

need a true national strategy to ensure we can compete on the world market.

I would also like to make a few comments about the existing dairy price support

program. While I know I may not make new friends out west with these comments,
54

I do believe many of my friends would agree that the existing price support program

needs a major overhaul, if not complete elimination. Although originally designed

to assist the industry during periods of extremely low-prices, this program has actually created a small segment of our industry that simply produces milk powder, regardless of true market needs, and sells that product to the Federal Government

at a cost to all of us in this room. As I will explain a bit later in my presentation,

milk price volatility does justify the need for a reasonable safety net. However, the

existing purchase program does not succeed at strengthening our ability to compete

and make a living—at a minimum the annual USDA expenditure to administer the

program, purchase product and store it in inventory does not equate, in my opinion,

to any meaningful level of support for the dairy producers here in the upper Midwest.

Next, I would like to take a few minutes to briefly lay-out some of my suggestions

for future dairy policy initiatives that properly positions not only the upper Midwest

—but also allows for my fellow dairymen around the country to make a decent living at milking cows.

While dairy industry leaders in other regions disagree on lots of specifics, I think

we can all agree that it is time to reinvigorate rural economies by ensuring the best

and brightest among us have opportunities to return to their home communities and

carry on our legacy of hard work and success. I would argue that while our government should not and cannot afford to guarantee the cost of production, it certainly

has a responsibility to make sure that existing programs in place are not operating

as hurdles to our ability to remain profitable.

Along those lines, I suggest four specific priorities that must be addressed by Congress to help reenergize the dairy industry and thus our rural communities.

First, the government needs to eliminate the outdated and antiquated Federal

milk marketing order system. A new and simplified pricing structure needs to be

phased in as a replacement for the many reasons I explained earlier.

Secondly, new and expanded risk management tools like permanent forward contracting must be expanded to all producers regardless if they ship their milk to proprietary or cooperative owned processing plants. Extreme volatility and extended periods of low prices call for this risk management tool to be made available to all

dairy producers—similar to the tools made available to farmers who grow other

commodities.

Third, Congress needs to phase out the existing dairy price support program and

replace it with a new program that encourages the domestic production of milk protein concentrates and other dairy products that are in high demand. There is no

reason why U.S. producers shouldn’t be providing the raw ingredients for this product, rather than turning to increased importation to meet consumer demand.

Fourth, we need a sensible counter-cyclical program that treats all operations, regardless of size and location, fairly. While the existing MILC program has been a

lifeline for many of the farm families in Wisconsin, we should not expect that level

of assistance to keep us in business. In fact, increasing budget constraints and international trade pressures may not allow for it to continue. However, we do need a

sensible program, and a reasonable level of support that is only triggered during extended periods of depressed prices.

Finally, Congress must make every effort to bring California into a new national

program. We can no longer allow America’s largest dairy producing state to be insulated with its own pricing structure. I know that there are plenty of producers in

California who would like to explore the possibility of forming a new national pricing system, while also dealing with some of their unique concerns related to milk

solids and issues surrounding the quota system. I think it is time to begin negotiations with California to see if we can come up with a program that allows both regions to prosper—I know it is a tall order, but we need to exhaust all options to

see if we can move beyond the pitting of one region against another.

The suggestions I have just explained are meant to be guiding principles for you

to consider. All of us in this room are keenly aware of how difficult it can be for

you to balance the regional nature of our industry. However, it is my hope that this

Committee will continue to work with not only producers from this region, but from

all over the U.S. to craft a forward-thinking and modern dairy policy that benefits

the entire industry.

Please know that my organization stands ready to assist you and your colleagues

as you attempt to craft the next dairy title of the new farm bill. I will be happy

to answer any questions you may have.
55

STATEMENT WILLIAM C. BRUINS

Mr. Chairman, members of the subcommittee:

My name is Bill Bruins and I serve as president of the Wisconsin Farm Bureau

Federation. I farm in partnership with my brother and two sons. Our dairy farm

has 600 milking cows with 1,100 acres. We are members of Alto Dairy Cooperative.

On the behalf of the Wisconsin Farm Bureau Federation, I am pleased to provide

comments on the dairy industry in Wisconsin but more importantly make some observations with respect to crafting future Federal dairy policy which is one of your

subcommittee’s responsibilities.

In Wisconsin, we are making strides to keep our dairy industry competitive by

advancing several state initiatives which include a dairy investment tax credit, recent legislation and rules to site new and expanding dairy operations and grant programs for innovative ideas.

In his testimony, Dr. Bob Cropp of the University of Wisconsin-Madison provided

the subcommittee with an excellent analysis of laying out the trends with in the

Wisconsin dairy industry with respect to the number of dairy farms and the number

of head per farm. I agree with his assumptions. We will have fewer, larger dairy

farms. However, our strong family farm heritage among other things will ensure

that Wisconsin has farms of all sizes.

We have a unique situation in then Upper Midwest as well. Normally, competition

for milk is a good thing for dairy farmers. But right now with relatively flat milk

production, our manufacturing plants are paying more for milk than their counterparts predominantly in the West. In the short term it has been great for dairy farmers but over the time this will deteriorate our manufacturing infrastructure. The

dairy industry through the Federal order hearing process needs to be able to more

quickly be able to change the ‘‘make allowance’’ to help our dairy cooperatives compete in a national market. Specifically, the dairy industry needs to be able to vote

on any change to a Federal order without voting out an order. Further, USDA needs

to speed up its entire hearing process.

With respect to Federal dairy policy, the WFBF has been a long-time proponent

of removing regional inequities and having the U.S. dairy industry become more

market orientated.

The price support program, which has been touted for years as an effective safety

net, no longer serves that purpose for several reasons. First, the price support program does not provide a true floor price. For example in 2000, the Class III price

was below the $9.90 support price for seven months. In 2002, the Class III price

was under support for three months and in 2003, the Class III price was less than

support for six months. This demonstrates that the $9.90 support price is too low

and not an effective safety net. Some, especially those making cheese may say that

the support price is too low and needs to be raised to make the price support program once again an ‘‘effective’’ safety. The only thing raising the support price will

do is trigger the over production of milk and the subsequent purchase of dairy products by the Federal Government.

Further, because of changes in the way we manufacture and market cheese, the

price support program and Commodity Credit Corporation (CCC) purchase program

are not as valuable as it once was to the Upper Midwest Dairy industry. I view this

as a great improvement—we are making cheese for the market and not for the Federal Government.

Over the last for or five years, when there has been purchases by the CCC they

have been in the form of nonfat dry milk. Rather than selling nonfat dry milk to

the CCC, I would much rather see our manufacturing plants producing a higher

value product like Milk Protein Concentrates (MPCs). Incentives to produce MPCs

would be beneficial to farmers and the dairy industry for years to come.

In the future, the WFBF believes the Milk Income Loss Contract (MILC) program

or a similar counter cyclical program is the best option to provide dairy farmers

with an ‘‘effective safety net’’ when prices are low because it provides a true price

floor. If we could properly structure a counter cyclical program we could eliminate

our current price support program and get the Federal Government out of the business of purchasing surplus dairy products. The government never consumes the

product—it just waits a while before it dumps the product on the market.

The WFBF has been a long time supporter of a counter cyclical program for dairy

farmers. In fact, the WFBF has advocated this approach more than 20 years ago

when then 1985 Farm Bill was being discussed. At that time, the idea did not get

much traction, but times have changed. The dairy industry is no longer a just a domestic industry. The world market influences prices more than ever before.

American Farm Bureau Federation policy supports ‘‘a market -orientated national

dairy program that includes a national counter cyclical income assistance compo-
56

nent, such as the Milk Income Loss Contract program, which is consistent with a

worldwide fair and open trade policy.’’

In March 2005 paper entitled ‘‘Dairy Policy in the Next Farm Bill: An Early Assessment,’’ Professor Ed Jesse, a dairy economists from the University of Wisconsin,

pointed out that: ’’Using a target price of $10.50 per hundredweight and paying 100 percent of the

deficiency relative to the Class III price on all milk would have yielded a total program cost of $1.4 billion since MILC began in December 2001 through February

2005. In other words, an unconstrained counter cyclical payment program with a

target price $0.60 higher than the current support price would have cost 70 percent

of the $2.0 billion cost of MILC.’’

Knowing that Congress would most likely put in place payment limitations, the

WFBF believes the payment limitation system that is used for other commodities

would work very well because farmers understand how it works and it could minimize current objections to the volume cap that is part of the MILC program.

The WFBF strongly supports MILC, however, in his paper, Dr. Jesse also pointed

out that the current MILC target price has been too high compared to average

prices for milk over the last few years, which makes the program income-enhancing

causing larger per hundredweight payments and large program costs. Any counter

cyclical program needs to be a safety net and not a price guarantee.

Lastly, trade issues will have a major impact on what provisions are in our next

Farm Bill. Countries around the world are asking the United States and other countries to reduce their subsidies. As you know, Farm Bureau has historically supported expanded trade opportunities. The WFBF believes a counter cyclical payment

program for the dairy industry, while still an amber box (trade distorting) program

under the World Trade Organization would cost less and be more accepted worldwide.

Currently, the WTO allows the United States $19.1 billion in amber box pay- ments. Using WTO calculations, the dairy price support program contributes $4.5

billion. The $4.5 billion is determined by taking the difference of the $9.90 support

price and a world reference price of $7.25 multiplied by total United States milk

production. It is important to know that while the $4.5 billion counts against the

U.S. in trade negotiations, very few of those dollars ever get into dairy farmers’

pockets.

Again, a counter cyclical program could be operated at less cost than the current

price support program and provide and effective safety net to farmers.

Lastly, I would like to make comments on a couple other areas that affect Federal

dairy policy.

The Cooperatives Working Together (CWT) program, a checkoff program initiated

by the dairy industry has some positive effect on milk prices. The WFBF supports

this program however we would like the program to focus more on developing export

markets rather than herd retirement.

With respect to the Federal Milk Marketing Order system, the Upper Midwest

has called for major reform for years. The FMMO is antiquated system that works

in conjunction with the price support program to determine prices around the country. The program worked great years ago when the majority of manufacturing milk

was produced in Wisconsin and Minnesota. While we are still major players, milk

production has shifted to the West. The FMMO system has not kept up with the

changes. The WFBF believes that Federal milk marketing orders around the country need to be consolidated into a single national order to minimize regionalism and

eliminate pooling issues.

Thank you for the opportunity to make a few observations with respect to future

Federal dairy policy. The dairy industry has a great opportunity to move forward

to a more market orientated approach that will be good for dairy farmers and processors in the long run.

STATEMENT OF GENE HUGOSON

On behalf of Governor Tim Pawlenty and Minnesota’s 5,000 dairy farmers, I want

to thank Congressman Gil Gutknecht and Congressman Collin Peterson and the

sub-committee members for coming to southeastern Minnesota to examine important questions about the future of the nation’s dairy policy.

Dairy production is a key part of Minnesota’s economy. In a typical year, cash receipts from dairy production surpass $1 billion—12 percent of the total value of the

state’s agricultural production. The total economic impact of Minnesota’s dairy production and processing industries is $10.8 billion, and each dairy cow generates

nearly $5,000 in economic activity.
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The total employment impact of Minnesota’s dairy production and processing industries is estimated to be 76,590 jobs. This employment figure includes direct employment of 6,111 jobs in dairy production, and indirect or induced employment of

another 21,291 jobs. Dairy processing, meanwhile, has an estimated direct employment impact of 8,646 jobs and an indirect or induced employment of 40,541.

While dairy production is the second largest economic contributor among Minnesota’s livestock categories, it is also posting the weakest performance among the

state’s livestock sectors. Minnesota’s share of national milk production dropped from

7 percent in 1980 to below 5 percent in 2005. Milk cow numbers dropped 31 percent

from 1992 to 2005, and the state’s annual milk production fell 17 percent in that

same period.

Much of the nation’s milk production is shifting to western states. For example,

from 2000 to 2005, California added 229,000 dairy cows and 5.3 billion pounds of

milk production. Idaho added 108,000 cows and 3 billion pounds of production. In

the same time, Minnesota lost 81,000 cows and 1.3 billion pounds of production.

The struggles of the Upper Midwest dairy industry raise long-term concerns. The

processing and production facets of the industry are at risk of becoming obsolete in

comparison to other states. As a result of these trends, producers and processors

may hesitate to reinvest at a time when such activity is needed.

As input costs have increased and commodity prices have lagged, profit margins

for farmers have shrunk. This has driven some Minnesota dairy farmers out of business, while others have chosen to farm part-time and work off the farm to supplement their farm income. Some have chosen to switch to alternative business models

such as organic production or on-farm processing. For others, the approach has been

to try to increase

the number of animals to offset the declining per-unit returns. As profit margins

tighten and the costs of operating a business and supporting a family increase, some

farmers find they need to modernize and increase their efficiency simply to generate

a livable income.

Regardless of which approach is taken, there are opportunities for success in Minnesota’s dairy industry when farmers are given the flexibility and freedom to choose

which business model best fits their needs and goals. However, attempts to expand

or improve their facilities are sometimes met with resistance. In communities

around the state, producers are increasingly faced with environmental and social

pressures that impact their operation. Public concerns about the environmental and

social impacts of modern animal agriculture have led to more stringent environmental rules and higher compliance costs for producers. Unfortunately, these public

concerns are too often based on misperceptions or misinformation. Nonetheless,

these pressures are constraining production growth and limiting investment. They

can also erode a farmer’s desire to continue in the business.

In recognition of these challenges, Minnesota Governor Tim Pawlenty created a

Livestock Advisory Task Force to evaluate the status of Minnesota’s animal agriculture industry and make recommendations to support its retention and growth.

The 14-member task force included three representatives from the state’s dairy

industry, as well as agricultural finance, producer organizations, academia, state

government and other livestock sectors. Task force members issued a report in July

2004 that included recommendations in areas such as local siting of livestock facilities, permitting of facilities, improving farmers’ access to investment capital, and

odor mitigation research. Progress has been made in several of these areas, but

more work needs to be done.

Despite its many challenges, Minnesota’s dairy industry does enjoy several competitive advantages over producers in other parts of the country. These advantages

include a diversity of farm size and structure, less expensive feed, readily available

water, temperate summers, and a strong dairy infrastructure. Also, the growth of

Minnesota’s renewable fuels industry benefits dairy producers in a number of ways.

For example, dried distillers grains, a co-product of the ethanol production process,

provide a valuable source of relatively inexpensive, high-quality feed for dairy cows.

New renewable energy technologies pioneered in Minnesota, such as methane digesters, help reduce farmers’ energy costs and create new revenue streams through

the sale of electricity and carbon credits.

There are also promising developments with regard to international markets. The

economic growth in Asia and Latin America has led to important new export opportunities for dairy farmers in Minnesota and other states. According to information

from the U.S. Dairy Export Council (DEC), almost one of every three new pounds

of milk solids produced in 2005 was sold to overseas markets. Also, DEC reports

that U.S. dairy exports increased 13 percent from 1.6 billion pounds in 2004 to 1.8

billion pounds in 2005. U.S. dairy imports increased only 4 percent in that time.

Dairy exports in 2005 equaled 8.3 percent of overall U.S. production.
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Perhaps the most important strength for Minnesota’s dairy industry is the enthusiasm and creativity of its next generation of farmers. These bright, enterprising

people want to be their own boss. They want to avoid a stifling office environment.

They love the beauty of the Minnesota landscape. They see an opportunity to raise

their kids the way they were raised. Above all, they believe there are still ways to

milk cows and support a family with a reasonably good income.

Greg Sabolik and his wife, Marisa, got into the dairy business six years ago and

today they milk 70 cows in Douglas County. Sabolik said he had a chance to try

life off the farm, and it wasn’t for him.

’’I got a degree in engineering and a job right out of college, but I always knew

I wanted to come back and farm,’’ Sabolik said. ‘‘I love what I do.’’

While many of the issues facing Minnesota’s dairy industry must be addressed at

the state and local level, there is still a need for effective and fair Federal dairy

policies as well. For example, Minnesota has long advocated for reform of the Federal milk marketing order system to correct imbalances and market distortions that

put our producers at a disadvantage. With recent changes in the marketplace, as

well as the upcoming farm bill debate and the influence of the World Trade Organization (WTO) discussions, I suggest that now is the time for the Federal Government to move the nation’s dairy policy from the early 20th century to the 21st century. After all, the foundation for our current dairy policy was set in a time before

interstate highways, jet airplanes or even television. So much has changed in the

way we move products and information, and in the way our markets work that we

no longer can afford to be saddled with such a cumbersome and convoluted dairy

policy.

As you undertake the next Federal farm bill, I would like to submit the following

observations.

DAIRY PROGRAMS

Minnesota has benefited from the Milk Income Loss Contract (MILC) program,

taking in more in payments than all but three other states. Congress should examine whether the $9.90 price support system and corresponding market distorting

government Commodity Credit Corporation (CCC) purchases of products should be

reduced or eliminated in exchange for an expanded MILC program. Consideration

should be given to the questions of whether there is a modern-day rationale for CCC

purchases and whether the market, through cooperative and private processing sectors, can process increased milk supplies, and market or store the corresponding

products without that program. This issue is especially important when you consider

that a significant portion of America’s U.S. World Trade Organization (WTO)

‘‘amber box’’ limits are taken up by current dairy price support programs.

The National Association of State Departments of Agriculture (NASDA) has been

advocating the creation of Partnership Agreements to help states leverage Federal

dollars to meet the unique needs and challenges of their agricultural industries.

These partnership agreements would have the added benefit of not counting against

the U.S. amber box calculations since they would not tied to production.

One example of how this might benefit Minnesota dairy farmers can be seen in

the Minnesota Department of Agriculture’s Dairy Development and Profitability

Program. Through this program, the state provides $1 million a year to help farmers improve their on-farm efficiency and modernize their facilities. Given the importance of farmers’ profitability and efficiency in today’s hyper-competitive environment, it is likely that a Federal program in partnership with and leveraging Minnesota’s program could have a widespread, positive impact on farmers who want to

remain in dairy production but are at risk due to inadequate facilities or inefficient

operations.

I also suggest that Congress examine whether, given the significant changes in

the marketplace for dairy products in recent years, it is possible that the current

price-support system inadvertently encourages production of products with limited

demand while at the same time taking away producers’ and processors’ focus from

products with growth potential. There is a limited market for non-fat dried milk,

especially in the all-important export markets. We need to make sure that the Federal dairy program does not stifle marketplace innovation.

Finally, with regard to Federal dairy policy as a whole, I believe Congress should

examine whether our country should continue to operate under an antiquated Federal milk marketing order system when our transportation infrastructure has modernized to allow fluid milk to travel hundred of miles within hours.

Conservation Provisions

As you look at re-authorizing components of the conservation title within the upcoming Farm Bill, I encourage you to devote adequate resources to the Environ-
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mental Quality Incentives Program (EQIP) as it relates to dairy producers. EQIP

has been a valuable program for Minnesota’s dairy producers, who continue to work

hard to comply with a myriad of local, state and Federal laws, rules and regulations.

In my experience, most Minnesota dairy farmers are eager to help conserve our natural resources, and will take advantage of opportunities to do so when they can.

One specific facet of EQIP I encourage you to examine is inequities in funding

in cost-share rates for dairy operations. The U.S. Department of Agriculture’s Natural Resources Conservation Service should strive to provide equitable cost-share

funding within similar regions of the Nation for all types of dairy operations, regardless of size or type of dairy system.

I suggest that Congress also explore how a revamped Conservation Security Program (CSP) may be of particular benefit to dairy producers and their operations.

A program like CSP offers hope that dairy operations will be given the opportunity

to receive incentive payments for raising forage crops, which are mutually beneficial

to livestock and the environment.

RISK MANAGEMENT

With farmers continuing to struggle with the peaks and valleys inherent in milk

prices, there is greater need than ever for our farmers to have solid risk-management tools. Tools such as livestock revenue insurance and whole-farm revenue insurance can help farmers manage price and production risk.

ADDRESSING STRUCTURAL DAIRY POLICY ISSUES IN NEXT FARM BILL

Regional controversies and inequalities have permeated dairy discussions for decades, and at times a solution to these problems has seemed beyond the reach of policy makers. However, I believe for the benefit of the entire dairy sector, the time

has come for Congress to tackle fundamental issues that have led to confusion and

acrimony. Our nation’s dairy producers deserve a Federal dairy policy that has uniformity, clarity and credibility in all regions of the country.

We must confront how future dairy policy will interact with the transforming

market place, the Federal budget and our WTO obligations related to limiting tradedistorting spending. Currently, of our $19 billion WTO spending cap, nearly $5 billion is dedicated to dairy spending. With several WTO proposals on the table to reduce overall spending, and feared challenges, it is naive to hope that dairy policy

and its corresponding spending can escape discussion. Ultimately, the goal of Federal dairy policy should be to assist the nation’s dairy farmers in managing the risks

associated with competing in a global economy and ensuring that policies don’t distort market signals or result in regional disparities among our dairy producers.

Thank you for the opportunity to provide comments to your committee, and for

your efforts and hard work on behalf of Minnesota and U.S. agriculture.

STATEMENT OF THOM PETERSEN

The Minnesota Farmers Union (MFU) appreciates the opportunity to comment on

the state of the dairy industry in the Upper Midwest. MFU is a grassroots organization that has represented farmers in Minnesota since 1929. With that in mind, MFU

would like to focus our comments on what our dairy farmers tell us our major

issues.

(1) Milk Protein Concentrates: Many dairy farmers tell MFU that they are frustrated with lack of government action involving the continued increased importation

of Milk Protein Concentrates (MPC’s). MFU believes that many Minnesota dairy

producers have a hard time understanding why MPC’s can be imported at unchecked levels. In 2005, MPC imports were up 22 percent, and many feel that has

a direct correlation on the price they receive for milk. Trade is a good thing but will

not work in the long run if fairness issues are not addressed.

(2) Milk Income Loss Contract: The dairy farmers MFU represents are generally

supportive of the Milk Income Loss Contract (MILC) program: while not perfect, the

program does provide a safety net approach for our farmers when needed. MFU

urges continued funding and a full extension of the program for the 2007 farm bill.

(3) Access to affordable health care: For many Minnesota farmers it is not surprising to see health care concerns rise to top of the issues they feel the government

could do something about that could impact their dairy. MFU is concerned about

rising premiums, near catastrophic high deductibles, and access to quality care in

rural areas. Lack of access to affordable health care many times forces a member
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of the family to work off the farm to obtain health care, and in expanding operations

offering affordable health care to employees as a benefit is very challenging.

(4) Conservation: MFU’s members strongly support the inclusion and continuation

of conservation programs such as EQIP and CSP, and urge full funding and continued promotion to dairy farmers. MFU believes that it is critical in Minnesota (land

of 10,000 lakes) that farmers receive recognition and compensation for past and future conservation investments.

(5) Fuel costs: Dairy farmers tell MFU that they are concerned about rising fuel

costs and the affect it is having on their operations. They hope that Congress remembers farmers when working to address what many feel to be a crisis. Nothing

explains the point more than a dairy farmer who told MFU in the past week, ‘‘The

milk hauler, the feed delivery truck, and the fuel tanker all have added a fuel surcharge, and the vet has increased the farm call charge due to increased fuel costs.

‘‘Who do I pass that on to?’’ the farmer asked.

(6) Organic: MFU supports those dairy farmers who choose to transition to organic dairy production and urges Congress to continue to fund cost-share and research programs. MFU believes that programs need to exist that will help those

farmers who choose organic to make the transition to a growing field.

MFU encourages the Committee to remember some important dairy farm numbers according to the Minnesota Department of Agriculture 2005 Minnesota Agricultural Statistics; 95 percent of all dairy farms in Minnesota milk 200 cows or less,

85 percent milk 100 or less, and over 40 percent milk 50 cows or less. These operations are very important to Minnesota’s economy. MFU believes that access to good

quality forage and water as well as processing facilities are among the many positive things that make Minnesota a great place to be a dairy farmer. Thank you.
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STATEMENT OF CLINT FALL

Chairman Gutknecht, Congressman Peterson, Members of the Subcommittee:

My name is Clint Fall, president and CEO of First District Association. I want

to thank you for the opportunity to testify today regarding the status of the upper

Midwest dairy industry, and to give you the perspective of our members on that important topic.

The dairy sector is extremely important to the economy of the Upper Midwest,

particularly Minnesota and Wisconsin. Minnesota’s dairy sector annually pumps

more than $1.2 billion into our state economy, and the total economic impact of Minnesota’s dairy production is estimated to be $3.1 billion. The total employment impact of Minnesota’s dairy industry is estimated to be 27,402 jobs, including direct

employment of 6,111 jobs and indirect or induced employment of 21,291 jobs. When

the multiplier effects are fully considered, it is estimated that each Minnesota dairy

cow generates $5,000 in economic activity for the State.

According to the Wisconsin Milk Marketing Board, Wisconsin’s dairy industry has

a $20.6 billion impact on the state’s economy and employs 160,000 people, accounting for nearly 40 percent of all Wisconsin agriculture jobs. The economic impact of

dairy farming in Wisconsin is more than twice as large as the citrus industry’s economic impact in the state of Florida and eight times as large as the potato industry’s economic impact in the state of Idaho. The average Wisconsin dairy cow generates more than $17,000 a year in economic activity, which circulates throughout

local communities.

First District Association is a dairy farmer-owned cooperative based in Litchfield,

Minnesota. The farmer-members for First District are located in Minnesota, Wisconsin, and Iowa and produce over 1.7 billion pounds of milk per year. Over 120 million

pounds of Cheddar cheese, 22 million pounds of whey protein concentrate and 32

million pounds of lactose are produced annually. Our single cheese processing plant

in Litchfield is a state-of-the art operation, and one of the few processing plants

with the technical capability to extract dairy calcium. Our customers include the

largest chocolate manufacturers, infant formula manufacturers, bakery companies,

dairy food processors (yogurt, cream cheese, processed cheese) and pharmaceutical

companies.

I am particularly pleased to be part of this panel of my colleagues representing

dairy processing companies, because it is an excellent opportunity to point out how

critical farmer-owned cooperatives are in the dairy processing sector, not only in the

Upper Midwest, but also in the Nation as a whole. In Minnesota and Wisconsin,

about 85 percent of milk is marketed through cooperatives. It is estimated that 60–

65 percent of cheese, and nearly 100 percent of butter and milk powder in Minnesota and Wisconsin are processed by cooperatives.

As a dairy farmer member-owned processing and manufacturing cooperative, our

goal is to maintain a competitive operation, not only to provide our farmers a fair

price for their milk, but also to return a profit to them from the dairy products that

we produce and market.

As a member of the Midwest Dairy Coalition and the National Milk Producers

Federation, we are also active in supporting Federal dairy policies that are beneficial to dairy farmers of the Upper Midwest and the Nation as a whole.

Dairy is highly regulated. The structure of Federal dairy policy has always played

a significant role in the status of the Upper Midwest dairy industry, although not

always for the better. There has been a tendency in Federal dairy policy to promote

high minimum prices for class I (fluid) milk and to instill policies that put downward pressure on the prices for manufactured dairy products. Whether it is the ongoing structure of the Federal milk marketing order system, or past experiments

with regional dairy Compacts, Federal dairy policy has often placed the Upper Midwest at a competitive disadvantage. For the Upper Midwest, where about 85 percent

of our milk is manufactured into cheese, butter, and powder, anything that artificially inflates the price of class I at the expense of manufactured classes of milk

is detrimental to our region.

Therefore, one of our clear policy goals has been to promote policies that treat producers in the Upper Midwest more equitably, and to work to reform or eliminate

those policies that discriminate against our region.

As we move into the debate over the structure of the next farm bill, I would like

to make several points about policies that are important to our producers and the

Upper Midwest dairy industry as a whole.
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MILK PRICE SUPPORT PROGRAM

The milk price support program has been the core base of support for milk and

dairy product prices for decades. Without a doubt, it is an important program that

should be continued. But equally clear is that the milk price support program is in

great need of reform. The current price support level of $9.90 per hundredweight

is a very low level of support. But even at that low level, the current price support

program has proven to be a porous and ineffective floor. Between January 2000 and

February 2003, the class III price fell below support in 12 of 37 months, falling as

low as $8.57 in November of 2000.

The central premise of the milk price support program is that dairy product manufacturers will sell dairy products to the Commodity Credit Corporation whenever

market prices fall below the product purchase prices established by USDA. Yet what

we are seeing is that manufacturers are reluctant to sell product, particularly

cheese, to the CCC. One of the key reasons for this is that the costs of selling product to the CCC are higher than the costs of selling to the commercial market. These

higher costs are associated with CCC processing and packaging standards and inspection and grading requirements that are different from industry standards. In

addition, storage and finance costs are higher because it takes longer for the CCC

to take delivery of product and make payment.

To address these unique costs associated with selling surplus product to the CCC,

we support a proposal by NMPF to increase the purchase prices for cheese, nonfat

dry milk and butter, to reflect those unique costs. I believe these changes could be

made administratively by USDA in order to better enforce the current statutory

price support of $9.90 per hundredweight. However, because USDA appears unwilling to make these necessary changes without Congressional direction, I believe that

these changes should be made in statute as part of the 2007 farm bill.

MILK INCOME LOSS CONTRACT (MILC) PROGRAM

Because of the inadequacy of the milk price support program as a safety net, First

District Association and other members of the Midwest Dairy Coalition argued during the last farm bill debate that an additional program should be established to

provide a more credible safety net for dairy producers, and that such a program

should be national in nature to provide benefits to all producers. Fortunately, others

agreed. The Milk Income Loss Contract (MILC) program that emerged out of the

2002 farm bill has proven to be a very effective safety net, and has helped us move

away from some of the contentious inter-regional conflicts that were commonplace

in dairy in the late 1990’s and the early part of this decade, particularly with regard

to regional dairy compacts.

Because of the counter-cyclical nature of the MILC program, the program has

proven to be very cost effective. Assistance is only provided to producers when market prices fall below target levels and remains dormant when market prices are

strong. Indeed, the MILC program was dormant for much of 2004 and 2005. Without question, our producers would far prefer to see market prices remain strong so

the MILC program would remain dormant. However, when prices do fall to low levels, as they did in 2002 and the first half of 2003, and as we are seeing currently,

the assistance provided by the MILC program has been critical.

One of the other tools used by Congress to improve the effectiveness and limit the

taxpayer costs of the MILC program has been to place a volume cap to limit the

benefits to the first 2.4 million pounds of production per operation, roughly equivalent to the production of about 135 cows. All producers are eligible for benefits, but

not beyond the 2.4 million pound annual cap. It is important to note that 83 percent

of all dairy farms in the Nation are fully covered under this cap. Yet even those

that exceed the cap receive great benefits.

The MILC program has proven beneficial to the vast majority of dairy farms in

the nation. With regard to the Upper Midwest specifically, there is no doubt that

the program has helped us to maintain our productive capacity during low milk

price cycles. In that context, it is worth noting that dairy cow numbers in Wisconsin

increased in 2005. This is the first time since 1994 that January-December dairy

cow numbers in Wisconsin have not shown a reduction. Arguably, the MILC program is one of the factors helping our region turn around.

As we move into the next farm bill debate, it is critical for our dairy industry and

our rural communities that the MILC program or a similar type of counter-cyclical

safety net program be continued.
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CONSISTENCY IN OUR TRADE POLICIES AND TARIFF SCHEDULES

Gone are the days when the U.S. dairy sector could operate without regard to the

global market. The opportunities and challenges of international trade are a reality

for U.S. dairy. In that regard, it is critical that we review our trade policies and

those of our trading partners, to assure that we have consistent and rationale policies as we move into the future. Specifically, during the Uruguay Round of WTO

trade negotiations, tariff rate quotas were placed on imports of traditional dairy import product classes such as cheese, butter, and nonfat dry milk. However, we failed

to recognize emerging trends in international trade, particularly with regard to milk

protein concentrates (MPCs), and we failed to create tariff rate quotas on those milk

protein products consistent with other dairy product classes. As a result, we have

seen instances in recent years during which MPC imports to the United States have

surged.

In March 2001, a General Accounting Office study requested by Congress determined that MPC imports increased 56-fold from 1990 to 1999, with a near doubling

of the MPC imports in 1999 alone. Not only do these import surges affect farmers’

milk prices domestically, they also have a cost to taxpayers. In a May 2004 study

by the International Trade Commission, it was determined that about 35 percent

of the Commodity Credit Corporation stock build up of nonfat dry milk between

1996 and 2002 was attributable to displacement of domestically produced nonfat dry

milk by imported milk protein products.

After several years of declines in MPC imports, MPC imports are once again increasing. It is critical that we modify our tariff schedules to place tariff rate quotas

on MPCs and casein, as proposed in H.R. 521, introduced by Congressmen Obey and

Sherwood. This legislation would not attempt to stop MPC and casein imports altogether. It would merely place commonsense limits to assure that the U.S. doesn’t

experience major surges of MPC imports again, as we did in the 1990’s. The United

States is currently the only dairy import-sensitive nation in the world that has not

imposed such limits on MPC imports. It’s time for us to push for more consistency

in our tariff schedules, and to fully recognize and respond to our own market

vulnerabilities, as have many of our trading partners.

There is no question that the Upper Midwest Dairy Industry is in the process of

becoming more competitive. The Upper Midwest has enjoyed, and will continue to

enjoy, many comparative advantages in dairy production and processing. We must

work together to achieve the necessary efficiencies to remain competitive, especially

with the West and Southwest. This will probably require modifications in traditional

premium structures, as well as efforts to provide producers with more accurate information about hauling and transportation costs in an effort to reduce those costs.

But as we make these shifts, we need to make sure to keep the interests of this

valuable industry and producers at the forefront. We must recognize that Federal

dairy policy must play a role in that process. It is our job to insist on policies that

treat our region fairly and equitably.

I thank you for this opportunity to testify.

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