SPEAKERS CONTENTS INSERTS
Page 1 TOP OF DOCUSDA'S FINAL DECISION FOR THE REFORM OF FEDERAL MILK MARKETING ORDERS
WEDNESDAY, MAY 5, 1999
House of Representatives,
Subcommittee on Livestock and Horticulture,
Committee on Agriculture,
The subcommittee met, pursuant to notice, at 1:00 p.m., in room 1300, Longworth House Office Building, Hon. Richard W. Pombo (chairman of the subcommittee), presiding.
Present: Representatives Boehner, Goodlatte, Everett, Lucas of Oklahoma, Chenoweth, Gutknecht, Riley, Peterson, Holden, Condit, Dooley, Berry, Stabenow, Etheridge, Boswell, Baldacci, Lucas of Kentucky, and Stenholm [ex officio].
Also present: Representatives Smith of Michigan, Minge, Baldacci, and Green of Wisconsin.
Staff present: Pete Thompson, John Goldberg, Christopher D'Arcy, Callista Bisek, Wanda Worsham, clerk; Howard Conley, Andy Johnson, and John Riley.
OPENING STATEMENT OF HON. RICHARD W. POMBO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. POMBO. I call the hearing of the Subcommittee on Livestock and Horticulture to receive testimony on the U.S. Department of Agriculture's Final Decision Concerning the Consolidation of Federal Marketing Orders and Milk Pricing to order.
Due to his express interest in the work of this subcommittee, today I ask unanimous consent to allow Mark Green of Wisconsin to sit with the subcommittee and participate, should he so desire.
Page 2 PREV PAGE TOP OF DOC Today's hearing is designed for this subcommittee to continue to exercise its oversight responsibilities with regard to the ongoing reform of America's dairy industry, as outlined and mandated under the Federal Agriculture Improvement and Reform Act of 1996, more commonly known as the farm bill.
This afternoon we will review the USDA's final decision on the reform of Federal milk marketing orders. As many of you recall, it took a great deal of time and energy in this subcommittee, in 1995 and 1996, to develop a policy for the U.S. dairy industry. Regional conflicts and misunderstandings led Congress to pass a reform measure with general objectives, charging the USDA to work on an informal basis with the industry to develop the specific details.
After 3 long years, USDA has published the congressionally-mandated reform package consolidating the 31 existing orders into 11 new broad marketing regions, and making changes in pricing policy in an attempt to more closely align the industry with the laws of supply and demand. Is the final decision perfect? Hardly. Is the final decision an improvement? In some ways, yes. Is the final decision final? Well, we may start to answer that question today.
Under the provisions of the Agricultural Adjustment Act, all modifications of existing orders, or establishment of new orders must be first ratified by a two-thirds majority vote of dairy producers in the order. USDA has tentatively indicated that those referenda will not be held until late August of this year. Further, once an order is final, producers may still petition for changes within that order.
As we begin to grapple with the Department's final decision, this subcommittee, and indeed all Members of Congress, have the responsibility to act in the interest of both their constituents, as well as the American dairy industry as a whole. We need to assess not merely short-term needs, but also competitiveness and viability in the long run. Within days of USDA's publishing the final decision, a number of legislative proposals were introduced. While these proposals are not intended to be the topic of discussions in today's hearing, the fundamental questions regarding class I differentials, price supports, forward contracting and regional pricing cartels are important components of the reform debate.
Page 3 PREV PAGE TOP OF DOC Underlying these topics is the uncertainty the impact that these proposals will have on the overall dairy economy, and to a greater extent, the individual producer's bottom line. It appears to me as if each individual dairy organization group uses its own standards for evaluating the economics of policy proposals, leading to wildly different projections. Each of these evaluations relies on a series of assumptions regarding supply and demand, leading to predictions of all-milk price, and producer's net cash receipts. All of a sudden, a debate on dairy policy becomes a debate on economic modeling, making an already difficult subject virtually impossible to effectively address. With everyone relying on a different analysis to make their case for a policy of their choice, its no wonder that the situation appears so chaotic.
Make no mistake, dairy policy is extremely complexa fact compounded when industry, academia, and USDA cannot even agree on the basic, underlying economic assumptions. Without some unity in the industry regarding the economic model on which to evaluate the impact of our decisions, I am concerned that the industry is asking Congress to make a tremendous leap of faith. For this reason, I would ask all parties, in coordination with USDA, to forge a single set of assumptions and a single model on which to evaluate the impact of various options before us.
As far as today's discussion, I would ask all of the witnesses to use the opportunity to address the strengths and weaknesses of their own models and assumptions, rather than simply shredding each other's. You will have ample time to do that in the coming weeks. In addition to addressing the specifics of the final decision, I hope that members and witnesses will share with this subcommittee their vision for the future of the dairy industry in America. Understanding the big picture is especially critical when dealing with issues this complicated.
As I have said before, I know it is unrealistic to expect America's dairy industry to speak with one voice. I do continue to hope, however, that at least those different voices can be more harmonious. Parochial, regional, and often narrow perspectives have, too often, deluded the ability of the dairy industry to influence and contribute to the national debate on the future of American agriculture. I hope we change this. I know that we should.
Page 4 PREV PAGE TOP OF DOC I look forward to today's testimony and welcome all the witnesses here. I would now like to yield to the distinguished ranking member, Mr. Peterson, for any statement he would like to make.
OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. PETERSON. Thank you, Mr. Chairman. Once again we face one of our favorite issues: Federal dairy reform. It is a time where, as always, we come together in peaceful and conciliatory tones to work together for the good of all dairy farmers. Seriously, Mr. Chairman, as you know, over the years you and I have spent countless hours and traveled endless miles all over the U.S. working toward the reform of our archaic marketing order system.
So here we are today to review and study the culmination of this effort. As you mentioned, Mr. Chairman, USDA was charged by Congress to consolidate the orders and develop a more economically based pricing system. Their final rule is the result. Initial reaction to the final rule has been strong, to say the least. I must admit that I am a little bit surprised by the amount of passion expressed by some groups, because the rule and its aggregate across the U.S. represents a modest amount of change, and a modest amount of reform.
As we discuss the changes today, I hope that we can refrain from exaggeration, because in my estimation the net result of the final ruleby most analysisis pretty small. To help us with the review of the effects, I join you, Mr. Chairman, in your challenge to the industry and USDA to work together for a unified agreement on the economic consumption used to gauge the effects of the final rule. Federal dairy policy is maddening enoughwith its complexities, turns and twistswithout the added difficulty of having to compare everyone's separate economic analyses.
To be certain, there are reports currently available which support any view. There have always been problems with misrepresentation of various analyses and we are seeing that exemplified here. For example, an often-used map showing the change in class I differentials has been frequently equated with the change in producer income. We all know that class I differentials are only one piece of the big puzzle. Over-order premiums and other incentives are rarely reflected in the analyses, but are, nonetheless, important. We must be careful today that all information is characterized in its true light.
Page 5 PREV PAGE TOP OF DOC Mr. Chairman, I would suggest that efforts by some to legislate marketing order reform is premature at best. We have only started to thoroughly review the final rule. I think rushing headlong into a bill-making machine situation is not going to benefit anybody.
Finally, Mr. Chairman, while I agree with your assessment that we are far from a unified national dairy policy, I would suggest to everyone present today that it is very dangerous to maintain the extreme divisiveness that we have seen in the industry. Agriculture, in general, is facing enormous challenges economically and in the Congress. The only chance available, I think, to farmers is if we can come to a consensus and work together. When agriculture is divided, in my opinion, none of us can move forward the way we want.
As always, I urge our witnesses today to keep these thoughts in mind. I would also like to extend a warm welcome to my colleagues that are present who are going to testify, and a special welcome to Commissioner Gene Hugoson, a friend of mine who represents the State of Minnesota. He is the Commissioner of Agriculture, now in the Ventura administration. He has not shaved his head yet. I don't know whether he has any wrestling credentials or not, but he is a good advocate for dairy farmers and does a good job for us in Minnesota.
So, Mr. Chairman, I look forward to the testimony today, and the discussion of all our esteemed witnesses. I thank you, once again, for calling this hearing. I am ready to work with you to come to a good resolution of this issue.
Mr. POMBO. Thank you. Because of the length of the hearing I would like unanimous consent that all further opening statements be included in the record at this point.
[The prepared statements of Members follow:]
PREPARED STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVEIN CONGRESS FROM THE STATE OF TEXAS
Mr. Chairman, thank you for convening this hearing regarding the Secretary's final decision on milk marketing orders. Let me also take this opportunity to thank Dr. Figueroa, his colleagues from the Department, and all the other witnesses for their testimony today on one of the most significant dairy decisions to come out of this administration. I know that dedicated USDA staff spent countless hours on this effort and, in light of their hard work, I deeply regret that I cannot be supportive of the final outcome.
Page 6 PREV PAGE TOP OF DOC One of the goals of Congress in passing the 1996 farm bill was to reform the order system. It was not the intent of Congress to promote the disintegration of dairy investment in much of the U.S. Much could have been accomplished regarding reform of the order system, even without touching differentials. We could have consolidated orders, improved the Basic Formula Price, or worked to make the orders more uniform.
Unfortunately, the Department chose instead to drastically reduce class I differentials, following the option 1B proposal. Many of us in Congress believe the option 1A proposal would have been a much more sensible step towards reducing class I differentials. The option 1A plan had other things going for it: the support of 238 House Members, a majority of the Senate, and 3,579 favorable public comments (out of 4,217 comments received).
I fear that the Department's decision to ignore the more reasonable approach to reform will only worsen the financial difficulties that have resulted from increased volatility in dairy prices. In Texas for example, cash receipts from dairy farming will decline significantly from baseline levels as a result of USDA's decision, according to the Department's own estimates. ''Marketing orders'' are supposed to encourage orderly marketing, but the Department's decision moves away from orderly marketing.
It is both disappointing and unfortunate that, because of this inexplicable decision on differentials, the Department's work on this effort will go unappreciated. I sincerely hope there is a way we can salvage this situation and produce a truly workable reform package. Until that time, many of us in Congress who care about dairy policy will have to oppose this proposal because of its serious, if not fatal, flaws. Dairy producers in this country deserve better, and I hope and believe that those of us in the Government can do better.
PREPARED STATEMENT OF HON. DEBBIE STABENOW, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
Page 7 PREV PAGE TOP OF DOC I appreciate the opportunity to participate in today's hearing on the issue of milk marketing orders. As we are all well aware, this is a very complicated, yet important system for determining the price of dairy products. I commend the Agriculture Committee for holding a hearing on this critical issue that will have long-term repercussions not only our dairy producers, but on consumers and the food industry, as well.
The dairy farmers in my district have been in close contact with me throughout the debate on milk marketing orders and have been unanimous in their support of the 1A option. I have strongly supported the 1A option during this process and expressed my support for 1A, along with many of my colleagues to Secretary Glickman in a letter and then in a meeting we held in the Capitol last year.
This year, my colleague and friend, Congressman Roy Blunt, introduced H.R. 1402, a bill to mandate the 1A option, and I was proud to support this bill as a cosponsor. Despite the clear and consistent message from Congress and producers nationwide, the U.S. Department of Agriculture has produced a milk marketing order that is contrary to option 1A. I am pleased to have the opportunity today, to hear from USDA how the final decision on the milk marketing order was formulated. I need an answer for my dairy farmers who are very disappointed with the USDA decision.
PREPARED STATEMENT OF HON. MARK GREEN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN
No State in this country relies on dairy more heavily than Wisconsin. I am extremely pleased to play a role in today's hearing regarding Secretary Glickman's milk market order reform proposal.
Wisconsin has a long and proud tradition as a successful agriculture State, In fact, it's been estimated that 25 percent of our State economy is tied to agricultureand our dairy industry is a major contributor to this sector.
Today, Wisconsin has 22,000 dairy operationsmore than twice as many producers as the next highest State. While the numbers are impressive, they mask the difficulties our dairy farmers face. In the last 9 years alone, Wisconsin has lost 10,000 dairy operationsmost of which are small family farms. It is important to note that the loss is not solely limited to the farmerthe impact is felt in the community as well. It is estimated that the average dairy producer in Wisconsin contributes $400,000 to the local economy. Dairy producers are in every way critical to the success of our communities and our State.
Page 8 PREV PAGE TOP OF DOC In 1937, Congress enacted legislation to establish milk prices based primarily upon the distance of the farming operation from Eau Claire, WI. During the thirties our country lacked the technology and infrastructure to rapidly and effectively transport drinkable milk and there was a legitimate need Congress addressed. The result was the creation of a regional milk payment system to facilitate the production of milk in shortage areasknown as the milk market order system.
Our world and the dairy industry have changed dramatically in the 62 years the milk-marketing system has been in place. Unfortunately, the milk marketing system has remained relatively unchanged and the Secretary's recent reforms represent the first real reforms to the milk marketing order system since its inception.
I was deeply troubled to discover that plans are already underway to reject the Secretary's proposal and legislate a return to the status quo. The status quo is based upon 60-year old technology; it assumes that the same milk production deficits existing in 1937 exist today; and it unfairly penalizes dairy producers from the upper Midwest by placing into law the requirement that our farmers have to receive a lower price for the milk they produce than dairy farmers from other areas.
We need a system that makes economic sense. A system in which farmers are no longer penalized or rewarded based on a guideline as arbitrary as for the distance they live from Eau Claire, WIa milk marketing system based on sound economic principles instead of antiquated assumptions. The Secretary's proposal takes modest steps in the direction of market liberalization. For this he should be applauded, and I hope this administration sticks by the Secretary Glickman's proposal.
While USDA's recent milk pricing proposal is a small step in the right direction, the reforms do not go far enough to erase the inequities inherent in the system. On average, Wisconsin loses more than three dairy farms every single day. Our dairy industry can be competitive in a fair marketplace and it should be allowed to do so. Hindering our farmers' chance of survival by rolling back the recently released milk order reform is wrong and it would eliminate the only milk pricing improvements for our dairy farmers in the last six decades.
Page 9 PREV PAGE TOP OF DOC It is important to note the Secretary's proposal was released after serious consideration was given to all segments of the dairy industry. The proposal was three years in the making and relied upon input from producers across the nation. Everyone was provided with an opportunity to have a voice and contribute to the reordering of the milk marketing system. Additionally, once the proposed rule is finalized it must be approved by two-thirds of the dairy farmers within each proposed order across the country. This process was in every way inclusive and it should not be politicized by regionalism.
Our farmers have been unfairly burdened by the milk marketing order system for more than 60 years and their voices deserve to be heard. I would like to thank Chairman Pombo for allowing me to be a part of this subcommittee and address this important subject.
Mr. POMBO. I would like to welcome our first witnesses, Senator Kohl, Representatives David Obey, Ron Klink, and Ron Kind. If you would join us at the witness table. I would like to welcome you all here. Obviously, the States that you all represent have a very deep interest in this issue. It is very obvious by the amount of interest that this hearing has received from you and your colleagues from your States. Senator Kohl, if you are ready, you may begin your testimony.
STATEMENT OF HON. HERB KOHL, A UNITED STATES SENATOR FROM THE STATE OF WISCONSIN
Senator KOHL. Mr. Chairman and members of the committee, thank you for allowing me to testify here today. I am here at the request of the Secretary of Agriculture, Dan Glickman, and the Wisconsin dairy industry to support the reforms in the milk pricing system recently announced by USDA.
For better or worse, the 1990 farm bill moved most commodities to a market-based pricing system. Dairy was left out of those reforms, and that was definitely for the worse. It is worse for the competitive dairy farmers of our region to see their businesses founder based on their proximity to Eau Claire, WI, rather than on their ability to produce a quality product at a fair price. It is worse for the consumers of all regions to pay anything but a fair price for their milk and cheese. The farm bill did include a requirement that USDA develop a new dairy pricing system based on good economics rather than regional favoritism. That new system is the issue before us today.
Page 10 PREV PAGE TOP OF DOC Though USDA's proposal is not all any of us wanted, it is a step in the right direction. It eliminates the current ridiculous price discrimination against dairy farmers who operate near Eau Claire, WI. It eliminates protectionist, regional dairy compacts that prop up a few dairy farmers at the expense of consumers inside the compact region and producers outside it. Perhaps most importantly, it is based on the recommendations of Congress, regulators, market experts, and processorsnot politicians who do not understand the complexities of the dairy market.
Of course, many of you have concernsand legitimate concernsover how USDA's proposal will effect dairy farmers in your home district. This is the price in moving the current dairy market forward toward a free market. That price is not too high. USDA estimates that their proposal will result in only a 2-cent decrease in milk prices over the entire milk market order system. I appreciate and acknowledge the need for every representative to fight for the farmers of their region. But for Wisconsin, this is more than a fight for one agricultural sector. It is a fight for fairness. It is a fight for the life of our traditional farm economy.
Milk is to Wisconsin, ''America's Dairyland,'' what coal is to West Virginia; what oil is to Texas, and what cotton is to Mississippi. Dairy is our most important agricultural product, and the bedrock beneath the local economies of thousands of Wisconsin communities. In Wisconsin, the dairy farming way of life is disappearing. We lost 7,000 dairy farms over the last 5 years. We lost them, not because our industry is outdated. It is not. We lost them, not because our family farms are inefficient, they are not. We lost them, not because our product is poor; our delivery is slow; our ability to meet demand insufficient. It is not. Wisconsin's dairy farms are disappearing because an antiquated and unfair milk market order system is driving farmers off their farms.
Of course, I, and others, cannot let that happen. USDA has decided not to let that happen. I hope that we can all support their overdue reform. Thank you.
Page 11 PREV PAGE TOP OF DOC Mr. POMBO. Mr. Obey.
STATEMENT OF HON. DAVID R. OBEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN
Mr. OBEY. Thank you, Mr. Chairman. I have in my hand here a picture of Albert Einstein. I asked my staff to find a picture of a person who we thought most resembled the chairman of the subcommittee. [Laughter.]
They selected this picture, because we concluded that you had to be Albert Einstein to understand the milk marketing orders. Further, I would suggest that if Albert Einstein had to understand those orders as a prerequisite for being allowed into this country, he would never have been able to become a citizen of the United States. I sympathize with your efforts to wade through this most complicated issue.
Everyone knows that dairy policy is incredibly complicated, and that the milk marketing order system is probably the most complicated component of dairy policy. However, this issue is very simple.
I think we all understand what happened. Last year, the Secretary of Agriculture was told that he ought to bring to the Congress a proposal for modernizing marketing orders in order to bring them more in line with economic and structural realities in the industry, today. Central to that proposal is a flattening of the dairy differential payments, which determine how much farmers in various sections of the country get for fluid-use milk. Traditionally, the system has been that greater differentials were paid the further you were from Eau Claire, WI, a community represented by Mr. Kind. I happen to represent one ward of that same community.
That might have made some sense, many years ago when that first debate took place, because we did not have refrigeration, and we did not have a modern highway system. Today we have both. Times have changed. It seems to me, dairy policy ought to change along with it.
Page 12 PREV PAGE TOP OF DOC The Secretary's proposal, in our view, is far from perfect, but it is a modestvery modeststep in the direction of national equity. In my view, it ought not to be further jimmied by the Congress. It does not eliminate the higher incentives paid to farmers in other regions of the country. It simply moderates them to a very tiny degree. It reduces the competitive disadvantage that our farmers are forced to compete under.
I think there is another reason why Congress ought to leave this system alone. When my friend, Steve Gunderson, chaired this subcommittee a number of years ago, he tried to bring before the House a legislative fix to the differential issue. At that time, he was cut off at the pass. He was denied an opportunity to even offer his amendment in the Rules Committee. He was told, in essence, by the leadership of the Congress at that time, ''Sorry, we are not going to allow you to proceed with a legislative effort to change this system. The best you can hope for is that we will give the Secretary of Agriculture an opportunity to make administrative recommendations to bring the system up to date. That is what you are going to have to live with.'' Operating under that principle, the Secretary has now brought forth his proposal.
As you know, this is the Secretary's second try. Initially, he brought forward what was known as option 1B, which was somewhat more favorable to our region of the country than the Secretary's new set of recommendations. When he brought those recommendations forward, the Congress passed legislation which, in essence, took away his ability to make any further adjustments for the remainder of the previous year. That is why we are here now. Since then, the Secretary has modified his recommendations to try to move, somewhat, in the direction of those who objected to his original proposal, in the first place.
I really believe, Mr. Chairman, we need to recognize that this issue needs to be dealt with by a neutral. Whatever you think of the administration on a variety of other policies, one would have to admit that the administration has no regional bias on the issue of dairy or agriculture. Whereas each of us, coming from our own narrower constituencies, do have a regional bias.
Page 13 PREV PAGE TOP OF DOC It seems to me that when the Congress tries to politicize this issue, it gets into trouble. That didn't begin with this session of Congress. In my view, the original problem started when Congressman Coehlo, in the 1985 farm billI believe it wasfor the first time suggested that they change the differentials, legislatively. They did. I think that what the Secretary is proposing now is simply a proposal that will get us back to an administratively determined set of fair arrangements.
I would make just one other point, in closing. Last year, I was able to get passed into law a requirement that we issue not only the price which farmers get for their product each month, but also to list their cost of production so that consumers would have an idea that farmers aren't living on a gravy train. If you take a look at the data that is now out because of that, the cost of production figures demonstrate that in our region of the country, it costs less to produce 100 pounds of milk than any other region of the country. Our farmers should not be penalized for their efficiency. That is what the existing system does. That is why I think that, while it falls short of the changes we would have liked to have seen in the Secretary's recommendations, it is far preferable to the Congress taking unilateral action.
Just one last point. I find it ironic that some Members of Congress who talk about the wonders of a barrier-free trade system, internationally, are at the same time encouraging regional trade barriers within the United States itself. It seems to me that the Secretary was told to move this system to a free market system. Yet, what our farmers face with this market system, is really a rigged system. It is not a true market system. That is bad enough. We are willing to live with that, if we get at least some improvement.
But it seems to me this Congress should not be debating this issue. It should allow what the administration has proposed to stand. I would simply also say, if it does not, if it chooses to bring something to the floor, I think it has an obligation to allow us to debate the whole range of issues attendant to this issue, including whether or not there ought to be any marketing order system at all; whether there ought to be one marketing orderas Mr. Gunderson believed there ought to be, a long time agoand a number of other items associated with this issue.
Page 14 PREV PAGE TOP OF DOC I thank the Chair for the time.
[The prepared statement of Mr. Obey appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
STATEMENT OF HON. RON KLINK, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA
Mr. KLINK. Thank you very much, Mr. Chairman. I guess as the only Pennsylvanian here, with these three people from Wisconsin, I feel a little bit like Custer at Little Big Horn. I will be the dissenting voice, I believe, on this panel. I would ask you to give my comments fair consideration.
Congress really can play a very key role in protecting dairy farmers if sound and fair policies are put into place. I think that is what all of us believe. Unfortunately, in Pennsylvania, I don't believeand our farmers don't believethe USDA's final rule for Federal milk marketing orders reform. We think it is poor. We think it is a confusing dairy policy. We thank you for reviewing it. We would like to offer our input.
Last month I met with over three dozen dairy farmers in my district. We did not meet, specifically, to talk about this. We talked about everything from reauthorizing the Northeast Interstate Dairy Compact, to saving Social Security, to estate taxes, to welfare reformevery kind of thing. But the comment that really set every one offthe subjectwas this whole idea about the Federal milk marketing order system and the USDA's final rule to reform that system.
The consensus among these farmers was that the Federal milk marketing ordering system leaves dairy farmers spending more time trying to figure out the pricing system, rather than doing what they need to do daily on their farm to survive. The farmers I spoke with gathered at Fred Scheel's farm down in Freedom, PA. They really expressed a need to eliminate mysteries that Albert Einstein could understand. They want this to be a simplified system where they can truly understand it, and to reduce the volatility to the industry.
Page 15 PREV PAGE TOP OF DOC March 5, we refer to that in Pennsylvania as ''Black Friday.'' The price for a hundredweight of milk dropped from over $17 per hundredweight, down to just over $10 per hundredweight. It lost 37 percent of its value. That kind of volatility does not allow farmers to be able to depend on any regular source of income. I was also amazed, as we were there that day talking about this, Mr. Chairman, and the rest of the members of the committee, how many of the farmers said that they have other jobs. They drive school busses. They drive trucks. They do other things to be able to support themselves on the farm.
Agriculture in my State of Pennsylvania is the leading industry. Dairy is the leading segment of that industry. We are not as large as dairy in Wisconsin, but we are getting up there. The total value of milk produced in our commonwealth amounted to $1.53 billion in 1997. Additionally, Pennsylvania is the fourth leading dairy producing State in the Nation. It is crucial to my State's economy that we continue to have a viable dairy industry.
I am sure that you have heard the numbers relating to the struggles that dairy farmers are having these days. The dairy farmers' tradition has been so key to economic success of Pennsylvania. Now it is in jeopardy. Farmers in my State will lose over $64 million each month, over the next 3 months, if these new regulations are implemented. If current trends continue, I am sure that these farmers will close down their operations and move off the farms and have to find jobs elsewherefull-time jobs.
It is clear the Federal milk marketing order reform package is poor dairy policy for Pennsylvania. Just as I am sure it is good for Wisconsin and other areas, in Pennsylvania we will suffer. Their problem is our problem. Something has to be done to protect our Nation's dairy farmersI agree with Mr. Obeyregardless of where you live in this Nation.
Currently, there are several ideas before Congress that can help to solidify the future of family dairy farms in Pennsylvania and across this country. For example, H.R. 1402, a bill in direct contrast to the USDA's new rule on milk marketing order reform, would implement option 1A, for calculating the price of fluid milk based on location-specific costs and the value of having fresh supplies of milk produced locally. H.R. 1604 is a bill that reauthorizes the Northeast Interstate Dairy Compact. It would also help the many family dairy farms in Pennsylvania. At the appropriate time I would like to discuss, either privately or at another committee hearing, those two bills with the members of this subcommittee.
Page 16 PREV PAGE TOP OF DOC Mr. Chairman and members of the subcommittee, I thank you for holding this hearing. I would just close by saying there are two issues that the farmers back in Pennsylvania really would like to see addressed in regard to USDA's current proposed orders. That is: they believe the reform equalizes prices that are paid to producers in different regions by reducing the amount that is paid to the producers. They would like to think that the prices to the producers should be leveled up and not down. They would like to make allowance, the amount the processors are allowed to deduct from the prices paid to the producers, is too high. That is really hurting the producers at the expense of the process.
With that, Mr. Chairman, I will submit my formal statement for the record. I thank you.
[The prepared statement of Mr. Klink follows:]
PREPARED STATEMENT OF HON. RON KLINK
Chairman Pombo and members of the subcommittee, thank you for allowing me to testify today. It is an honor to be here and to work with you to try and find solutions for the problems facing our Nation's dairy farmers. Congress can play a key role in protecting family dairy farms if sound and fair policies are put into place. Unfortunately, the USDA's final rule for Federal milk marketing order reform is a poor and confusing dairy policy that must be reviewed. I thank you for holding this hearing to examine the new rule and to look for better ways to protect our dairy farming industry.
Last month I met with over three dozen dairy farmers in my district. The topic of conversation ranged from reauthorizing the Northeast Interstate Dairy Compact, to saving Social Security, to eliminating the estate tax. However, the topic that caused the most debate was the Federal milk marketing order system and the USDA's final rule to reform that system. The consensus was that the Federal milk marketing order system leaves dairy farmers spending more time trying to figure out the pricing system rather than doing what they need to do to survive as dairy farmers. The farmers that I spoke with at Fred Scheel's farm in Freedom, PA expressed a need to eliminate the mysteries that surround Federal milk marketing orders, to reduce volatility in the industry, and to use sound dairy policy when reforming the system.
Page 17 PREV PAGE TOP OF DOC Agriculture is my home State of Pennsylvania's leading industry and dairy is the leading segment of that industry. The total value of milk produced in the State amounted to $1.53 billion in 1997. Additionally, Pennsylvania is the fourth leading dairy producing State in the Nation. It is crucial to my State's economy that we continue to have a viable dairy industry.
Mr. Chairman, I am sure that you have heard the numbers related to the struggles that dairy farmers are having these days. The family dairy farm tradition that has been so key to the economic success of Pennsylvania is in jeopardy. Dairy farmers in my State will lose over $64 million a month over the next 3 months if the new regulations are implemented. If current trends continue, farms will close and farmers will be without jobs. It is clear that the Federal milk marketing order reform package is poor dairy policy for Pennsylvania.
Clearly their is a problem with the current system. Something must be done to protect our Nation's dairy farmers. Currently, there are several ideas before Congress that can help to solidify the future of family dairy farms in Pennsylvania and across America. For example, H.R. 1402, a bill in direct contrast to the USDA's new rule on milk market order reform, would implement option 1A for calculating the price of fluid milk based on location specific costs and the value of having fresh supplies of milk produced locally. H.R. 1604, a bill to reauthorize the Northeast Interstate Dairy Compact would also help the many family dairy farmers in Pennsylvania. At the appropriate time, I would be more than willing to discuss the merits of these bills with the members of the subcommittee.
Mr. Chairman and members of the subcommittee, I thank you for holding this hearing and looking into the proposed rule regarding Federal milk marketing order reform by the USDA. I hope that progress can be made to clarify the system and better protect America's dairy farmers.
Mr. POMBO. Thank you.
Page 18 PREV PAGE TOP OF DOC Mr. Kind.
STATEMENT OF HON. RON KIND, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN
Mr. KIND. Thank you, Mr. Chairman, Mr. Peterson, and members of the committee. I appreciate the opportunity to bat cleanup, here, on the first panel of today's hearingespecially following Mr. Klink. I ask unanimous consent to make Mr. Klink an honorary ''cheesehead'' for purposes of this hearing today.
I am pleased to have the opportunity to comment on the Department of Agriculture's Federal milk marketing order final rule. I am happy to be joined by my colleague, Senator Kohl, and Representative Dave Obey, from Wisconsin. I want to thank them, especially, for the leadership they have provided to the dairy industry in our great State of Wisconsin.
My congressional district, in western Wisconsin, is one of the largest dairy-producing regions in the entire country. The economic prosperity of every community, not just my congressional district, but the entire State of Wisconsin is impacted by the dairy industry. Unfortunately, the antiquated, Depression-era Federal dairy policy has resulted in a mass exodus from this proud industry.
Since 1980only 19 years agoWisconsin has lost, roughly, one-half of its dairy farms. Roughly, five to six family farmers a day, approximately 1,800 a year, have been forced out of business. While there are many economic factors contributing to the dairy farm losses in the State, there is no question that pricing fluid milk based on the distance from a city in my district, Eau Claire, is the number one reason for the loss of so many family farms in western Wisconsin. We are hoping that policy can be changed.
The 1996 farm bill included a provision that phased out the Milk Price Support Program and called for the reform of the milk marketing order system. Based on that mandate, USDA has moved forward with a reform package that seeks to reduce the pricing inequities between regions in this country. While these reforms do not fully level the playing field for Wisconsin producers, they are a slight improvement over the status quo. The final rule flattens the nationwide average differential, reflecting the new productive capacity that exists, nationwide, today. By reducing the average differential, the final rule moves in the direction of allowing marketing conditions, rather than Government price controls, to determine effective prices in local markets.
Page 19 PREV PAGE TOP OF DOC Ironically, supporters of the status quo blocked my predecessor, Representative Steve Gunderson, from legislating more significant changes during the 1996 farm bill. At that time, fearful of more drastic reform, Congress asked USDA to propose an administrative remedy that consolidates Federal orders and provides for a more market-oriented system. Now, after USDA has conducted numerous hearings; thousands of pages of testimony, and engaged in lengthy rule making, Congress is, again, proposed to even the most modest reform proposals.
If the dairy industry is to remain competitive, Congress should not advocate a rigid, regulatory pricing system that pits region against region, which efforts to maintain the status quo or to create compacts would do. It is hypocritical and unwise for a Congress that is pushing for fair and international market expansion on every front to advocate a domestic dairy policy that is inefficient, regionally discriminatory, and unfair to consumers and my dairy producers.
If fact, Mr. Chairman, early last December I had the opportunity of traveling with a small delegation to Brussels to meet with the members of European Parliament and European Commission. Representative Dooley, who is on the committee, attended. Senator Pat Roberts was along. We were pressing for a frank discussion on a common agricultural policy in the EU, and pressing for a fair and a level playing field in international trading environment. Their basic response to us was that we really didn't have standing to come and talk to them about a fair international trading environment, so long as we can't keep our own house in order.
I am afraid that is a foreboding comment leading up to the WTO discussions that are going to take place, later this year, out in Seattle. If we don't seize the opportunity of trying to level the playing field domestically here, our trade representatives are going to be hard-pressed to negotiate fair trade agreements and agriculture policies that, too, have antiquated government policies that distort market conditions.
Page 20 PREV PAGE TOP OF DOC In addition, Mr. Chairman, no responsible debate on this issue is possible unless we have an opportunity to debate all aspects of the issue, including the elimination of the milk marketing order system; the establishment of a single milk marketing order that eliminates the gross distortions in the marketplace, and other approaches to the situation.
Once again, I thank you for the opportunity to provide input regarding the proposed final rule. If the final rule requires change, I believe it should be made through the administrative process, by market participants and regulators who work in, and thoroughly understand the current system, rather than by Members of Congress who seek to uphold the antiquated milk pricing system in order to protect regional interests.
I thank the chairman and members of the committee for the opportunity to testify before you today.
Mr. POMBO. I have no questions of you. I believe Mr. Peterson has none. Do any of my other colleagues have questions?
Thank you for your testimony.
I would like to call up our next panel of witnesses: Dr. Enrique Figueroa, Administrator, Agricultural Marketing Service, USDA; accompanied by Dr. Keith Collins, Chief Economist, and Mr. Richard McKee, Deputy Administrator.
STATEMENT OF ENRIQUE FIGUEROA, ADMINISTRATOR, AGRICULTURAL MARKETING SERVICES, U.S. DEPARTMENT OF AGRICULTURE; ACCOMPANIED BY KEITH COLLINS, CHIEF ECONOMIST, AND RICHARD MCKEE, DEPUTY ADMINISTRATOR, AMS DAIRY PROGRAMS
Mr. FIGUEROA. Thank you, Mr. Chairman and members of the committee. I appreciate the opportunity to come before the committee and discuss the Department of Agriculture's final decision on Federal milk market order reform. I will make my comments very brief, just to highlight what our final decision has done. Then I look forward to a question and answer period.
Page 21 PREV PAGE TOP OF DOC Federal milk market reform is a result of the mandate from the 1996 farm bill, in addition to our appropriations bill that amended some of the things that we could address in the timetable for reform. There are four basic areas which the Federal milk market order reform addresses. One is order consolidation; two is to replace the basic formula price; three is classified pricing, and four is the consistency of the various languages to make it consistent across all orders.
We were mandated by the farm bill to consolidate the orders to no less than 10 and no more than 14. We present 11 orders in our final decision. There were slight changes in the final decision vis-a-vis the proposed rule. Those three changes are a reflection of the comments that we received for the proposed rule. We replaced the basic formula price with a class III or class IV price. The class III and class IV prices will now be a function of the milk components, which is much more reflective of what the marketplace is pricing. We will base those prices on butter, dried powdered milk, whey, and cheeseboth in barrel form, as well as block cheesesto generate class III and class IV prices. Whichever of those two prices is the higher for any given month will be the price that will be used as the BFP replacement.
With regard to classified pricing, our final decision is consistent with the mandate of the farm bill. We move toward a system that provides incentives to be much more responsive to market signals. We provide a system where it assures consumers of a reliable, consistent supply of high-quality milk and milk products. We have a system that provides sufficient revenue to producers to stay in the business of producing milk. We consolidate a number of the languages for the various orders that are in place. We also include a class IV price category, which is the minimum price of milk used to make butter and milk powder.
We are looking at August to conduct a referendum in each of the 11 orders. We look for October 1 for implementing the final decision. It has been a process in which we have conducted a number of outreach efforts. We have received over 6,000 comments. It is a process that was arrived at in looking at the Nation as a whole. The final decision meets the mandates of the farm bill in providing a consistent, reliable supply of milk and milk products, while guaranteeing farmers sufficient revenue.
Page 22 PREV PAGE TOP OF DOC In addition to releasing our final decision, we also released an economic impact analysis in which the impact we estimate over the next 6 years is minimal, both in terms of cash receipts as well as the price of a hundredweight of milk.
We look forward to working with the Congress. We recognize that our decision has elicited some controversy. In that vein I will close my comments and accept any questions that you may have.
Just one thing, at 1 o'clock this afternoon we announce the BFP. For your information it is $11.81 per hundredweight. It is 19 cents higher than the BFP of last month.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Figueroa appears at the conclusion of the hearing.]
Mr. POMBO. Thank you, Dr. Figueroa. What is your estimation to the extent to which dairy farmer income will be affected by the adoption of class I differentials under the final USDA rule?
Mr. FIGUEROA. Our estimate, Mr. Chairman, is that, on average, per year, for the next 6 years, cash receipts to producers in the regulated areas of the country is a loss of $2.8 million per year. When we incorporate the nonregulated areas of the country, i.e., the impact across the entire Nation, our estimate is that it will show a positive $3.2 million per year, over the next 6 years.
Mr. POMBO. What does that work out to by price per hundredweight?
Mr. FIGUEROA. In the regulated areas it is a drop of 2 cents per hundredweight. When we incorporate the unregulated areas of the country, i.e., the entire Nation, the effect is zero cents per hundredweight.
Mr. POMBO. I would just follow that up by asking you, what would be, if you were doing a projection with the current system in placenot the proposed system that you have brought forward, how closely could you get to estimating that price? I mean, 2 cents a hundredweight is almost undetectable.
Page 23 PREV PAGE TOP OF DOC Mr. FIGUEROA. That is correct. It is very small compared to the total price of a hundredweight of milk. It is a very small, negligible change. I am not sure that I understand your questions.
Mr. POMBO. How much confidence would you have in your estimation, your modelyour economic model, in estimating out that? How much confidence do you have in going by prior estimationsprojectionsthe Department has done?
Mr. FIGUEROA. I am going to let Dr. Collins answer that. He has more experience in the historical estimates at the USDA.
Mr. COLLINS. Mr. Chairman, I can't quantify the confidence we have in that model. Some models can be quantified. You can put a standard error on model forecasts because they are based on long histories. We constructed this model just for the purpose of analyzing this rule, so we have not been able to evaluate it on any future performance. But like all economic models, it has a lot of assumptions built into it. It seems to perform fairly well. We have a fair amount of confidence in it, to put it in qualitative terms.
Mr. POMBO. Assuming for a moment that new legislation is enacted, if USDA's formulas do not perform as expected, would USDA consider modifying the final rule at a future time?
Mr. FIGUEROA. You mean between now and October?
Mr. POMBO. No. No. Because you are not going to be able to tell how it performs.
Mr. FIGUEROA. With any rule or any market order that is in place, Mr. Chairman, we will receive petitions; evaluate petitions on whether a particular facet or component of our final decision is working accordingly, or not working. If we receive a petition, at some point in the future, that we need to revisit and reconsider some aspect of our final decision, we will look at the petition and evaluate it on its merits.
Page 24 PREV PAGE TOP OF DOC Mr. POMBO. So, hypothetically, if the economic model that is used isn't accurate and we come up with a different result a year from now, there is the possibility that a petition would be presented to USDA and it could be changed?
Mr. FIGUEROA. That is a possibility, yes, sir.
Mr. POMBO. Specifically on the dairy compacts, what is the current administration policy concerning the Interstate Regional Compacts?
Mr. FIGUEROA. The Department's position at this point in time, Mr. Chairman, is that we have not taken a position as to whether we are advocates or not supportive of compacts. We are following the law. We are assisting the compact that is currently in place. We did draft our final decision with the understanding, which was mandated by the farm bill, that once our final decision is implemented, the authorizing legislation for the compact would cease to exist.
Mr. POMBO. All right, thank you. Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman. It was brought up about these bills that have been introduced. This bill that would legislate 1A, have you looked at that?
Mr. FIGUEROA. My staff has evaluated that bill, yes, sir.
Mr. PETERSON. Would that have to have a referendum if 1A is legislated, or does it just impose it? Say that Congress changed your rule, legislated 1A, would there be a referendum in August on 1A?
Mr. FIGUEROA. It is my understanding that that would have to take place, yes. The market order system is such that each of the individual orders needs to vote up or down the various components of the Federal order system. One-A would be, as I understand the legislation, one of those components, i.e., the classified pricing components.
Mr. PETERSON. In the analysis, currently in the non-fat dry milk, in the year 2000, under your analysis you are showing a $1.40 price. The baseline world price is 78 cents. Mr. Collins, what is it in this system that would cause the dry milk to be $1.40 if the world price is 78 cents? Can you explain that?
Page 25 PREV PAGE TOP OF DOC Mr. COLLINS. Well, for one thing, we are pretty much isolated in the world market, because of the tariff-rate quota and over-quota tariff that we have on imported dairy products. I think out in the year 2005 we would have a over-quota tariff on non-fat dry milk imports. That is, I can't remember exactly, but it is in the neighborhood of 40 cents a pound. In addition to that, there would be other costs associated with trying to move non-fat dry milk into the United States. In addition to that, there would be transportation costs in trying to move non-fat dry milk into the United States. I don't think the landed price of imported non-fat dry milk would probably be much under $1.41, like we have projected it would not be a whole lot below that.
Mr. PETERSON. Did you do an analysis, similar to what you have done under your current rule, for 1A?
Mr. COLLINS. Yes, sir.
Mr. PETERSON. If compacts under 1A caused certain regions of the country to produce a lot more milk than a region can use and that gets dumped into manufacturing, couldn't that have a big impact on what the price of non-fat dry milk is?
Mr. COLLINS. Yes, it could.
Mr. PETERSON. Does your analysis show that, or didn't you look at that?
Mr. COLLINS. We did not put our projected prices of non-fat dry milk in our analysis. No. We do have the change in manufacturing use under 1A and under our final rule in our analysis. I can't remember exactly, but it seems to me that there is about a 300 million-pound-a-year difference. Under 1A there would be about 300 million pounds more milk going into manufacturing uses, which would increase the production of non-fat dry milk, butter, cheese and affect their prices.
Mr. PETERSON. You maybe told me this. Why did you feel that you needed to raise the make allowance? A number of people are going to testify about that.
Page 26 PREV PAGE TOP OF DOC Mr. FIGUEROA. We received, during the comment period, Mr. Peterson, almost unanimous comments from both processors and representative producer groups that the make allowances that we had in our proposed rule was too small or too restrictive. The comments provided sufficient amounts of evidence that led us to make those changes.
I might add, Mr. Peterson, that in our final decision, we refer to a modified 1B and a modified 1A in comparison to our final decision. The 1A and the 1B that were in the proposal needed to be modified because of some of the things that we found during the comment period.
Mr. PETERSON. Mr. Collins, have you looked at the FAPRI?
Mr. COLLINS. I have looked at the abundance of reports that have come out in the last week or two.
Mr. PETERSON. Can you explain to me why there are these big differences? Are there differences in baselines or are they using statistical analysis?
Mr. COLLINS. If I could take a minute to just comment on this. I thought Mr. Pombo's opening statement presented this very well. There is a huge number of economic analyses that have come out. Lost in all of that is whether, fundamentally, conceptually, what we are doing makes sense or not. Instead, we are tied up in trying to figure how much farm income is going to be affected. We have quite a range of estimates. We have the USDA estimate. We have the FAPRI estimate that you mentioned. We have National Milk Producers Federation's estimate. We have an Agri-Mark estimate. We have a professor from Missouri's estimate. We have a forthcoming and tentative result from the University of Wisconsin. I don't know what Cornell is going to say here today. But there are at least those five analyses that are on the table.
I would say, you ask why we get such a big difference? Well, first let me characterize the difference. We show essentially, as Dr. Figueroa indicated, no big changealmost no change at allin cash receipts for farmers averaged over 6 years into the future, for the U.S. as a whole. FAPRI shows, for the U.S. as a wholethis is my estimate; I haven't seen them do a farm income estimate, but they do have an all-milk price effectroughly $80 million a year decline. The Milk Producers Federation shows roughly $200 million a year decline. Some of the other studies are larger than that.
Page 27 PREV PAGE TOP OF DOC Let us just take those three as illustrative: $0 to $200 million a year decline for total cash receipts in dairy, in the future, what we are talking about is $23, $24, $25 billion a year. So, these estimated changes in farm income represent 1 percent, or less, in total cash receipts. I don't think we are talking about big difference among these estimates. In the perspective of what farmers earn in a year as a whole, these are pretty small numbersroughly 1 percent, or less.
With that as a prologue, let me respond to the question about FAPRI's analysis. FAPRI shows, I believe, an 8-cent decline in the all-milk price, averaged over 7 future years. We show a 2-cent decline in the all-milk price averaged over 7 future years. That is a 2-cent to an 8-cent decline on a base of about $15 a hundredweight. That is hardly much of a discrepancy between us and FAPRI.
People have criticized us because our non-fat dry milk prices are high, particularly early in our projection period. All right, let me take them out. I will throw out the first year of our projection, so that the non-fat dry milk prices are not affecting our analysis. If I do that, I get about a $50 million decline, per year, on average in Federal order areas. I think FAPRI's decline is about $80 million per year, on average.
So, fundamentally, I think we are getting the same conclusion. Unfortunately, I think that they are getting that conclusion with some flawed assumptions. I would take exception to a lot of what they did. To honor Mr. Pombo's charge, I won't spend my time shredding their analysis. On the whole, while I think there is not a big difference in the net effect shown.
Mr. PETERSON. Mr. Chairman, if I could just followup. Your economic analysis assumes compact is going to expire, the current Northeast Compact.
Mr. COLLINS. Yes, sir.
Mr. PETERSON. Did you do an analysis what would happen if what you proposed goes into law and the compact is extended? Is that analysis done?
Page 28 PREV PAGE TOP OF DOC Mr. COLLINS. No, we have not done that analysis.
Mr. PETERSON. Can you do that?
Mr. COLLINS. We can do that analysis, yes.
Mr. PETERSON. Mr. Chairman, I would like to request that they do that, if that could be possible.
Mr. POMBO. I would be very interested in seeing how that would come out, if you could share that with the committee. For the record, I would appreciate it.
[The analysis will be completed at a later time and forwarded to the subcommittee for inclusion in the permanant record.]
Mr. COLLINS. Specifically, the analysis is of the compact extended to the 20-something States that are considering it.
Mr. POMBO. The Northeast.
Mr. COLLINS. Oh, the Northeast Compact, as if it were continued.
Mr. POMBO. If it were to continue.
Mr. PETERSON. That is all we have. It's there. That is an issue in this particular rule.
Mr. COLLINS. I might point out that there was a study done by the administration which, I am sure, you are aware of. It was mandated and done last year by the Office of Management and Budget on the economic effects of the Northeast Interstate Dairy Compact. There are quantitative estimates of the effect of the compact with current marketing orders in place in the Nation.
Mr. POMBO. Well, we would like to see it.
Mr. PETERSON. And finally, Mr. Chairman, on page 68 and 69 of this book that they put out, there is a kind of a chart that shows what happened with the consolidation and changes. I ask them to make a gradient, so you could kind of tell what went up or went down in different regions, which I have here. I would like to make this part of the record. It shows, for example, in each area the percentage change up and down. It is easier to understand what these charts on 68 and 69 mean. I would also ask that the Department make available these charts to all the members so that they can see this.
Page 29 PREV PAGE TOP OF DOC Mr. FIGUEROA. We will do that, sir.
Mr. POMBO. Without objection, it will be included in the record.
[The information follows:]
"The Official Committee record contains additional material here."
Mr. POMBO. Mr. Everett.
Mr. EVERETT. Thank you, Mr. Chairman. I want to thank you for having the hearing and the work that you and the ranking member have done over the years trying to get some consensus on this Einstein-type problem.
Dr. Figueroa, one of the stated purposes of the Federal market order system is to provide consumers with a fresh, abundant supply of milk. It does not seem logical that lowering minimum prices to producers in areas already deficit in milk production is going to encourage enough milk production to supply current markets, not to mention future markets. Production in my State of Alabama has dropped from 524 million tons in 1988 to, simply, 386 million tons in 1998. You can see Alabama is a milk production State. That is roughly a 140 million ton drop in about 10 years. Could you please tell me the rationale behind decreasing the minimum prices in areas of the country that are most deficit in milk production, and increasing the minimum prices in areas in where there is no need to increase milk production?
Mr. FIGUEROA. Yes, sir, Mr. Everett. The final decision is a decision that was arrived at in using an economic model that addressed the milk supply across the country. That model, in essence, its objective was to minimize the cost of transporting milk from points of production to points of consumption.
To that relative surface, if you will, we made additions to arrive at our final decision. We recognize that in some areas of the country prices were lowered, as far as the differentials were concerned. In other areas, prices were increased. So those are simply minimum prices. As you are aware, there are over-order premiums offered in the marketplace in a number of areas. So that, in your specific example, you may well find over-order premiums taking place to attract more milk to these people in deficit areas.
Page 30 PREV PAGE TOP OF DOC Mr. EVERETT. And if those over-order premiums do not take place, what happens in a State like oursin Alabama? We have had this continuing deficit for over 10 years. We have lost 140 million tons and a lot of dairy farmers.
Mr. FIGUEROA. It is our estimation, sir, that our final decision, indeed, will assure consumersbe they in Alabama or any other place in the countrya reliable, consistent supply of high-quality milk.
Mr. EVERETT. That is based on the model that you plugged all this information in. Mr. Collins has already testified a lot of assumptions.
Mr. FIGUEROA. That is correct, sir.
Mr. EVERETT. How many comments in support of option 1A did you receive and how many in support of option 1B?
Mr. FIGUEROA. Mr. McKee will look for that number, sir. It was clearly the number of comments that we received in support of 1A was significantly larger than the comments in support of 1B. In the rulemaking process, sir, we did not look at comments as votes, if you will. We looked at the substance of the comments; the validity; the amount of research and/or other evidence that is provided to us in support of their comments. It is in that nature that we arrived at our final decision.
Mr. EVERETT. Why would you have a comment period if you are not going to judge the volume? For instance, my figures that there were 3,579 comments in support of option 1A and only about 400 in support of option 1B. So you are telling me that the 4,000 people's comments are of no use to you?
Mr. FIGUEROA. No, sir. I would not say that they were of no use at all. We, indeed, did make some changes with regard to our final decision, vis-a-vis, the proposed rule and other areas of our final decision. We just simply felt that our final decision is more consistent with the mandate of Congress for moving the dairy sector into a more market-responsive system, into a more efficient system. And that is, indeed, what our final decision addresses.
Page 31 PREV PAGE TOP OF DOC Mr. EVERETT. Doctor, with all due respect to my dairy farmers, it looked like USDA had already made up its mind before the comment period; then had the comment period and disregarded what the supporters of 1A had to say and proceeded like they wanted to proceed.
Mr. Chairman, thank you.
Mr. COLLINS. Mr. Chairman, can I just clarify one thing? Mr. Everett asked about the model and he drew a conclusion about the model that I don't think was accurate. I wanted to just clarify that, because there is not one model, but there are two models that we use. We use one model to determine the supply, demand and price effects of the class I differentials after we establish them. The other model is the model that we use to establish the logic of the class I differentials, which is what I think, you were asking about.
I talked about the assumptions of the model that we used to do supply, demand and price analysis. The model that was used to establish the class I differentials was the dairy sector simulator model at Cornell University. I would say, essentially what that model doesand this is the ultimate justification for what we use to establish class I differentialsis it tries to simulate what the world would look like, what the U.S. dairy market would look like, if we had free, fair competitive milk markets prevailing in the United States.
Essentially, what it does is that it has over 200 supply points where milk is produced in the United States; over 200 consumption points where milk is consumed. It accounts for over 600 processing plants in the United States. Then it asks the question: given this production; given this consumption, what is the least-cost, most-efficient way of hauling and distributing that milk from the production points to the consumption points? From that model comes out what the difference in prices would be in, essentially, a fair, free and competitive market, from region to region for milk used for fluid purposes.
Page 32 PREV PAGE TOP OF DOC That was the basis of establishing our class I differentials, not the models that I talked about that we used for supply, demand and price purposes.
Mr. EVERETT. Were your models established prior to the comment period or after?
Mr. COLLINS. Both of those models were established prior to the comment period.
Mr. EVERETT. In other words, they may have had biases built into them?
Mr. COLLINS. Absolutely.
Mr. EVERETT. Thank you, Mr. Chairman.
Mr. POMBO. I recognize the ranking member of the full committee, Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman. First question: Over the last several weeks the Department has been urged to move the remaining, unused portion of deep tonnage that we were allowed under the gap agreementsabout 74,000 non-fat dry milk; lesser tonnages of whole milk; lesser tonnages of cheese. We have also, I understand, about 10,000 tons of product that have been bid and then canceled. What progress are we making to make sure that we keep a constant flow into the world market under the agreements that we have had made and the canceled contracts?
Mr. COLLINS. Well, I think we are making progress on that. As you accurately depicted, there are two issues. One is the unused World Trade Organization commitment. The second is once we have allocated sales, and then those sales are unshipped, we have an unshipped allocation. We do have a process going within the administration, within the Executive Branch, to make a decision on how we are going to resolve that issue. So, it is moving along. It is being adjudicated within the administration now.
Page 33 PREV PAGE TOP OF DOC Mr. STENHOLM. We have a time restraint, do we not?
Mr. COLLINS. We do.
Mr. STENHOLM. You are going to make it in time?
Mr. COLLINS. Well, my personal view is that if we are going to use it, we ought to use it before July 1.
Mr. STENHOLM. Right.
Mr. COLLINS. We ought to use it as soon as we can. The commitment year is a JulyJune commitment year, so we would like to use it before then.
Mr. STENHOLM. That is encouraging. Industry has noted that in its regulatory analysis, you estimate a domestic price for non-fat dry milk of $1.40 in the year 2005. At the same time, the baseline world price is shown at 78 cents. What underlying factors led the Department to believe the domestic prices would diverge from the world price to such a degree?
Mr. COLLINS. That is similar to Mr. Peterson's question. I think that we have had large divergences in the past between the non-fat dry milk price in the United States and in the world price. We have had large divergences between the butter price in the United States and the butter price in the world.
Case in pointtoday. The butter price in the world market is probably 50, 55 cents a pound. In the United States it is over a $1 a pound. I don't think that is a particularly unusual event to have a large discrepancy between what we have in the United States and what is in the world market. I think that what may be unusual, though, is the $1.41. I think that is pretty high, relative to prices of the past several years. I think that is an issue people have raised some concern about with respect to our baseline.
Mr. STENHOLM. I guess one of the concerns I have with a lot of the rhetoric and a lot of the testimony that we will hear today is to those that believe that somehow, some way, the U.S. dairy farmers can compete in an international market that is less free than the international market is today, and shows no imminent signs of getting more free by the definition in which we have prospered in this country. When see those kinds of divergent prices, $1.40 and 70 cents, how can we with a straight face say that the answer for dairy production and dairy producers is to absolutely let the market take its toll?
Page 34 PREV PAGE TOP OF DOC Mr. COLLINS. If I can answer that, I would say that we have come to that conclusion for U.S. agriculture in its entirety. Within U.S. agriculture, there will be some sectors that will benefit very well. In fact, probably most sectors in U.S. agriculture, because no other country in the world has the ability to produce agricultural commodities like we do. There will be other commodities that may not do as well. We all know the effects on tomatoes, for example, of the NAFTA agreement. But we also know the benefits to the beef industry; to the pork industry; to the dairy industry; to the corn industry of NAFTA.
So I think when we make judgments about where our trade policy is going to go, we are doing it for the good of agriculture as a whole. Now, specifically with respect to milk, I think the dairy industry, right now, is struggling, globally. We have a tremendous of dairy products out on the market. In Russia and Asia, we have tremendous potential consumers of dairy products on the ropes, with respect to their economies We have had a big increase, this year, in milk production in Australia, which I don't know that we can have year in and year out. Right now, in the United States, we are having our own big increase in milk production.
I don't know what will be the future of the dairy industry competitively in the world. I think right now there is quite an aberration between where we are with the rest of the world. If we can pursue trade liberalization around the world, and if we can, in fact, discipline the subsidy programs of other countries as we continue to liberalize our own, that may help us.
I might say that all is not hopeless on that front. We recently won a WTO panel with respect to Canada, which shouldif it prevailsreduce Canadian dairy product exports into the world market and increase their consumption of fluid milk from the United States. So, it is a hard thing to know: where we are going to go in the long term and how well it will benefit dairy. I am not sure that the answer is, either, erecting a price insulation fence around the U.S. dairy industry. Ultimately, all that will mean is that we will have a much bigger adjustment to make in the future. Economists call a crisis a huge change in relative prices. That is what you face if you try to insulate yourself, in the long run.
Page 35 PREV PAGE TOP OF DOC Mr. STENHOLM. I agree with you on your analysis in total, but there are a lot of ''ifs'' in there.
Mr. COLLINS. There are a lot of ''ifs.''
Mr. STENHOLM. That bothers me; when, say, the ''ifs'' of WTO; ''if Canada does what''
Mr. COLLINS. I couldn't agree more. A lot rides on the backs of our negotiators to get a fair and free negotiation.
Mr. STENHOLM. Well, if you will go ahead and beat that product in the short term, maybe we will do better in the long term.
Mr. COLLINS. That decision is not without some complication and controversy. I didn't get into that.
Mr. POMBO. Mr. Riley.
Mr. RILEY. Thank you, Mr. Chairman. Thank you for the opportunity to discuss this. I think Mr. Obey is probably right. When this was trying to be explained to me yesterday, I wish I had been Einstein. I needed all the help I could get.
But as I listen to this testimony and I tried to get an indication of this yesterday; I said, ''Forget milk orders. Forget transfer payments, over-order premiums. Tell me how much you get for a hundredweight of milk in Chicago in 1998. How much do you get in Alabama?'' They were comparable. Chicago was $15.38. These are what is called ''mailbox prices.'' This is what you go to the mailbox and get for your milk. In Alabama, it was $15.34. So, basically it was 4 cents difference.
Under these new orders, Chicago now will get, basically, a dollar more for hundredweight than Alabama will. Mr. Obey called that a modest and tiny adjustment. A dollar a hundredweight is a significant adjustment. It certainly is not a tiny one. But when I looked at this in context, if I understand your testimony right, you said that basically the national price of milk to the consumer is not going to change. It will only be reallocated.
Page 36 PREV PAGE TOP OF DOC Then, if I understood your testimony right, I think that it was Mr. Kind that said that ''We in Wisconsin have the cheapest milk production prices in the United States.'' Yet, they are going to get an increase in price. The people in Alabama have a much higher production cost and are going to get a reduction in price. Yet, the price to the consumer does not change.
Now, I don't think that you have to be an Einstein to understand that if it doesn't help the consumer, and it materially detracts from our ability in the South to produce fresh milk, this is almost a ridiculous program, to me. How could we ever justify increasing the profits to someone in Wisconsin and diminishing the prices in Alabama, when Alabama is in a deficit position?
My good friend, here, said a moment ago, ''In my State we have lost almost half of our milk producers.'' Yet they are the most efficient milk producers in the United States. If they are having this type of economic crisis in their dairy industry, think what it takes for an Alabama producer just to survive. Now we are going to go back, and by any classification, you have to consider that the numbers you came up with are arbitrary. They have been all over the board for the last 6 months.
I would just like to know, if it is not going to benefit the consumer; and it is only going to benefit low-production States and cost more in high-production States, how do you justify this?
Mr. FIGUEROA. Mr. Riley, when I mentioned, earlier, that the price was zero dollars across the country, that was the price per hundredweight to the producer. Our impact analysis indicates that at the consumer level, the price to the consumer per gallon of milk is going to decline, on average, 2 cents per gallon. So, I just want to make that clear.
Mr. RILEY. So, you are talking about destroying deficit States production for 2 cents a gallon. Let me take it another step. If Minnesota cannot survive today, and they have the lowest production cost in the country, then you tell me what I tell my milk producer in Alabama, when we are going to cut his and he has a higher production cost?
Page 37 PREV PAGE TOP OF DOC Mr. COLLINS. Can I make a comment about this? First of all, you started out with a whole bunch of premises, most of which were not quite right. With respect to what is going on in Chicago, you said the price of milk would decline by a dollar.
Mr. RILEY. That is not what I said.
Mr. COLLINS. That is not what you said?
Mr. RILEY. I said the differential between the price in 1998 and the differential in the price 1999 is going to change by a dollar.
Mr. COLLINS. The differential will increase by a dollar, is that rightthe class I differential in Chicago?
Mr. RILEY. Chicago goes up 55 cents; Alabama goes down 38 cents. That is a 93-cent spread.
Mr. COLLINS. Then let me not correct you. Let me just add to that by saying that would raise the price of milk in the Chicago order, by our estimate, 16 cents a hundredweight, which is not a whole lot.
Second, I would just amplify Dr. Figueroa's comment on the benefits to consumers, which do appear quite small when you look at 2 cents per hundredweight. That too, varies regionally. In some of the key consumption areas there are benefits that are fairly large of 5 to 7 cents per gallon of reductions in the price of milk in Philadelphia and New York, for example.
Third, there are also some benefits to the Food Assistance Program recipients. For example, under the Food Stamp Program, 10 percent of all the Thrifty Food Plan dollars go to fluid milk. So there are some reductions there as well. I wanted to clarify that there are few consumer benefits.
Mr. RILEY. I think you are right. There are very few consumer benefits. You also have to build into this equation that you are making absolutely no adjustments for over-order premiums.
Page 38 PREV PAGE TOP OF DOC Mr. COLLINS. Absolutely.
Mr. RILEY. So as long as the premium structure is there, why do we even go through the charade of trying to set individual State's marketing order prices if we have a competitive system already in place for additional over-production of milk? Is there a rationale?
Mr. COLLINS. We have a system that is competitive and all we are trying to do in our proposal is make it a little more competitive.
Mr. RILEY. What you are doing is making it less competitive for some, more competitive for others. But if you are truly willing to let supply and demand work, then do it with the over-market premiums.
I know I am out of time, Mr. Chairman, but one other question. Where did we come up with these numbers? How did they go from option 1A to 1B to what we have today? It was basically a 40-cent increase. Is this a political number that you came up with to help sell the program? Is there any kind of statistical analysis that says, ''We are going to add 40 cents back''?
Mr. FIGUEROA. Mr. Riley, as you may recall in the proposed rule, the proposed 1A had a $1.60 base. Our preferred option in the proposed rule had a $1.20 base. We arrived at the 40 cents so that we would equate our final decision with regard to the base that was there on the 1A proposal. That, to us, indicated a minimum price that would move milk and generate revenue for producers across this country, so that they would have sufficient revenue, on average. The impact would not be as negative.
Mr. RILEY. If that is the case, why don't we leave the marketing program where it is, which generates more income for all of the farmers?
Mr. FIGUEROA. Again, Mr. Riley, we arrived at our final decision consistent with the mandate of the 1996 farm bill to go to a more market-oriented system. Our final decision, indeed, does that.
Page 39 PREV PAGE TOP OF DOC Mr. RILEY. Any type system that ends up with winners and losers to this magnitude, I think, the Congress is going to have a very, very difficult time endorsing.
Thank you, Mr. Chairman.
Mr. POMBO. Mr. Etheridge.
Mr. ETHERIDGE. Thank you, Mr. Chairman. Let me thank you and the ranking member for holding this hearing today. I also want to thank the witnesses for appearing and those who have been here earlier.
Let me preface this by saying that I am going to be biased in what I say. You start from that premise. Number two, I was not here in 1996, so I am going to add that to it. There will not be any question about where my questions are going to be headed.
As I rememberif I am incorrect, I hope someone will straighten me out on thisthe requirement to the Department, as it relates to the 1996 farm bill, was with regard to the marketing orders in that farm bill and not to come up with all the new pricing information that we now have. I hope you will share that with me in a minute. There are a couple more points I want to make before we come back to that.
When you get to the fluid milk price, that is what has generated tremendous controversy and has us here today, I think. USDA has used reform, in my opinion, as an opportunity to sort of find a wayI think we just heard from several questions hereto sort of redistribute income. In the process of redistributing income, let me just say up front, my Statenot unlike some of the otherslost about half of dairy production over the last 15 years. We now find ourselves being a net importer of milk and a State that is growing very rapidlyNorth Carolina. It is a fast growing State with a major consumption.
I heard someone earlierI don't know which one of youtalk about a map. I just happen to have one. I don't know who produced the map. I don't have any idea. The name is not on it. It is a mighty red map. It shows about who are winners and losers in this thing. I think Mr. Riley's point is that if this map is correct, the green ones are the winners and the red ones are the losers. This map is about to bleed to death. The whole thing just really raises some questions.
Page 40 PREV PAGE TOP OF DOC I guess having been involved on the administrative side for 8 years; having responsibility of developing modelsI know a little bit about economic models and the assumptions and how assumptions can go wrong. When they go wrong and the farmer who was producing milk is out of business, he does not have the luxury of going back in. His land is gone. His equipment is gone. All of us lose. I think that is a real concern that I have in this whole issue.
To get to the questionsomeone made the point''on average.'' It is sort of like saying the stream is on average at 6 inches deep. It is 6 feet deep on one end and 3 inches deep somewhere else. You drown just as quickly. We have a lot of farmers, who are producing milk, who are drowning.
In the areas I represent in North Carolina, a deficit State, they are not unlike what Mr. Riley just talked about. I won't replow that ground, but I do want to hear more comments on it. Because they are the ones who are losing most. I have a question as it does relate to that economic model. Did you factor in your economic model the cost to those producers? Because if you only deal with the marketing and the production of milk, you have to factor the costs that the farmers have to produce it. As those farmers move out and go out of business and that farm is gone, we lose more than just a producer of milk. That land is gone. We no longer have those greenways that are available in areas of the country that are fast-growing. Dairy production serves several purposes.
My question to you, as we look at this and I hope you will expound on it and help me understand, is what do we say to the farmers that are going broke on average? As we continue to lose them, where does that put us 10 or 15 years down the road as we find ourselves in the situation of importing dairy products from overseas?
Mr. FIGUEROA. Mr. Etheridge, first of all, let me say that milk production in the Nation has increased. It is our estimate that it will continue to increase. Obviously, there are some parts of the country that are decreasing in farm numbers at a relatively higher rate than decreasing in total production of milk.
Page 41 PREV PAGE TOP OF DOC I want to restate, as I stated to Mr. Riley, we developed our final decision having in mind the country's needs as a wholethe needs from the producer community; the processor community; the distributor community, and the consumer communityto arrive at a final decision that long-term best serves all of those agents and that marketplace. It is a final decision that is much more market-oriented. It responds to market signals. It responds to specific products, i.e., the components of milk. Our pricing system addresses that. We feel that it is a much more equitable system that will be in place once this final decision is adopted. We recognize that there are regional differences, but at the same time, our analysis nationwide indicates that cash receipts to producers will increase $3.8 million per year over the next 6 years.
Mr. ETHERIDGE. Mr. Chairman, I know my time is out. You are talking about all consumersI mean, all the receipts for all producers.
Mr. FIGUEROA. Yes, sir, across the country.
Mr. ETHERIDGE. That gets back to the point I raised earlier on average. If you break them down, a lot of folks are losingbig time, while some others gain. That was the point, I think, Mr. Riley made earlier. I think we can agree on that.
Mr. FIGUEROA. Yes, sir.
Mr. COLLINS. I might say that we looked at 32 order areas. There are 31 orders now. We looked at 32 when we started this analysis. We lowered differentials in 17 orders and raised them, or left them unchanged, in 16 orders. All I am doing is illustrating your point. There are changes. You can't go from the average alone. But there is a fairly even balance between the number of increases and the number of decreases, nationally.
Mr. PETERSON. Mr. Chairman, if I could? I just want to point out that I think the map you have, Representative Etheridge, is a class I map. That is just one small part of this whole equation. What the Department is trying to say is that when you factor in the changes in the pricing of manufacturing milkwhich is what we are really trying to get at with this thingthere is very little change in terms of what the producers get.
Page 42 PREV PAGE TOP OF DOC Mr. POMBO. Mr. Green.
Mr. GREEN. Thank you, Mr. Chairman. Let me begin by thanking you, Mr. Chairman, for allowing me the privilege of sitting on this subcommittee today.
Mr. Collins, you said that you didn't want to get into some of the assumptions. Under the admonition of the Chair, I would invite you to discuss some of those assumptions. It seems as though so much of the questioning today is based upon some of the assumptions that are in those other reports. That seems to be driving some of this discussion.
In particular, could you talk about some of the assumptions that have lead to the conclusion, contrary to your own, that producers will lose $200 million per year as a result of the proposed rule? If you would discuss some of the assumptions that went into that $200 million figure and how those may be inaccurate.
Mr. COLLINS. Sure, I would be happy to. First of all, of the five studies that I've mentioned that I am aware ofthere may be, and probably will be moreonly two of them take into account the changes in supply, demand and price changes that might be generated when you change class I differentials, or you change a class III formula, or you change a class IV formula. That was done in the USDA analysis and the FAPRI analysis.
The other analyses are more like arithmetic exercises. They are accounting exercises. Two of them are based on going back to 1994 to 1998 actual dairy price data, and plugging that data into the class III formulas that we have come up with. For example, the one that got the $200 million decline in income and the one that got a bigger decline, showed that over that period1994 to 1998our class III formula would generate a class III price that is 47 cents lower than the current basic formula price definition.
This becomes a loss in farm income that has nothing to do with us changing the class I differentials. In fact, for some of these studies, most of the loss in farm income does not come from change in the class I differential, which we have spent most of this time talking about. It comes from the belief that our class III formula is 47 cents lower than the basic formula price.
Page 43 PREV PAGE TOP OF DOC What happens if the class III price is lower than the basic formula price? Well, the class III price in all of these analyses is the class I price mover. It is the price on which the class I differential is added. So if you lower the foundation by 47 cents, then you lower the minimum class I price by 47 cents. That is where much of the income loss is coming from.
Now, I have a problem with that approach. I think that if you go back and started out in 1994; and you took the actual dairy product prices for 1994; and you plugged them into our class III formula; and it lowered the class III price by 47 cents; and it lowered class I differentials by 47 cents, it would lower farm income. It would lower production, and it would raise dairy prices in 1995 above what they were.
What these analyses do is they go ahead and use the actual 1995 data; the actual 1996 data; the actual 1997 data; and the actual 1998 data. Those would not have been the data that prevailed if you had started in 1994, 1995, and 1996 and used those dairy product prices. So, it is not an analysis at all. It is, essentially, some kind of pass-through accounting exercise.
What you really have to do, as Mr. Peterson said, is take into account the full range of impacts that would occur. There are going to be effects on class III prices; effects on class IV; effects on class II and effects on class I. Fundamentally, the dairy market is not supported in price. The class III and class IV markets clear. They are basically free markets. You can't support the price of class III and class IV milk. We don't have supply control. The markets have to clear somewhere in the dairy industry. We are getting rid of the price support program. Markets have to clear. Where do they clear? They clear in class III and class IV markets.
So, if you lower your accounting identity, is that going to change the market price? To FAPRI's credit, they say no. In the FAPRI analysis they say, basically, our class III formulaif it is in fact 50 cents loweris an accounting mechanism. It is an artifact of USDA. It does not affect the market price for class III and class IV milk. That is why they get a much lower estimated drop in farm income. I think that is a much more reasonable way to go. That is one major concern I have with these analyses.
Page 44 PREV PAGE TOP OF DOC Mr. GREEN. If I can, my time is running short. Don't some of these studies use minimum price figures as opposed to mailbox figures in their calculations of loss?
Mr. COLLINS. Oh, absolutely. I am giving you an example in class III markets. That is the exact same thing. If it is true that our class III formula gives a 47-cent lower priceI am not sure that is accuratebut if that were true and markets cleared above that, where do those returns go? They are not retained by the co-ops. The co-ops are going to pass them back as patronage distribution to the producer. I think that is true.
I also think that this question on over-order premiums on class I prices has been largely ignored. It was raised here by one of the members. Take a look at what happened in the Northeast Interstate Dairy Compact when they raised the minimum class I price. What happened to over-order premiums? They went down. So what do you think might happen if we lower the minimum class I price? Over-order premiums might go up. Yet, most of these analyses say that we have no basis for changing our over-order premiums. Of course, USDA said that, too. I think the reason is that no one knows, for sure, how to change them. I think these realities of the marketplace are effects that would increase the producer's income.
I think there is one final one, if I could mention it. One that intrigues me, and one that we have not modeled or analyzed, as well. That has to do with our definition of what is the class I price mover. Under the current system, it is the basic formula price: the value of milk going into cheese production. Under our proposal it is the higher of the class III or the class IV price. All of these other analyses assume that class IV prices, because of weak non-fat markets, are going to be below the class III price. So the class I price mover, year in and year out, is the class III pricethe average class III price for the year. If the class IV price were above the class III price for even 1 month, that would raise the class I differential, but nobody assumes that.
Page 45 PREV PAGE TOP OF DOC The FAPRI analysis has 7 years where the annual average class III price is the class I price mover. Seven years in a row. That means for7 times 1284 consecutive months, because even if for 1 month the class IV price was above the class III, the class I mover would be above the annual average class III price. So, for 84 consecutive months in a row they assume that the class III price is the class I mover.
Now, let me ask you, in the last 7 months, how many times has the class IV price been above the class III? Let me answer that: 4 out of the last 7. If I go back to 1994 through 1998the celebrated period that all these analyses are usingand I use our actual formulas for computing the class III and class IV prices; how many months, using our new definitions is the class IV price above the class III? Thirty out of the 60 months. So, this is an enhancement to the class I price mover that increases farm income that is not being accounted for by anyone, including us. So, there is a lot at stake here that has not been evaluated and analyzed, that are offsets to these obvious declines in class I price.
Mr. GREEN. Thank you, Mr. Chairman.
Mr. POMBO. Mr. Boswell.
Mr. BOSWELL. Thank you, Mr. Chairman. I just have a brief question. I think this has been touched on different times. Some of us have information from the Producers Federation that raises a question about the declining they will have, versus, what I think I am hearing from USDA: there will not be a large decline. It is kind of a wash. Do you have any comment on how the Federation could come up with a large decrease in income, versus how they figure different than how you figure it?
Mr. COLLINS. Virtually everything I just said in response to the last question goes to explaining the difference in what we did and what National Milk did. I don't want to make too big a deal of these differences. This is a difficult exercise to try to model. Such a complex system for all the different regions of the country to take into account and project all the changes in prices.
Page 46 PREV PAGE TOP OF DOC I really think, in the end, these results on a national average basisI am not talking about regionallyare very, very close to one another. They are not significantly different from zero, when you talk about $200 million on a base of $23, $24, or $25 billion over the next few years. Nevertheless, the National Milk Producers Federation shows an annual decline of about $200 million$196 million, to be exact. We show a wash.
One of the reasons people have criticized our analysis is that we get a big income increase in the first year. We have losses in the next 5 years. We have an increase in the first year because we have butter and non-fat dry milk prices. People have criticized us as being way too high in our estimates, in light of what we now know that is going on the marketplace. I tend to agree with that.
As I said when I commented on an earlier question, I am willing to throw out the first year in our analysis. In which case, we would show a national average decline in farm income over the remaining 5 years of about $50 million; National Milk, $196 million. I think National Milk's analysis is flawed. I don't think it is analysis at all. It does not take into account demand adjustments that would result as a result of the price changes that would be generated by the changes in the differentials. So, I think the analysis is flawed. But in the end, even their flawed analysis is not a whole lot different than our relatively sound analysis. [Laughter.]
Mr. BOSWELL. They might take exception to that last statement.
Mr. COLLINS. You all are going to have a chance to hear them respond, I am sure.
Mr. BOSWELL. Well, I trust they probably will. Thank you very much, Mr. Chairman.
Mr. POMBO. Thank you. I would like to ask the Department if there is somebody that is going to stay around after this round of questioning to answer anything that comes up from the any of the other panels.
Page 47 PREV PAGE TOP OF DOC Mr. FIGUEROA. Yes, sir. I am going to have somebody from the dairy division stay here to answer any questions.
Mr. POMBO. And it is somebody that can answer questions?
Mr. FIGUEROA. Technical questions, Mr. Chairman.
Mr. POMBO. OK. We have had people stay before. When I ask, they would say, ''We are not cleared to answer any questions.''
Mr. FIGUEROA. Technical questions they will answer, Mr. Chairman.
Mr. POMBO. OK. Well, I want to thank the panel for your testimony and for answering your questions. I am sure there are going to be further questions that the committee is going to have. If you could answer those as quickly as possible it would be appreciated.
Mr. FIGUEROA. Mr. Chairman, I just want to mention, relative to your opening statement, we would be more than glad to help in this coordination of the various entities that have estimates out there to perhaps, sit down and see whether we can come up with some kind of understanding of how these numbers differ.
Mr. POMBO. Well, I would appreciate that. Thank you.
Mr. FIGUEROA. Thank you.
Mr. POMBO. I would like to call up the next panel: Mr. Ben Brancel, Mr. Gene Hugoson, Dr. David Anderson, Dr. Mark Stephenson, Dr. Scott Brown, and Mr. John Frydenlund. Could you join us at the witness table please?
Thank you all for joining us. Mr. Green asked if he could introduce our first witness on this panel. Mr. Green.
Mr. GREEN. Thank you, Mr. Chairman. I would like to introduce to the subcommittee a friend of mine for some time, Wisconsin Agriculture Secretary, Ben Brancel. He is no stranger to the legislative process, having served for almost a dozen years in the Wisconsin legislature. He was the chairman of our budget-writing committee and was also assembly speaker, for some time. I introduce Ben Brancel to the committee.
Page 48 PREV PAGE TOP OF DOC Mr. POMBO. Mr. Brancel, you may begin.
STATEMENT OF BEN BRANCEL, SECRETARY, DEPARTMENT OF AGRICULTURE, TRADE AND CONSUMER PROTECTION, STATE OF WISCONSIN
Mr. BRANCEL. Mr. Chairman, Mr. Peterson, committee members, and, certainly, my friend, Congressman Green, I am here today speaking on behalf of 22,000 dairy farm families of Wisconsin. What is interesting is during the comments people were talking about their States. One quick note, in 1997 and then 1998, I lost all of the industry that North Carolina has. I lost five times the industry that Alabama has in that short period of time, under the existing pricing structure.
You heard from several Congressmen and one of our Senators about the dairy industry in their States; its efficiencies; where it ranks; some of the benefits of living there, and some of the drawbacks of finding yourself to close to Eau Claire. Secretary Glickman has taken a great deal of time to go through the reform of milk marketing orders. It was not done quickly. It was done with public input. It was done with listening sessions.
In fact, in Green Bay, WI, over 500 people attended the listening session on milk marketing orders and reforms. In fact, more attended that one hearing than all the other hearings put together. They extended the hearing time by 2 hours and then told others they were sorry they could not take their testimony, but they could present it in writing.
He has done this to try to garner information from around the United States. Some will come to the table today and suggest that I should be advocating different points of view because it would benefit my dairy farmers to a greater extent. I am not here to be greedy. I am here to ask for fairness.
One of the things we know is that this Congress directed Secretary Glickman and his Department to take a serious look at the milk marketing order reforms as they relate to the marketplace, not where you live. And by doing that, restructure it to fewer orders and to a more market-based oriented price system.
Page 49 PREV PAGE TOP OF DOC Quite frankly, I think he did a fairly decent job. It is not what we wanted. It certainly did not go far enough. In fact, there is still discussions about what is the ultimate impact? In the recent weeks I have seen various maps, proposals, and analyses since the announcement. All obtain assumptionsnot ''assume'' that gets us into troublebut the assumptions that are best, I think, are put forward by the USDA analysis. All others are partial and most every one is extreme. I know the legislative process well enough to know that if you can talk about the part that impacts you the greatest and you put it on the extreme end, then you shift the debate.
We believe that the proposal put forward is based on market analysis, not miles of distance from any one location, and that by taking a broader view point of the marketplace in establishing the base prices, you will have some conclusions coming out that are fair. It was pointed out by the Congressman from Pennsylvania that they consider March 5, Black Friday. That didn't just happen in Pennsylvania; that happened everywhere. That happened under the existing pricing system. It happened because we were not attuned to the market. We were not reacting fast enough. We were not doing a good job of informing the industry and the farmers of the direction things were happening.
Regional pricing compacts, the one we have and others being proposed, if layered on top of a milk marketing order system only exacerbates the confusion, not simplify it. You have the boat being floated in some areas by two different systems, while in other areas you are going up and down with the tide that becomes even greater. It is our hope that this Congress will allow the administrative rule being put forward by the Secretary to see its day in court and certainly, as you have heard from the USDA commentors, if in fact there are found to be problems, they are willing to go back in and review those. But to suggest that we should save one farmer to sacrifice another is not very fair to the dairy industry as a whole.
I did not come here to ask for greater differentials for fluid products to drink, like orange juice. I would love to start an orange orchard. If I could have greater differentials, I might have the chance of being successful in Wisconsin.
Page 50 PREV PAGE TOP OF DOC That is facetious. It is a poor way of ending my statement, but it kind of indicates the system that we have been in for a long time, since 1937.
Thank you for your courtesy, Mr. Chairman and committee members.
[The prepared statement of Mr. Brancel appears at the conclusion of the hearing.]
Mr. PETERSON. Mr. Chairman, if I could, Mr. Gutknecht was going to introduce Mr. Hugoson. Formerly, I kind of had a little fun with him, earlier, but I would like to do that. He was appointed in 1995 and it should be noted because he was appointed by a Republican, and then again by a reform governor. There weren't very many commissioners that pulled that off.
Mr. Hugoson is a farmer. He served in the State legislature for 10 years in Minnesota. He is currently the president of Minnesota Association of State Department of Agriculture and serves on the board of the National Association. He is real active with the Midwest Coalition and a lot of other issues.
Welcome to the committee.
STATEMENT OF GENE HUGOSON, COMMISSIONER, DEPARTMENT OF AGRICULTURE, STATE OF MINNESOTA
Mr. HUGOSON. Thank you, Chairman Pombo and Mr. Peterson. I appreciate that. I am working on the governor's hairdo myself, but it is under different reasons than the way the governor has accomplished it.
I appreciate the chance to come and share before you today. I am the Commissioner of the Minnesota Department of Agriculture. We have 9,000 dairy farmers in our State. Of course, to them, this is a big issue as well.
Dairying is big business in Minnesota. It is a $1.2 billion business for our farmers. It is another $1.2 billion business for subsidiary-types of activities that go on related to the dairy industry itself. Fifty-thousand jobs in the State of Minnesota alone are attributable to dairy. It is the largest livestock business in Minnesota. It follows only corn and soybeans as it relates to the agricultural economy overall.
Page 51 PREV PAGE TOP OF DOC Certainly, we have had an interest in the dairy program reform for some time. We have looked at the system that has been in place up to this point. It has been one that has been based on location, not on market. No offense intended to my friends from Wisconsin, but frankly, Mr. Chairman, we have come to the conclusion that it would probably be easier to move Eau Claire, WI, 1,000 miles in any direction rather than trying to depend on some kind of reform that really gets at the issue of what the dairy system ought to look like.
As we began this process started by the 1996 farm bill and depending on the Department to carry it out further, we had hopes that, in fact, it would move in the direction that would be more equitable to give us that level playing that we felt did not exist. While I have to tell you today that the reform that has been proposed by the Department of Agriculture did not go as far as many of the farmers in Minnesota would have liked to have seen it, I am here today to tell the committee that we think it is a lot better situation than what exists under the status quo. It is moving in the right direction in the sense of giving some credence to the marketplace, as opposed to just geographic location.
My colleague, Secretary Brancel, referred to the compact issue. Let me expand on that a little bit. While that is not necessarily part of the issue in this legislation that might be considered, or certainly the reform package that the Department has laid before you, certainly that issue has come up several times today. We know it will come up some more before this discussion is all over. For us it would be adding insult to injury if, in fact, we were to revert back to the status quo under the reform program and then add compact on top of that.
Frankly, what it does is that the compact system rewards those areas that have a high utilization of fluid milk. That is not the case for those of us in the Midwest, especially Minnesota and Wisconsin. We only have about 18 percent of our milk production that goes into compacts. When you look at the studies that have been donegoodness knows we have heard reference to that todaywe know that those studies exist, out there, while there may be a lot of controversy over what are the correct figures, and so forth. Mr. Chairman, that might be one of the most valuable the subcommittee could do would be to, in fact, come forth with the help of the Department and verify some meaningful figures that we could all base our decision on.
Page 52 PREV PAGE TOP OF DOC Even the figures that have been produced by the University of Missouri which show that if the compact is extended in New England and extended to those States in the south and southeast that are talking about it, Minnesota farm milk prices would drop by 21 cents a hundredweight. That, Mr. Chairman and members, translates into $27.2 million lost in Minnesota alone.
When we look at what has happened to the dairy industry in Minnesota, we have suffered some of those same problems that everyone else is talking about. We have lost an extensive number of farmers3,800, to be exactover the last 5 years. When you look at the percentages that that translates compared to where other States are, we find that we are just as high, or actually, higher. Twenty-eight percent of our dairy industry has gone out of business in the last 5 years. If, in fact, we were to see the compact provision continue on, we could see that become even further decimated and be more problems down the road.
We talk about the compact situation and what it does for dairy. Frankly, Mr. Chairman and members, what we would like to see is a compact system in place for soybeans. It costs us more in Minnesota to ship our soybeans to the port than it does for, say, someone in southern Illinois, or somebody in Louisiana. Maybe it would make some sense, because of the cost difference in production and transportation, that in fact we would do it for that commodity, or for some of the other commodities. We, Mr. Chairman, can't grow tomatoes as cheaply as you can in California. So perhaps something would be helpful there that we could use that would allow us to have a system in place where we could all share this, based on because of where live and not just the marketplace situation.
In closing, just let me say this: I represent Governor Ventura, who is one of the only two Independent governors elected in the United States at this point. One of the reasons why that election took placeand was a surprise to a lot of people, not only in Minnesota, but really around the whole United Stateswas because that there was a growing number of people that believed that government needs to be motivated by commonsense, not necessarily just by political decision.
Page 53 PREV PAGE TOP OF DOC With that in mind, Mr. Chairman, we would implore the Congress to consider, very carefully, this whole issue of milk marketing reform. Certainly, it does need to be done on a common sense basis, not done because of some regional politic kind of situation. Mr. Chairman, members, I thank you for the opportunity to be here today.
[The prepared statement of Mr. Hugoson appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
STATEMENT OF DAVID ANDERSON, ASSISTANT PROFESSOR AND EXTENSION ECONOMIST, DEPARTMENT OF AGRICULTURE ECONOMICS, TEXAS A&M UNIVERSITY
Mr. ANDERSON. Thank you, Mr. Chairman and other members, for the opportunity and time to be here today. My role in this is part of the AG and Food Policy Center at Texas A&M, to analyze the economic impacts of the final rule, not on the country as a whole, but on farmers, at the farmer level, so to speak. I will relay some of our findings to you this morning.
By way of background, there are three basic kinds of constructs or assumptions that I will lay out. The first of all is our data. We analyze this final rule and other policies in terms of a representative farm. That farm is developed with a group of farmers, sitting around a table much like this, that we pull together in a room and build on paper what a dairy farm really looks like. We have done this for 26 representative farms in major production areas of the country. These farmers, as our experts, develop the cost structure, the size, and the production levels of a dairy that, if it were right there in front of you, would look like a dairy in the area and one they could all relate to.
Page 54 PREV PAGE TOP OF DOC We then use that farm data to analyze the financial impact of the final rule on the farm. By way of a baseline, we used the FAPRI January 1999 baseline. The changes on that baseline due to the final rule come from USDA's regulatory impact analysis for the location closest to where the representative farms are located.
I am going to detail this in terms of three basic areas that, I think, many people have expressed interest in. The first is central New York. We have what we call a moderate-sized farm there with 110 cows that we analyzed this rule on. Basically, that area in the impact analysis sees about a 40-cent per hundredweight decline in the all-milk price, from the baseline. On this dairy farm, by the year 2005 we project it would see a 15 percent decline in its net cash farm income, and an increase in its probability of not being able to cover its cash expenses, going from some 70 percent to 85 percent.
We maintain two of the representative farms in Wisconsin, another area that I think everyone is interested in. One is what we call a moderate-sized, 70-cow farm. The other is what some would call a very large, 600-cow Wisconsin farm. On both of these farms, these producers are very cost-efficient. Very efficient producers, as we have heard some talk about today. The impact analysis suggests, that on average over the 200005 period the would see an 18-cent increase in their all-milk price. Both of these dairies reflect that in terms of modest increases and net cash farm income, and the ability, or probability, of reducing their probability of having a cash flow deficit.
The last area that I would mention, and we have other areas as well that I would be happy to talk about if anyone has specific questions, is one in central Texas, a 400-cow, in that area a moderate farm, in the Stephenville area. This dairy sees roughly a 50-cent decline in its all-milk price, on average over the period, reflecting quite a largein fact, by 2005 a more than 50 percentdecline in net cash farm income, and an increase in its probability of not having enough cash at the end of the year to pay his expenses, going from about 70 percent to 85 percent, just under the final rule.
Page 55 PREV PAGE TOP OF DOC I want to talk about, in general terms, some of these other areas of the country, particularly in the Southeast. I include in that area Missouri, Georgia and our north Florida dairy. All three of those see very small declines in financial performance under the rule. Basically, that is because of a positive price impact in the first year, under the regulatory impact analysis. But what you find is that over the next few years, all of the benefit early on is fully offset by declines in all-milk prices in the out years.
Overall, I would say on what we would all consider a moderate-sized, family farm dairy in each of those areas, particularly the Southeast, Northeast, and Southwest, we would be likely to see on these farms increased financial problems and difficulties under the final rule.
With that as a closing, I will turn the microphone over to the next member. Thank you very much for your time and the opportunity to be here.
[The prepared statement of Mr. Anderson appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
STATEMENT OF MARK STEPHENSON, DEPARTMENT OF AGRICULTURE ECONOMICS, CORNELL UNIVERSITY
Mr. STEPHENSON. Chairman Pombo and members of the committee, thank you very much for the opportunity to come here and speak today.
I am appearing, not certainly on behalf of Cornell University or New York or the Northeast, but really as an academic that spends a good deal of time thinking about and working in the dairy industry. I hope that I take what is a national perspective with my comments.
Page 56 PREV PAGE TOP OF DOC The Federal order reform final decision is a very large and complex document as, no doubt, all of you have realized. It is probably best measured in pounds, rather than pages. With a document that large, it is no surprise that there were a number of dramatic changes that have been proposed in the way that milk is priced. Although I think that many of the changes are controversial, USDA is really to bein my opinioncommended for what is a reasonably equitable and reasonably good rule, with several creative solutions to present-day marketing problems.
I must confess that when the proposed rule was given to me, I did not anticipate that I would like the final rule very much at all. There were a number of changes that had been made between the proposed and final rule that I think addressed a number of the problems in the dairy industry that I saw at that time.
There has been a fair amount of discussion whether these changes that have been proposed in the final rule are small, or whether they are really rather large changes. I would suggest to you that the changes that are proposed are large. I don't see any way to demark them other than to say they are really rather dramatic changes. Although I believe that most of those large changes were warranted and perhaps, even necessary, changes. Many producers and processors will struggle to remain competitive under the new orders. There will be winners and there will be losers in this kind of reshuffling that is going on.
We have had States that have been specializing into, or out of, the dairy industry since the 1930's. I don't see that changing at all. The changes in the Federal order final rule, here, arein my opinionnecessary changes to merely embrace the structural change that is already taking place.
At Cornell we have done a fair amount of work to look at the regional differences in the value of milk that exists. The research from Cornell University would support the relative differences in class I values between the locations in the final rule. For example, the relationship between class I prices in Wisconsin versus New York. Our research at Cornell, however, really can't be used to support the level of class I prices in the aggregate. When we took a look at the model results that we get, they simply tell us what the relative price differences would be. In order to transform that information into a class I differential, something needs to be added to it, some fixed increment. Therein, I think, is a good deal of the discussion that has gone before: the proposed rule and this final rule, as well.
Page 57 PREV PAGE TOP OF DOC I believe that the class I differentials in the final rule would probably be improved and would blunt some of the problems that we are hearing from folks today, if an additional 40 cents were added everywhere. This would approximately restore in aggregate across the United States the revenues to dairy producers that class I differentials have generated. In specific regions they would be higher, and lower in some others.
I would also point out, Mr. Pombo, as no doubt you know, State orders and other federally-unregulated areas have not been ignored in the Federal order process, nor can they be. The concern of alignment for manufacturing prices in the Federal order near our largest milk-producing State of California, really has probably been addressed by adopting the make allowances, which are comparable with California's, in the product pricing formula. It is also true that the lower class I differentials in nearby federally-regulated territories threatened California's class I milk pricing structure, and therefore, for perhaps this entire system. The milk that has been moving into California over the last couple of years would become even more competitive. Prices in State and Federal orders really must be aligned.
Finally, I guess I would try to address just one other issue and that is the issue of interstate dairy compacts. Compacts employ, fundamentally, the same tools as Federal orders do. In that sense, neither one is superior to the other in their basic capabilities. The real issue is one of regional coordination and politics. The threat, if you will, of interstate dairy compact proliferation should not be, in my estimation, considered a mitigating course of action for implementing class I differentials in the final rule. Compacts are likely to exacerbate the regional acrimony over price differences across the country.
I would like to have you consider these pieces of information. I would be glad, at the appropriate time, to answer information about any of the Cornell models that we have run. Thank you.
[The prepared statement of Mr. Stephenson appears at the conclusion of the hearing.]
Page 58 PREV PAGE TOP OF DOC Mr. POMBO. Thank you.
STATEMENT OF SCOTT BROWN, RESEARCH ASSISTANT PROFESSOR, FOOD AND AGRICULTURAL POLICY RESEARCH INSTITUTE, UNIVERSITY OF MISSOURI
Mr. BROWN. Thank you, Mr. Chairman, for the opportunity to provide you with the Food and Agricultural Policy Research Institute's analysis of the final rule for Federal marketing orders.
FAPRI is a congressionally-funded unit. Our mission is to provide objective, quantitative, off-the-Hill analysis of alternative agricultural policies. Therefore FAPRI does not recommend, nor endorse, any particular policy. My remarks today regarding the final rule will highlight the quantitative changes the final rule will have on the U.S. dairy industry, relative to continuation of the Federal marketing order system.
The degree of complexity necessary in administering the current Federal marketing order system makes development of an economic model that replicate it extremely difficult. Add to that the effects of changes in the Federal marketing order system and you have additional difficulties to deal with. The complete effects of the final rule will be unknown until market administrators implement it.
One of the largest debates surrounding order reform has been the surface of class I differentials. USDA's final rule establishes fluid differentials that make the price surface much flatter across the United Statesthat is, in areas of the country such as the Southwest and the Northeast. The final rule lowers class I differentials. Conversely, in the upper Midwest, the final rule raises class I differentials, relative to current levels.
The final rule also establishes new pricing mechanisms to which the class I differentials are added. First, minimum class prices for milk headed to the cheese, butter or milk powder sectors are tied, by formula, to the respective dairy product prices. Second, these new class I differentials are then added to the higher of the minimum class III or class IV price. Dr. Collins alluded to the fact earlier, that we can now have class I prices be driven by either the butter powder sectors or the cheese sector; unlike today, where we just have them driven by and large by the cheese sector. That is an important part of the final rule and should not be overlooked. Most economic models will have a lot of difficulty trying to deal with analyzing this class I mover issue.
Page 59 PREV PAGE TOP OF DOC The changes to the dairy industry at the national level, as a result of the final rule, are small. U.S. milk production is expected to decline by only 400 million pounds, or 0.2 percent, as a result of implementing the final rule. By 2006, all milk prices remain below baseline levels by only 4 cents per hundredweight. These results are close to those found by the USDA in their own regulatory impact analysis. In 2005, USDA shows U.S. all-milk prices a penny per hundredweight below their baselinea difference of roughly 3 cents from the FAPRI model results. The difference between FAPRI's and USDA's analysis is well within the errors associated with each of the models.
However, differences between FAPRI's study and USDA's analysis are evident in the year 2000, the first year of the results. USDA's baseline anticipates much stronger demand for non-fat dry milk than FAPRI. Most other dairy analysts expect some weakness in non-fat dry milk prices as we eliminate the CCC support price for non-fat dry milk. The strong demand for dry milk in the USDA's baseline results in a much larger change in the fluid milk price mover than is shown in our own work. The differences in baselines between USDA and FAPRI, where they show much higher non-fat dry prices, really are more critical to the year 2000 than they are to any other year of our analysis.
The regional results show much larger impacts under the final rule. When we look at the regional impacts between FAPRI's analysis and USDA's analysis, they are, again, quite similar. In our analysis, 12 States show milk prices that decline more than 25 cents per hundredweight, relative to the baseline. The State of Texas, for example, shows milk production that declines 3 percent, relative to our baseline. Yet, other States, like Wisconsin, are expected to increase production, relative to the baseline. These regional differences occur, in large part, as a result of the class I differential changes under the final rule.
Another more important difference between our analysis and that conducted by the USDA rests in the new minimum class III price calculation. FAPRI's analysis suggests that farmers will have to compete for larger premiums on their milk that is destined for the cheese vat, than is the case under the current system. You will have heard, by the end of this hearing, many thoughts surrounding minimum class III prices. It is a complicated part of the final rule. In fact, the issue is too difficult to discuss in my brief testimony today. I would be glad, however, to spend more time at a later date, in discussion this issue.
Page 60 PREV PAGE TOP OF DOC It is important to note that minimum class III prices do impact the minimum class I price. This feed-through effect to fluid markets results in the largest portion of the class III price effect in our analysis.
In summary, our analysis does suggest small changes to the aggregate dairy sector under the final rule. Revenue to dairy producers declines, on average, by less than 1 percent under the final rule. The regional results of the final rule do suggest shifts in where milk production will occur. With the exception of the year 2000, our results remain close to those presented by USDA. Minimum class III prices need further examination under the final rule regarding their impact upon the dairy sector. As is always the case, any change in dairy policy is always difficult to achieve. I look forward to answering any questions you have regarding our analysis.
[The prepared statement of Mr. Brown appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
STATEMENT OF JOHN FRYDENLUND, DIRECTOR, CENTER FOR INTERNATIONAL FOOD AND AGRICULTURE POLICY, CITIZENS AGAINST GOVERNMENT WASTE
Mr. FRYDENLUND. Mr. Chairman and members of the committee, on behalf of Citizens Against Government Waste and members of the National Consumers Coalition Food Group, I appreciate this opportunity to testify on USDA's final rule on Federal milk marketing orders. In particular, we appreciate your recognition that taxpayer and consumer groups have a right to input on such decisions.
CAGW is a 600,000-member, non-profit, non-partisan organization, which grew out of President Reagan's private sector survey on cost control, better known as the Grace Commission. The Center for International Food and Agriculture Policy institutionalized CAGW's long-standing goal of dismantling Depression-era agricultural price supports and regulations. We believe that Congress should build on the accomplishments of the 1996 Freedom to farm bill, and achieve a truly free market for agriculture. The best way to assure America's farmers a prosperous and secure future is to achieve a more open global food economy, and to dismantle barriers to free trade. Members of NCC's food groups, specifically Consumer Alert, the Competitive Enterprise Institute, and the Hudson Institute have asked to be associated with this statement.
Page 61 PREV PAGE TOP OF DOC For years, CAGW has advocated reform of the complex Federal milk pricing system. The Federal milk marketing orders needed a massive overhaul. However, the new regulations will actually do little to enhance industry competitiveness; and will continue to artificially inflate the price of most dairy products, continuing to impose what amounts to a consumer milk tax.
Government-managed pricing systems, such as the Federal Milk Marketing Order Program, undermine the most basic free market concept of negotiating contractual agreements between buyers and sellers. Free market competition, in almost every other business sector, has created the most robust economy in the world, and raised the standard of living for all Americans. Why not let free market capitalism work for the dairy industry, as well?
USDA's final rule fails to eliminate minimum pricing, the milk classification structures, or the regional differentials. On the other hand, elimination of the system would result in milk marketing being more responsive to consumer demand, and free the industry to pay greater attention to the marketplace. Milk would be produced where it can be done most efficiently and competitively, and manufactured into the products that are wanted by the consumerfree enterprise. While this new plan may reduce the cost of the Federal milk market order tax by just over $100 million annually, this is insignificant. The Federal marketing orders will continue to impose, at least, a $1 billion annual milk tax on consumers.
Despite our disappointment with the lack of reform, and our understanding of the difficulty that USDA had even going this far, we are even more alarmed at the prospect of legislative proposals that would override USDA's plan and impose even higher class I differentials. This would overturn even the minimal reform of reducing some of the price differential distortion.
One of the most important things to come out of this rulemaking is USDA's recognition that many of the existing class I differentials are too high, and that they can be reduced without jeopardizing an abundant supply of milk in all regions. Therefore, it is incongruous to raise class I prices through more compacts. There is no justification for adding another Government-sanctioned layer of regulatory bureaucracy to fix prices regionally.
Page 62 PREV PAGE TOP OF DOC Whether Congress mandates higher class I price differentials, or spread dairy compacts from coast to coast, the result will be a repeat of the 1980's. Then, artificially-high milk price supports led to excess milk production; declining sales of milk, and Government purchases of surplus production that cost taxpayers $17 billion.
If compacts are allowed to spread unchecked, the cost to consumers would dwarf the $55 million that has been imposed on New England's consumer. While the New England region produces less than 3 percent of the Nation's milk supply, adding additional States to the Northeast Compact and creating a Southern compact, could bring more than 40 percent of the Nation's milk supply, and 60 percent of the Nation's consumers, under the power of a milk-pricing cartel.
Congress must heed the lessons of the past. Rather than expanding the Federal Government's role in milk pricing, Congress must stay on the path begun in the 1996 farm bill. The commitments made to phase out the Government's role in the dairy industry, and to sunset the Northeast Dairy Compact, should be kept.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Frydenlund appears at the conclusion of the hearing.]
Mr. POMBO. Thank you. I thank all of you for your testimony.
Mr. Anderson, in your testimony you talk about an increase in price in Wisconsin, and a decrease in price in New York, as part of your analysis of a typical dairy farm in those two States. Can you share with the committee what the price per hundredweight would be in Wisconsin, versus what it would be in New York? Even though you see an increase and a decrease, what would the final analysisthe pricebe in each of those two States?
Mr. ANDERSON. Let me think for just a second here. I don't think I have those numbers in front of me. I will probably have to come back to you with the correct answer, but here is about what they are. We are looking at a baseline U.S. all-milk price in a $13.20 kind of range over the 200005 period.
Page 63 PREV PAGE TOP OF DOC Increasing about 20 cents, in WisconsinI think it is about 18, on average; and declining roughly 40 cents, in New Yorkfrom that baseline kind of levels.
Mr. POMBO. So, in Wisconsin, you are saying that it would be $13.40?
Mr. ANDERSON. I should make the point that that is roughly the average U.S. all-milk price. I just don't remember, right offhand, what those baseline levels were in Wisconsin versus New York.
Mr. POMBO. Just so I have an idea. I will give you the opportunity to correct it for the record. But you are saying $13.40 in Wisconsin, and $17.60 in New York?
Mr. ANDERSON. And $17.60? Excuse me. If we use $13.20 as the number, it would be $13.40 for Wisconsin, and $12.80 for New York.
Mr. POMBO. OK. You are going to have to answer that for the record.
Mr. ANDERSON. Sure.
Mr. POMBO. I am not following your answer. Your answer doesn't seem to square with what I think your testimony gave me.
Let me ask, Dr. Stephenson, you brought up the compact issue, toward the end of your testimony. You talked about how compacts and Federal milk marketing orders, kind of, offset each other. Would you expand upon that a little bit as we struggle with this particular issue?
Mr. STEPHENSON. I didn't really mean to imply that they offset each other. But I think that much of the thought process today is that if we can't get an adequate class I price out of the Federal order reform process, then we can get it out of a compact. My contention would be that you are better off to think about a coordinated system of pricing and have all of the toolsI guess the leversin one particular place, not in two competing organizations.
Page 64 PREV PAGE TOP OF DOC Mr. POMBO. I wonder about the need for a Federal milk marketing order if a particular region is within a compact, because they do seem to have somewhat competing interests in regulatory powers that exist within those.
Mr. STEPHENSON. Again, the tools that are used in a Federal order system are primarily those tools to offer classified pricing, pooling of those receipts, plant auditing, and data and statistics.
A compact would try to do this same sort of thing. They would classify-price milk according to its end use. They would try to share those receipts among producers. What they would lack is much of the infrastructure that Federal orders currently have. In fact, our Northeast Compact is reliant on the Federal order system to perform much of the auditing and numbers that is actually being required there for the compact area.
Mr. POMBO. Thank you. Mr. Peterson, do you have a question?
Mr. PETERSON. Well, yes. Sorry I missedI don't know what you have asked. I don't think this has been asked.
For Mr. Anderson, Stephenson and Brown, do your analyses account for over-order premiums and other incentive to farmers' receipts?
Mr. BROWN. Our analysis does not assume any changes in fluid, over-order premiums under the final rule. That is, relative to their current levels today, we do not assume any changes in those fluid over-order premiums under the final rule.
We do, however, for milk destined for the cheese vat, have increases in over-order premiums, relative to our baseline levels. Roughly, we are going to show over-order premiums in the magnitude of 28 cents per hundredweight of milk.
Mr. PETERSON. Mr. Anderson?
Mr. ANDERSON. Yes, sir. Yes, in our analysis, over-order premiums are captured in terms of establishing what they were when we worked with the panel developing the representative farm data. So, for example, over-order premiums on one of our dairies are developed straight from the producer's mailbox check that they get. So, to the extent that we do have premiums captured, but they remain constant over this analysis between both the alternative and the baseline, there is an over-order premium built in. It only changes to the extent that the regulatory impact analysis has one built in. I think it was testified to earlier that it does not, but there is a basic over-order premium built in.
Page 65 PREV PAGE TOP OF DOC Mr. PETERSON. Mr. Stephenson?
Mr. STEPHENSON. Mr. Peterson, I am not here to testify today on impact results from a Cornell model.
Mr. PETERSON. OK. So, in other words, you basically took what is there now and ran them through the model. If there are over-order premiums that are currently being generated, you just took those; built them in and ran them through the systemstatic, without taking into account how the changes: establishing class III and IV milk based on utilization; and the changes in the class I differentials might impact either the additional over-order premiums, or lessening over-order premiums, based on what all those price changes do in the marketplace.
Mr. BROWN. That is correct on the fluid side. Again, we do change premiums for manufacturing milk in the FAPRI analysis that we present.
Mr. PETERSON. On what basis?
Mr. BROWN. We change those over-order premiums on the manufactured side based on the additional revenue that cheese processors would likely accrue if they only had to pay this new, minimum class III price. If I only have to pay that minimum class III price, there would be additional revenue that would start at the cheese processor level. Some of that is likely going to return back to producers as they see some additional premiums come their way, or see additional cooperative dividend checks at the end of the year. So, we do see that occurring.
The crux of your question is a good one on the fluid side, however. The regional results of many of these models that have been presented to this point, all suggest not any change in fluid over-order premiums. If in areas of the country where we saw large declines in class I differentialslike Texas, like Pennsylvaniaif those can be offset by producers being able to capture additional premiums, then it will tend to moderate the regional results of what we have presented. Likewise, a State like Wisconsin, where we see increases in class I differentials, we might have the ability to see those premiums decline, as well. So that is very much the crux of some of the regional debate that is going to occur.
Page 66 PREV PAGE TOP OF DOC Mr. PETERSON. I assume that you guys agreed to try to work with USDA and us to come up with some analysis that everybody agrees to. Was that discussed and agreed to?
Mr. BROWN. We have been talking with USDA regarding our analysis and theirs. There is an issue or two where we differ, but we are trying to talk through those differences and see where we come out.
Mr. PETERSON. Well, it would be helpful if we could get that to happen. I guess the other thing that I would say, as you can tell by some of the discussion around the committee room today, we have a lot of education to do. People are not understanding the difference between class I milk, and manufacturing milk, and how that all interrelates. We need your help to come up with something that we can all agree on, so we can at least be talking off of a basis that makes some sense. Otherwise, we are going to end up on the floor of the House writing dairy legislation and having members vote on it that have no idea what they are doing. We have been there before. We are lucky we are not in worse shape than we are, right now. I see you are nodding your head. We will leave it at that.
Mr. POMBO. Mr. Green.
Mr. GREEN. Thank you, Mr. Chairman. A question for Secretary Brancel, if I could: I shared the chairman's confusion in the comparison that Mr. Anderson made between New York producers and Wisconsin producers. Can you tell us what the average Wisconsin producer is receiving now, versus his or her counterpart in New York?
Mr. BRANCEL. Well, I don't have the numbers for New York. But I do know that for 1998, which was a good year for dairy around the United States, we had a mailbox price in the $15.36 range. I was surprised that Mr. Anderson is using a cow-herd of 600, because we have less than 3 percent of our herds at that level. In fact, the average cow-herd size is 57 cows. I think what happens is that in my remarks when I talked about extremes is when you do multiples on 60 rather than 57, it looks greater than what it is.
Page 67 PREV PAGE TOP OF DOC Mr. GREEN. OK. Also, a question for Mr. Frydenlund with Citizens Against Government Waste: First of all, I agree with the thrust of your comments that neither the final orders, nor the options previously, went far enough. I would agree with you there. But if you had to choose between the final order that we are talking about today, as opposed to the current system, do you have a preference? Does your organization have a preference?
Mr. FRYDENLUND. Yes. We have made a baby step in the right direction.
Mr. GREEN. In the limited time I have, to Mr. Anderson: Could you address what I talked to Secretary Brancel about? Why did you choose the numbers that you did in herd size in trying to compare farms from different regions.
Mr. ANDERSON. I am glad you asked that. When we go out and are asked to develop these representative farms in an area, we try to get one that we would call a moderate size. Some would call it a family farm. We try to get one that is larger. It is identified by producers in the area. It may be many times larger, but it still has to be people where we have a group of producers who look like that around the table.
To give a little background, when we started this project in 1990, we had the exact same group of producers and that representative farm was 150 cows. We got the exact same comments: ''That is completely atypicalout on the fringe.'' It is the same people who have gotten larger in size. Are there many of them in the State? No, there is not, but there are more than there used to be, and a group of them around the table.
I am not saying that is typical of large producers across the entire State. It is typical of a group of very large producers right there in that area.
Mr. GREEN. But wouldn't it make sense, in trying to measure the impact for various States, to focus on what is the predominant size farm? Admittedly, the numbers I have from USDA are 1 or 2 years old. But what I see here is that over 50 percent of our farms have less than 50 head. So, if you are trying to measure what the overall impact is, presumably you would focus on that. It is less than 600 headto which they are almost none.
Page 68 PREV PAGE TOP OF DOC Mr. ANDERSON. Typically, we always use the 70-cow dairy in all of our things. But our 600-cow dairy results were used. They are already out there. I didn't see the point in not putting it in there. Typically, we talk about the 70-cow dairy. This estimated 18-cent per hundredweight increase in the all-milk price gives the 70-cow dairy a net cash income increase by about 2.5 percent. It increases about 3, almost 4, percent on the larger. But since the larger one had been used and was already out there, I did not want to just not ever mention it, because it is an obvious question. Typically we always talk about the 70-cow, Wisconsin dairy.
Mr. GREEN. The reason I draw your attention, as I have talked to other members, they are using the 600-cow number as much as anything. I think, unfortunately, it has been misleading in the debate that we have had over this issue.
My time is running out. Let me ask you this: In your analysis, were you using minimum prices or mailbox prices?
Mr. ANDERSON. It is a change in the all-milk price and using that, basically, as a proxy for, at least, a change in their mailbox price. It is a change in the all-milk price, as comes out of the regulatory impact analysis.
Mr. GREEN. Thank you, Mr. Chairman.
Mr. BRANCEL. Mr. Chairman?
Mr. POMBO. Yes.
Mr. BRANCEL. You asked one question; might I hazard an answer to it? You asked a question about compacts and the Federal order system and the relationship to those. Our analysis is if the compact doesn't accurately reflect the marketplace in the U.S. as a whole, then the compact holds prices artificially high, putting more product on the market. Then, under the survey of commodity products, the class III or the class IV price will be decreased and depressed, which means the Federal order prices will float downward.
Page 69 PREV PAGE TOP OF DOC That was my comments in my speech when I commented on compacts holding prices artificially high. Then you will have even a greater tidal wave effect on the Federal order system.
Mr. POMBO. Mr. Stenholm.
Mr. STENHOLM. Mr. Frydenlund, do you believe that compacts are unconstitutional, under U.S. law?
Mr. FRYDENLUND. I am not a legal scholar, but I think they should be declared unconstitutional. [Laughter.]
Certainly, an interference with interstate commerce. That should be unconstitutional.
Mr. STENHOLM. Any other witnesses at the table who are not constitutional lawyers care to give your unconstitutional answer to that question?
I mean, I hear a lot of opposition. I was not enamored, quite frankly, when we went to the Northeast Compact. I believe that a Federal system was something that we absolutely needed for the dairy industry, or any other industry. When we start splitting off into State efforts, we are going to run into trouble, as Mr. Peterson talked about. The differencethe regional differenceswe have always had them. I hear them at the table, today.
Now, we are talking in terms of a Federal law that was designed to eliminate the dairy support price by 2002, of which several of you have said you regret the administration didn't go further in this. Therefore, we are now beginning to struggle with this question. If it is not unconstitutional for States to attempt to do through compacts what we have been attempting to do through Federal order, what are we to do?
Mr. HUGOSON. Congressman Stenholm, you have asked a couple of questions there. Back to your first one, are they constitutional or not? I am not an attorney either, but in my view they do disrupt interstate commerce. That, to me, is a problem under the Constitution.
Page 70 PREV PAGE TOP OF DOC Mr. STENHOLM. But they don't have to. They only do so if, in fact, you price the product noncompetitively.
Mr. HUGOSON. Mr. Chairman and Congressman?
Mr. STENHOLM. I like the way you say that, but go ahead.
Mr. HUGOSON. Old habit, sir. When you look at how they are going to be structured, or appears that they will be structured, in such a way that the Midwest will not be able to access the sale of milk there; and yet the overflow class I milk comes back and impacts our class III prices, that becomes a real problem with interstate commerce.
I also would venture that I think we, other than ensuring almost certain constitutional challenge by someone down the road, also beg the question of are they GATT legal? Do we run into some problems as it relates to what we face on the international scene, as well?
Mr. STENHOLM. Let me switch it to a little different area. When we talk about the free market and let the market reign; when you have a large number of producers of all shapes and sizes, you have a real problem with survivability, even of efficient smaller farmers, unless they, through cooperative effort, work together in order to obtain the efficiencies of the market that are achieved by integrated companies, et cetera. It has been a perfectly legal, under the Capper-Volstead Act, process to go through. I am not sure quite how to answer this question.
In light of where this debate is going, and the difficulties that we have always had with Federal legislation on dairynow we are having multiple State involvedif producers choose to cooperate to the most full extent that we have ever seen, and are able to achieve the pricing and the inventory management that other businesses do, on a regular basis, would there be anything wrong with that, in any of your minds?
Mr. FRYDENLUND. Let me just speak up. There would be nothing wrong with that. That is independent. It is individuals banding together. It is not the same as the Federal Government creating a cartel.
Page 71 PREV PAGE TOP OF DOC Mr. STENHOLM. What if State governments, constitutionally, give these cooperative efforts tools that they might use in order to better accomplish the goal of which every single one of you, I believe, would want to see done: that is, to provide for a stable dairy industry in which dairy men and women might have an opportunity to profit in the market system. Would there be anything wrong with that?
Mr. BRANCEL. Mr. Chairman and Mr. Stenholm, that, in fact, has happened. States, or at least areas, have chosen not to go into the Federal order system, and to establish a different mechanism to address the issue. California is a perfect example. They have voted not to be involved in the Federal order system. We will all have to make that decision when, in fact, whatever rule is put forward by the USDA or by Congress. Once that decision is made at the local level, they can form large co-ops, who then have to go into the marketplace and compete. I don't believe they are going to be able to establish a price, at any set level, if they can't get rid of the product.
Mr. STENHOLM. That is a given. That is an absolute given. My time has expired for today. I wanted to broach this question: I think there is too much knee-jerk opposition to some of the efforts that are being talked about.
For example, compactsthey have real problems, but they don't necessarily have to be fatal as far as constitutionality, or, in fact, in result. So long as you keep supply and demand in line, and you have a reasonable pricereasonable being determined by what the consumer is willing to pay. Dairymen can't price their product, whether it is whole milk or anything else, higher than what the consumer will pay without taking a real hit in the marketplace. It happens.
But there we have another little problem because we find that fluid milk is not often priced based on what the consumer demand is. Milk has been used for loss leaders in many, many instances in which you price milk to bring people into your store. That is an accepted business practice. There is nothing wrong with that. It does really muck up the philosophical arguments that we often hear on the floor, and has been presented here, today.
Page 72 PREV PAGE TOP OF DOC I just raise this, Mr. Chairman, because as we get into this whole question of compacts, given the fact that my State is about vote one; and given the fact that I had real problems with the previous one, we are not taking a good hard look at it ourselves. Obviously, by my inability to ask the question succinctly, today, it is something, I hope, we can count on you helping with. Because the very question as to whether it is constitutional, or not, is going to be a very relative question to this. A lot of times we hear those who espouse the Constitution saying, ''Anything not written in the document is reserved to the States.'' If that is true, dairy compacts might very well be constitutional in the States.
Mr. PETERSON. Mr. Chairman, if I could just make a suggestion to the ranking member, maybe the solution is that we should just have this operate like California operates. If you have a compact, then you are out of the Federal order system.
Mr. STENHOLM. I have felt that about California for 20 years. [Laughter.]
But they never wanted to get ''kerplumb'' out of the Federal order. They always wanted the benefits of the Federal order, plus the benefits of a compact.
Mr. PETERSON. But they are not on the Federal order system. The Northeast Dairy Compact is in the Federal order system, and they have the compact on top of it. I think, maybe what we ought to do is legislate that if we are going to have compacts, you can't be in the Federal order system. That area is taken out and they can administer it themselves. They can do whatever they want.
Mr. STENHOLM. I yield the remainder of my time to the chairman from California and the other gentleman from California to answer your question.
Mr. POMBO. You are not going to get an argument out of either one of us. [Laughter.]
Page 73 PREV PAGE TOP OF DOC Mr. GUTKNECHT. Thank you, Mr. Chairman. I apologize. I was trying to vote on a rule approved by the Rules Committee, so I have been bouncing back and forth. I really do believe this is one of the most important issues this subcommittee, and ultimately, the full committee are going to deal with this year.
I would like to respond, just briefly, to Mr. Stenholm's questions. I would like to. At least for my understanding, most legal scholars believe that in and of themselves the compacts are unconstitutional. They do violate the Commerce clause. They have been authorized by the Congress. So, in effect, Congress has authorized them to do it, and therefore, they are constitutional as long as we approve them. If States were to go ahead and organize their own compacts without congressional approval, then the likelihood is that they would violate the Commerce clause. I believe that is the understanding.
I believe my colleague from Minnesota is also correct about the State of California, but I won't dig any deeper into that.
I say that this is one of the most important issues, particularly for the upper Midwest, because it is an issue that has caused a good deal of angst among dairy producers in the upper Midwest for a very, very long time. We finally saw a little bit of a light at the end of the tunnel. Now it appears that some of our friends and colleagues from different regions of the country are about to undo what has been done.
I want to especially say ''thank you'' to my friend, Gene Hugoson, Commissioner from Minnesota. He is more than just my commissioner, he is a friend of mine and has been for a long time. We thank him for coming out. I think he raised a very interesting point. Those of us in the upper Midwest already receive lessour producers dofor our corn, our beans and many of the other products that we grow and produce in the upper Midwest, simply because we are so far from the market. If we are going to continue to price commodities based on how far we are away from some geographical point, then I would hope that this committeethe Agriculture Committeewould take a serious look at it. Maybe we should price corn and beans based on how far we are from the nearest port. Because if fairness is what we are after in terms of coming up with commodity pricing that is regionally based, then maybe it is time that we say, ''The further away you live from Portland or New Orleans, maybe you should get more for your corn and beans.'' The problem, of course, with that is it becomes just fraught with all kinds of problems.
Page 74 PREV PAGE TOP OF DOC I don't really have any questions for this panel, but I do, again want to thank Chairman Pombo and others for helping to put this hearing together. I hope it will not be the last. It is a very serious problem. At first when the Secretary came out with his reform plan, there were a lot of people in my area who were very disappointed. I tried to remind them that it is like the story of the 95-year-old man and asking him what it is like to be 95 years old. I said, ''Considering the alternatives, it may not be that bad.''
So as we begin to see some of those alternatives coming forward, I think that the plan that the Secretary has put forward is an improvement; is a step in the right direction; does move us down the road toward fairness. And while it may not be all that the dairy producers in the upper Midwest would like to see, it is a whole lot better, I think, than where we are todayor where we could be, if these compacts are expanded. I believe that compacts, if they don't violate the Constitution, certainly violate the spirit of the Constitution and why the 13 colonies came together.
With that, Mr. Chairman, I would yield back my time.
Mr. POMBO. Mr. Dooley.
Mr. DOOLEY. I thank you, Mr. Chairman. I guess my first question to the panel would be does everyone agree that what the Secretary has proposed in the final rule is moving the pricing of milk in a more market-oriented direction than from what the status quo is? Does anyone disagree with that? Everybody agrees with that?
Mr. FRYDENLUND. Well, Congressman, that is very, very relative. I mean, I would not want to sit here and say that anything that is being done, either in Congress or the administration, is doing much of anything to move anything in a market-oriented direction.
Mr. DOOLEY. Certainly, of the alternatives that have been discussed, I would share Mr. Gutknecht's concerns that some of us were more excited about what the Secretary originally proposed. The only reason I bring this up is that the arguments that were made in challenging what the Secretary was doing really then are by proponents that are advocating that we move in a less market-oriented direction.
Page 75 PREV PAGE TOP OF DOC Mr. FRYDENLUND. Absolutely. That is why I would say the real prospect to be alarmed about is those that think that this baby step the administration has taken has gone too far.
Mr. DOOLEY. I guess I was reading the testimony of Mr. Anderson. I appreciate all the work that you did on this. If I understood correctly, you did the analysis in projecting the net cash farm income for herds around the country. For New York, in the year 2005, under the administration's proposal a 300-cow-herd in central New York could expect to have a net cash farm income of $347,000? That is on page 3 of the testimony I have.
Mr. ANDERSON. Yes, sir. That is with that representative farm, a very cost-efficient, very effective group of producers. Yes, sir.
Mr. DOOLEY. From my perspective, for a 300-cow-herd, a return, before you are doing some of your capital expenditures or debt financing, of $347,000I would think if I were a dairyman that a 300-cow dairy, today, knowing that I could make $347,000 in 2005, the signals it would be sending me would be to increase my herd to 600 cows, quite likely.
Mr. ANDERSON. There are a lot more bigger dairies around in some areas.
Mr. DOOLEY. So this is a trend that, basically, is inevitable in what we have seen happening.
Mr. ANDERSON. I think if you looked at structural change in the industry and dairy farms that are out there, the move is, clearly, to larger dairies. I think it has certainly been happening everywhere. It is due to profitability and cost-efficiencies in returns to scale and size. Clearly, that trend has been happening all over the country.
Mr. DOOLEY. I don't know how many of you had the chance to look at the table and the information Mr. Obey gave the committee, the source from the USDA, where they did the cost of production and the cash expenses for last yearbasically October 1998 to 1999. They range from a high, in the Southeast, of $17.65 a hundredweight, to a lowand there was a little bit of a misrepresentation on who is the lowest cost producer herein the Pacific of $11.24 a hundredweight. Would most of you agree that those are in the ballpark range, probablyI mean the USDA numbers? Yes, Mr. Brancel?
Page 76 PREV PAGE TOP OF DOC Mr. BRANCEL. As you use averages, they are very accurate. One of the things we have found in our State is we have smaller size operators that have gone to intensive rotational grazing; gone to least-cost inputs and production has dropped on those herds, but profitability has skyrocketed. We have also had those that have gone larger for efficiencies of scale and they have done fairly well. As averages go, I think you are pretty reflective of what is going on. But even in our own area, we see two different trends starting to happen.
Mr. DOOLEY. I think my colleague from Alabama and another one from North Carolina were speaking about their concerns in seeing a reduction in producer prices. But in some respects, a Federal policy is to ensure that any producer in the country, regardless of their cost of production, should be ensured a profit on their milk production. I mean, if we are going to try to move in a market-oriented direction, it is going to be tough to do that.
Why should we, in the future, have separate manufacturing classes? If we do, in fact, establish a value for different components of milk, why don't we let the market dictate that? Why should we have a system which price is always based on an end product? Mr. Stephenson?
Mr. STEPHENSON. Mr. Dooley, there is a regional difference to the value of milk. It is no different than New York apples are worth less in New York than they are in Florida. Oranges are worth more in New York than they are in Florida. Milk and its components differ across the country.
If you are going to choose to price things on a purely component basis, components have different values in different locations. For example, even in Florida where we have a very high class I utilization, cream, which is excess to the class I market can get trapped, so to speak, down in that region. It has a low value in some points in time. You are going to need to recognize the value of milk, whether it is on a component basis or on a hundredweight basis, some way.
Page 77 PREV PAGE TOP OF DOC Mr. DOOLEY. Why wouldn't the market dictate that? In California we produce a lot of milk out there. We have a lot of components of milk looking for homes throughout the country. If butter fat going into butter, or cheese, or whatever else, was of greater valuegreater demand for it going into therewhy should it be priced differently?
Mr. STEPHENSON. First of all, I think, you need to ask yourself, ''Do we need any form of regulation, at all, in this industry?'' If we look back in history as to why this regulation evolved in the first place: we have a product that is bulky; it is costly to transport long distances; it is perishable, and we had what was perceived to be an imbalance of power in the marketplace at that point in time. It gave it an unfair advantage to one side of the market. It created competition in the marketplace.
Mr. DOOLEY. Can you make that argument with the mergers of all the co-ops? Can you make that argument, today, that the co-ops that are producer-owned, there is an imbalance in the market power now?
Mr. STEPHENSON. I think I can, Mr. Dooley. I don't have any problem feeling that we would see a real difficulty in milk prices without some degree of regulation. If you are going to have regulation, that regulation ought to recognize regional values in milk. Those regional values change, over time. That should be recognized, as well.
Mr. POMBO. Mr. Minge.
Mr. MINGE. Thank you, Mr. Chairman. I would like to thank the panel for being here, especially Mr. Hugoson on behalf of the State of Minnesota.
I would also like to just ask the question, would we be better in the upper Midwest if we had no milk marketing orders at all, given the turmoil that we have gone through with this process over the last several decades and where we are today?
I know in talking with farmers in Minnesota I quite often hear the comment, ''What good is this doing us?'' We just had a comment from Mr. Stephenson about the vulnerability of milk in the marketplace that has no structure or regulation. But, I have heard the opposite comments coming more recently from our dairy farmers. I would like to ask, Mr. Hugoson, if you have any comment on that. Or, Mr. Brancel, or anyone else.
Page 78 PREV PAGE TOP OF DOC Mr. HUGOSON. Thank you, Mr. Minge. Actually, back when the 1996 farm bill was going on, at the Department of Agriculture we were advocating, along with Mr. Gunderson, to do away with the Federal milk marketing order system, in effect. We felt we would be in a better position. Given the direction that that did goor didn't gowe have, I guess, taken the position that, ultimately, that would still be desirable. But in the meantime, some type of transition working in that direction would make sense.
Again, looking at what we refer to as a leveling of the playing field; feeling that our people could compete in that kind of a situation: more market-oriented as opposed to looking at a location determinate as it exists now. That is why we have taken the position that while we would have preferred USDA and Secretary Glickman going farther than he did, nevertheless we applaud moving in the direction that he is, at this point; and support the Congress allowing that decision to stand. We think it is a step in the right direction.
Mr. MINGE. Mr. Brancel.
Mr. BRANCEL. One of the things that is really interesting in the State of Wisconsin is that we have to have products that we can price, so that when we meet at Ogalalla, NE, head to head with California, we can sell our cheese as well as they can sell their cheese. By the same token, we have to be able to go into the Indianapolis area, or Chicago, IL, and be able to push fluid tanker loads of milk in those markets.
So, it depends on the marketplace you are trying to access, what you really need your base price to be at. We believe that this rule that has been put forward more accurately reflects the marketplace for cheese, and still puts a balance in for fluid milk production.
If I were a fluid processor, what I would want to be buying from a farm is 1 percent-fat milk. I don't want all that fat. Because then I have to get it out and I have to try to move it. Unless, the market is high enough, I make a profit on that end, too. As a cheese processor, I would want to get high-fat, high-protein component milk of high quality, so that I don't have to move a lot of stuff. It costs me a lot of money to move all that water. All I want is the components out of the product to make cheese, so I can compete against him, because that is my competition.
Page 79 PREV PAGE TOP OF DOC So, it depends on the product you are making and the area you are going to. Whether the rule becomes advantageous to the entire State of Wisconsin, we don't know yet.
Mr. MINGE. Well, as I understand the perspective of many of the dairy farmers in the upper Midwest is that they are located in an optimum region for dairy farming, but they are located in the worst region when it comes to Government pricing policy. This work against an efficient allocation of resources within our Nation. What we have done is that we have, essentially, Balkanized the country into different economic regions for dairy purposes, at the same we are pursuing a free trade policy, globally. It is a very difficult concept for many of us to understand because of the apparent inconsistencies. At the same time, none of us like the volatility that we have seen in agriculture: corn, soybeans, wheat and other basic crops. Hog prices going down to $8.00 a hundredweight. We don't want that to happen in milk. But then we saw the basic price slip by about 35 percent in 1 week, and I am not sure if the marketing orders and the support price system are insulating us from that volatility in the dairy sector.
I would like to urge that as we proceed as a committee, and as we proceed at the Federal level, that we both try to deal with the problems of volatility, but not distort the allocation of our Nation's resources in dairy in a way that is fundamentally inconsistent with what we are pressing for, which is a free trade policy internationally, to encourage an optimal allocation of resources.
I feel that, although the Secretary has made progress here, that it is incremental, and it still leaves us dramatically short in the upper Midwest of what we feel is fair treatment of the farms in our region.
Thank you, Mr. Chairman.
Mr. POMBO. Thank you. I want to thank the panel.
Mr. GUTKNECHT. Mr. Chairman.
Page 80 PREV PAGE TOP OF DOC Mr. POMBO. Make it quick. We have got another panel.
Mr. GUTKNECHT. Since there has been a lot of discussion about compacts, I wonder if it would be in order not to take any bills or amendments dealing with compacts, since I think we have the votes now to lay them on the table. [Laughter.]
But, I do want to ask a question, and I think the commissioner from Wisconsin does have some information. One of the reasons the Northeast got into the dairy compact business was to protect small dairy farmers. Do you have any research on just how successful that was?
Mr. BRANCEL. Well, if you are referring to farmers that are still farming cow-herd sizeone of the comments we have consistently heard is compacts are maintaining family farms. And, in fact, using some data that we received from the NASS, the National Ag Statistics Service, we find that all of the farms lost in the State of Vermontwhich is a huge advocate for the compactwere all small-sized farms. They maintained all of the larger farms in their State. All of the smaller farms are the ones where they are having losses, and they still continue to have some losses, as we have in the Midwest.
Mr. GUTKNECHT. Well, thank you, Mr. Brancel. I just hope that you would share that with the committee, and when this issue comes up again, we will have some of that information. Thank you.
Mr. POMBO. I want to thank the panel for your testimony. There will be further questions that come from the committee; they will be submitted to you in writing. I know that there have been a few issues that have been raised, and I would like to give each of you the opportunity to answer those more in-depth for the committee hearing for the record. But, I appreciate you all coming in and testifying. Thank you very much. I will excuse this panel.
I would like to call up the final panel: Mr. Linwood Tipton, Mr. Jerome Kozak, Mr. Will Hughes, Mr. Paul Halnon, Mr. John Wilson, Mr. Paul Rovey, and Mr. Robert Junk.
Page 81 PREV PAGE TOP OF DOC Thank you all for joining us. Welcome to the committee.
Mr. Tipton, if you are ready, you can begin.
STATEMENT OF E. LINWOOD TIPTON, PRESIDENT AND CEO, INTERNATIONAL DAIRY FOODS ASSOCIATION
Mr. TIPTON. Thank you, very much, Mr. Chairman. We appreciate very much the opportunity to do this. And, we also appreciate the fact that you have called the hearing. I think that it has focused a lot more attention on facts already and less rhetoric than we have had on this subject for quite a period of time. So, I congratulate you for making sure that everybody that is involved has an opportunity to address the committee.
IDFA has long sought reform, and for many, many years a number of people have had mild support for reform and for more market orientation, but, in reality, have sought for more Government intervention. Unfortunately, I think that situation has not been changed a great deal, albeit, maybe is moderated somewhat.
There were three primary tenets of reform in the FAIR Act: Federal milk market order reform, the elimination of price supports, and temporarily authorize a Northeast Compact, which was to be terminated a month ago with implementing the Federal order reform. The approach of asking the Secretary to reform Federal milk marketing orders was only adopted by the Congress after they attempted to establish a number of specific rules, and specific kinds of regulatory program, toward re-regulation. We were unable to achieve a consensus, and so asked the Secretary of Agriculture to undertake that, which he has done. Unfortunately, in our opinion, anyway, there are some who would like to start that folly again, of seeing if they can rewrite specific language into the orders.
IDFA, like many others who have testified to our members, has really wanted more significant reform than is included in the final order. However, we believe they have begun the reform process, and we believe they have done a reasonably good job of addressing a number of the issues that needed to be addressed. And, so, we would definitely like to see the packages issued by the USDA in its final rule implemented without congressional changes.
Page 82 PREV PAGE TOP OF DOC Two or three of the reasons that we supported, particularly, one, some people have already addressed, the issues of manufacturing milk prices: One of the major things that we thought was extremely important, and was accomplished in the reform package, was to improve the alignment of manufacturing milk prices under Federal milk marketing orders with California.
California is the Noi. 1 milk production State in the country. It has increased its production by 9 billion pounds in the last 10 years. Nine billion pounds of increase is equal to the entire State of Minnesota's production annually; that increase in California is equal to Minnesota's production. It is 3.5 times the annual production in Vermont, just the increase alone.
Other western States have increased their production, as well. This is why it is so important to the Federal order. Prices were not in alignment with California under the current order provisions. California is number two in cheese production, number two in butter production, number one in nonfat dry milk production; it produces nearly half, about 45 percent, actually, of all the nonfat dry milk produced in the United States. It is extremely important, if you are in the business of competing with producers who are in California, or manufacturers who are in California, that you have some relative relationship in the prices between the Federal milk marketing order and California.
With respect to class I, there are two elements to the class I pricing mechanism. One is the basic mover; what changes the prices from month to month? And, the other is the class I differentials.
One of the things that few people have identified and talked much about is the fact that the basic formula mover, according to the USDA's calculations, would have been under the final order, actually, increases by 20 cents a hundredweight class I prices. That is based on the 1994 to 1998 comparison. If you look at the basic formula mover from 1996 to 1998, it was 60 cents. That is simply because they use the higher of the class III or the class IV price, and during a significant number of those months the class IV price was the price that was actually driving the prices, and would have been a substantial increase in the class I prices. In fact, that increase would more than offset the decreases in many of the class I differentials by use of the final order differentials as opposed to 1A. Nobody wants to talk about that, but that is a significantly important element.
Page 83 PREV PAGE TOP OF DOC Simply said, you can't focus on one part of the program without the others. 1A is an issue we concur with what most of the other analysts have said: that there probably is not a really large, significant impact from the final order from what current revenues to dairy farmers are. However, if they were to implement 1A, that would increase the amount of revenues rather significantly, and would increase no production and would further decrease the manufacturing milk prices.
We think that most of the analysisI've just got a couple more comments and then, I will concludebut, most of the analysis, I think the FAPRI analysis is recently on target and, I think that the USDA analysis is recently on target. Most of those still underestimate what will actually happen in the marketplace. FAPRI has indicated they did not change the class I premiums. I think there will be class I premiums. There will be an increase in class I premiums, particularly if FAPRI is right, that there will be higher premiums for manufacturing milk. I think that you can't change that relationship between manufacturing milk and class I prices very much. So, I think there will be higher prices on class I milk as well.
We support forward contracting very much, and would like to have seen that in the rule. It was not. And, we are really concerned about the compacts and weseveral of the questions today wereand I would like to characterize it and I will close with this: that, really, as we see compacts, it is a device to attempt to protect the high-cost dairy farmers from the competitive forces of lower-cost dairy farmers and, to the extent that they are regional, that is what it is. And, we believe that is a violation of the Constitution, and we are very hopeful that that will not be pursued and forced into litigation. Thank you.
[The prepared statement of Mr. Tipton appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Page 84 PREV PAGE TOP OF DOCSTATEMENT OF JEROME J. KOZAK, CHIEF EXECUTIVE OFFICER, NATIONAL MILK PRODUCERS FEDERATION
Mr. KOZAK. Good late afternoon, Mr. Chairman and Vice Chairman, Mr. Subcommittee Member.
I am Jerry Kozak, chief executive officer of the National Milk Producers Federation. I am here today to discuss NMPF's reaction to the USDA's final rule on Federal milk marketing order reform. Today, I will specifically focus on how the rule will negatively impact dairy producers from a national perspective, not a regional perspective.
The final rule makes many reforms that will improve the milk order program, and USDA did accept several modifications that our organization had suggested last year. Howeverand this is a big howeverthe final rule does something enormously consequential that Congress did not suggest: It reduces prices dairy producers receive for their milk by hundreds of millions of dollars annually. Specifically, the USDA proposal slashes class I differentials and provides cheese manufacturers with a make allowance that exceeds their manufacturing costs and virtually assures them of much more significant profits, while placing the greater financial risk upon dairy producers.
NMPF has estimated, based on USDA's own data, that if we would have had this program in place during the past 5 years, dairy producers would have received nearly $1 billion less in revenue. And, I was comforted to see Mr. Collins admit that, after the analysis produced by the legions of economists at USDA, they couldn't come up with very significant difference between, quote, what he called our ''flawed revenue.'' Something is discouraging about that.
In fact, he said it was a simple arithmetic average that we created. And, in fact, it is not true; we went back and used their actual numbers. We did use an arithmetic average, but we didn't take into consideration, as he indicated, supply and demand.
Page 85 PREV PAGE TOP OF DOC But, in USDA's own analysis, they demonstrate that their presumptions are less than 0.5 percent. So, therefore, I think we are really right on target.
And, the final comment I have for Mr. Collins is that he may not think $150 million is a significant amount of money, but I wish he would stand up in front of all dairy producers, no matter what region of the country they are, and make that statement. I think he would be aghast as to what the reaction would be.
I also want to draw your attention to the FAPRI analysis, which Scott Brown just discussed. FAPRI's assessment of the final rule found the class I differentials dropped nearly 30 cents per hundredweight and class III prices nearly 50 cents per hundredweight lower than the BFP. This combined, and I am quoting, ''nearly 75 cents less, than the current system.'' FAPRI's results are consistent with our analysis.
Now, USDA has tried to have it both ways. Let me quote from the Department's press release on March 31. ''The goal of reforming class I differentials is achieved by using generally higher differentials, as proposed in option 1A, while retaining the pricing surface of preferred option 1B.'' Mr. Chairman, you can put lipstick and a dress on a cow and call her Madonna, but she is still a cow. And, despite USDA's attempts to gloss over the fact that they tried to achieve a compromise on class I, they have given us a dressed-up version of option 1B.
At these committee hearings last year, on the initial rule, I testified that the class III make allowances in the proposed rule were too low, based on our members' manufacturing costs. In an effort to move closer to market conditions, without substantially decreasing producer income, NMPF did submit comments demonstrating how the proposed rule could be improved. Our proposal contained a recommendation to increase the class III make allowances to support reasonable manufacturing costs.
The comments we submitted specifically opposed modification of class III price formulas below historic levels. We asked for a haircut and they responded by shaving our head. They have simply gone too far in increasing the make allowances and reducing producer income.
Page 86 PREV PAGE TOP OF DOC Mr. Chairman, in conclusion, I realize the Federal order process has been contentious and difficult. I commend this panel for their continual oversight and concern about the issue as the process has evolved.
I also want to recognize USDA's efforts to reform the Federal orders. It wasn't an easy assignment, but, unfortunately, they have not made anything easier with some of their key decisions. No matter how many rosy projections USDA has put forth using what we feel is unrealistic economic assumptions, they can't explain away the fact, that, by dropping the class I price 29 cents and the class III price 47 cents, dairy farmers across this country will lose significant revenue. How can USDA confidently assert that the world price of 60 cents to 70 cents per pound of nonfat milk will rise to $1.40 in the year 2005? Mr. Collins has already noted that that is a fallacy. And, that is without a price support program.
In fact, only in the year 2000, as Mr. Collins demonstrated, is the net revenue to producers, nationally, increaseda prediction, we feel, is based on assumptions of high values for butter. Without a positive year 2000, as Mr. Collins said, the revenue loss for producers will be, in fact, much greater than $2.8 million, which is projected by USDA. We can't afford to risk the livelihoods of hard-working dairy farmers on this type of manic speculation.
Mark Twain said ''There are two times in a man's life when he should not speculate: When he can't afford it, and when he can.'' Dairy farmers can't afford to speculate on whether USDA's overly optimistic analysis will be good for them. This committee and this Congress cannot allow USDA to risk the future of dairy farmers through this proposal, America's dairy industry has too much riding on it.
In conclusion, given the final rule as it has been proposed, the Federal order referenda, this August, will give our producers, a choice between the lesser of two evils: either no Federal orders or a severely compromised, poorly-constructed program that reduces their income. Dairy farmers are counting on this subcommittee, and this Congress, to rectify those problems, so that dairy farmers will have something to vote for not against. Thank you.
Page 87 PREV PAGE TOP OF DOC [The prepared statement of Mr. Kozak appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
STATEMENT OF WILL HUGHES, COORDINATOR, UPPER MIDWEST DAIRY COALITION
Mr. HUGHES. Thank you, Chairman Pombo and other members of the subcommittee. I am Will Hughes. I coordinate the Upper Midwest Dairy Coalition, which is a group of 19 organizations in the upper Midwest, and we represent about one-third of the milk and about one-third of the producers in the Federal order program.
I learned something the last time I testified, going before Jerry Kozak, to use a prop. And, to use a lighthearted example of a short statement that I could make, it would be our recommendation that we appreciate you overseeing what is going on with USDA and this reform activity. But, either I could give you the aspirin to cover your headaches, in trying to legislate on this complex program or, as I suggest, we could give it to USDA, who is sitting behind me, and let them deal with it. There is a lot of good people in the dairy industry and we can work this out in the administrative process.
I hope you are not overly frustrated with the wide differences in opinions offered today about the USDA's final decisions and its impacts. I think I feel a little better today about what has come out about some of the analysis. And, it is typical of the decisiveness that we have seen, and it comes about from treating dairy farmers differently according to where they live; whereas, in other Federal programs involving agriculture, we essentially treat farmers fairly and fairly uniformly.
I want to leave you with five key points. I hope that they stand out.
Page 88 PREV PAGE TOP OF DOC Point 1, the dramatic impacts of revenue losses to farmers are mainly predicted by those who seek to protect their advantage under the current system or status quo. The analysisI think Keith Collins did characterize it properlyis pass-through accounting, back of the envelope, is another way to calculate; it is incomplete analysis. And, really, it constitutes scare tactics to ensure that legislation is promoted to keep status quo. I don't think that is a good approach.
Also, to quote Mark Twain, as Jerry did, Mark Twain said that, ''There are lies, damn lies, and statistics.'' We think the most complete and accurate analysis today is that that has been done by USDA in their regulatory-impact analysis. It takes a large, complex, economic model to accurately predict what will happen. Historical analysis is unlikely good at predicting the future.
USDA's analysis shows that the impacts, overall, are nearly revenue-neutral. Reasonable modeling of the new formulas do respond to market forces and result in near revenue-neutral impacts. Remember, Federal order prices are minimums; they do not represent the actual prices paid to farmers. Note that, in all milk prices a mailbox price is published by USDA. USDA has been very careful to minimize the adverse impacts of the rule.
Point No. 2: the large losses predicted on class III will not happen because: (a) Federal orders do not set prices for commodities, meaning cheese, butter, and powder, markets do, and the class III formulas will reflect those product prices; (b) commodity prices will adjust to supply and demand forces and set the correct price levels; (c) premiums exist in payments for milk used in class III and will continue to do so, and most of the analysis ignores this.
I am not suggesting that these formulas are perfect. We did not propose these formulas. But, as Winwood Tipton has said, and some others said today: California in the West sets the economics for commodities and is pulling the rest of the country toward their system. USDA had a difficult choice to make in how they drew the lines. And, on balance, considering the whole package, we are willing to let it be tested in the marketplace and deal with it administratively, if adjustments are needed.
Page 89 PREV PAGE TOP OF DOC Point No. 3: Those who claim the large loss of impacts on class III, and then propose to fix that by legislating 1A differentials, are fooling producers. They, in doing so, would shift revenues from producers, whose milk is used in manufacturing form, to those who has used in fluid form. And, that is sort of like Robin Hood in reverse. The irony of this is that farmers everywhere depend on manufacturing revenues, which you have heard about today, and manufacturing milk volumesno excessthat is used in fluid volumes.
Point No. 4: class I differentials need to be flattened out, and they should have been flattened out even more to reflect modern and realistic economics of milk transportation and processing. The upper Midwest seeks this flattening to level the playing field. We did not seek higher differentials in the upper Midwest, because we could not come up with the justification for it on an economic basis. The Cornell model, though, provides good framework for a nationallyand I emphasize ''nationally''coordinated and efficiently allocated milk system. And, why should Federal orders set prices higher than that efficient system? They shouldn't. And, if it does, it will distort markets, as a consequence.
The only argument to keep the large differences in class I differentials is to protect local milk prices relative to Eau Claire in the upper Midwest. And, that is protectionist clothing in otherwise domestic free-trade wardrobe that we are trying to operate here in this country. Why is dairy different than other commodities? They are not. And, as you have heard today, dairy compacts will have similar effects and wear some of the same badge of dishonor.
Point No. 5: USDA's final decision relaxes only modestly the degree of price intervention. That is good for both producers and processors. It allows the market to work. However, it still provides a framework of protection on minimum pricing; yet, it stimulates innovation. This overhaul is long overdue. USDA has done a good and thorough job. Not everyone got everything that they wanted, but nearly everyone got something that they did want. It will need a lot of micro-level and macro-level adjustments as we proceed forward, and USDA is in the best position to make those adjustments.
Page 90 PREV PAGE TOP OF DOC Just quick, with three recommendations: let producers decide the fate of the rule, Congress avoid legislating details in this complex program, and (c) ask USDA to monitor the following factors and address any problems in follow-up rulemaking: farm level prices in revenues, milk supply-and-demand balance, price volatility, economic dislocation, and equity.
Finally, Congress should work towards tools to support all dairy farmers equitably without creating burdensome market distortions. One place to start is to extend the support program until we can look more comprehensively at other income support tools that will support dairy farmers equitably. Thank you.
[The prepared statement of Mr. Hughes appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Halnon, before you proceed, we have a vote, a series of votes going on on the floor right now. I believe there are four votes that are going to occur. So, we are going to be over there for a little while. I can give you the option of submitting your testimony for the record, and we will adjourn the hearing and submit questions to the panel for the record. Or, we can recess, go take our votes, and come back. I don't know what your schedules are. I know that I have a number of questions for this particular panel, but it is getting late and I will leave it up to you.
Mr. HALNON. Do you want me to respond to that?
Mr. POMBO. You can. [Laughter.]
Mr. HALNON. I am at your disposal. I will do it whichever way you want.
Mr. POMBO. OK, we are going to recess and then come back. If there is any of you, because of planes or other reasons, who can't stay, I will ask unanimous consent that your entire testimonies will be included in the record. But, we are going to recess. It will probably be about 45 minutes so you can go get a Coke, and we will be back.
Page 91 PREV PAGE TOP OF DOC [Recess.]
Mr. POMBO. If we could have everybody at the witness table join us back in the room, please?
I apologize for the delay. Mr. Halnon, if you are ready to begin again.
STATEMENT OF PAUL W. HALNON, DAIRY ECONOMIST, SOUTHEAST MILK INC.
Mr. HALNON. Thank you, Mr. Chairman. I am here today representing Southeast Milk, Inc., which is a cooperative association that represents all of the producers in the State of Florida and those that would be regulated under the Consolidated Florida Milk Order.
As you probably recall, we have, from the start, maintained that the orders were not in need of major reform. And, the Department's final rule essentially accepts this. It makes improvements in the classification allocation provisions. It accepted it except for the pricing provisions.
The recommendation for class I is going to cause some serious marketing problems in the Southeast, and that is our concern. The committee has heard today about the level and relationship of all class prices included in the final rule. Since the industry in the Southeast is one that primarily produces for the fluid market, I would like to limit my testimony here today to class I prices. However, we do support the Milk Producers Federation and their efforts to obtain more realistic class III, class IV, and basic formula prices.
The Department's final rule includes a pricing plan that is patterned after 1B, even though there are some slight increases over the 1B that was proposed in the proposed rule. In the Southeast, where production is not sufficient to satisfy fluid demand on a year-round basis, the decision will reduce class I prices, and in many cases in significant amounts. In earlier testimony we had stated our concerns about this and we urged the Department to adopt pricing option 1A.
Page 92 PREV PAGE TOP OF DOC Pricing option 1A is a alternative that does not drastically change the current system and has worked well for over 60 years in assuring our Nation's consumers an adequate supply. It has the support of an overwhelming majority of the Nation's dairy farmers, and that was evidenced by the number of submissions to the USDA in response to the proposed rule.
The situation in the Southeast has been especially difficult and farmers have been leaving the dairy industry at an alarming rate. Over the past several years, the deficit situation has become more critical, as evidenced by USDA's annual milk production data.
USDA's annual report shows that milk production for the 10 States that comprise the major production areas for the Southeast has declined over 15 percent in the last 6 years, with declines occurring in every single year, including last year, incidentally, when the prices were at all-time record highs.
Production declines have been the most in 6 years in the States of Kentucky and Tennesseeand these two States are the leading milk-producing States in the Southeast, along with Florida. In Kentucky and Tennessee, the production has dropped in the last 6 years more than 20 percent. These production declines have occurred even though the population of the Southeast has continued to increase at a rapid pace. The combination of declining milk production and increasing population has meant the greater and greater quantities of supplemental milk has had to be imported from more distant areas to fulfill consumer demand.
In justifying the reduction of class I prices, the Department suggests that producers should rely more on negotiated over-order prices. In this connection, it should be pointed out that dairy farmers in the Southeast have always had to rely on over-order prices, but it has been done with mixed results. The ability of producers to obtain adequate negotiated prices depends, in large measure, on the extent to which they are organized in cooperative associations. With the exception of Florida, there has always been a sizable number of producers in the Southeast that have not been represented by co-ops. Therefore, they must negotiate individually with processors.
Page 93 PREV PAGE TOP OF DOC In this situation, over-order price negotiations has had mixed results, and the resulting market prices are seldom uniform among handlers. There is no reason to believe that producers will be able to bargain for even higher over-order prices to compensate for the lower class I prices that are included in the final rule.
Even in Florida, where all producers are organized in a co-op and where over-order prices have traditionally been the highest, the final negotiated price must recognize the prevailing prices in surrounding markets. So, any reduction in prices in other Southeast markets will be immediately reflected in Florida negotiated prices.
Producers' inability to bargain effectively for a reasonable price for their milk supply is one of the more important reasons for producers to seek a milk order. The uniform market prices that have resulted from Federal regulation have contributed in large measures to the orders' success. It seems to us that reducing class I prices, either through lower class I differentials or lower basic formula price in areas where it is acknowledged that present prices. does not generate adequate supplies, will recreate the very market instability that orders were designed to correct. It should be clearly understood that reducing class I prices in the Southeast, as the Department final rule does, will not mean lower consumer prices. It will mean, however, that the decline in production in the Southeast will be accelerated, with the resulting increased reliance in milk imported from other areas.
Because of its bulk and perishability, transportation costs for fluid milk invariably make imported milk more expensive than locally-produced milk. So, further declines in local production will necessarily mean higher milk costs for processors, which, of course, will result in higher retail prices for consumers. This needs to be emphasized, Mr. Chairman. There is no area of the country where milk is cheaper when it is imported. The transportation cost for milk, invariably, makes local-produced milk less expensive than imported milk.
The supply situation in the Southeast is going to be further impacted in a negative way, because the basic formula price that is used as a basis for all class I prices, as adopted in the final rule, will result in a lower class I price than provided at the present time. While we recognize the need to develop a replacement for competitive pay price now used to determine the basic formula price, any change in the method of computation should not result in an additional price reduction to producers. Consequently, we support the recommendation of the National Milk Producers Federation to address this problem and we support their efforts in this regard.
Page 94 PREV PAGE TOP OF DOC Mr. Chairman, we appreciate the opportunity to testify here today, and I will stand for any questions. Thank you very much.
[The prepared statement of Mr. Halnon appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
STATEMENT OF JOHN WILSON, CORPORATE VICE-PRESIDENT OF MARKETING AND ECONOMIC ANALYSIS, DAIRY FARMERS OF AMERICA
Mr. WILSON. Thank you, Mr. Chairman. My name is John Wilson. I am corporate vice-president of marketing and economic analysis at Dairy Farmers of America. I am speaking on behalf of 24,600 dairy farmers, who own our cooperative. DFA is a dairy cooperative that is strictly owned by dairy farmers, no other owners. Our purpose is to market all the milk produced by those farmers every day of the year.
DFA owners operate dairy farms in 45 States and they will produce about 21 percent of the national milk supply in 1999. That should illustrate that we are not regionally biased. We do look at the national impact of what happens to DFA members, which should be a microcosm of what happens to all dairy farmers nationally.
Dairy farm families still need Federal orders in order to get a fair price for their product. The basic purpose of the Federal order system is to establish minimum farm prices at a level that assures consumers of a sufficient quantity of milk. In doing so, Federal orders provide for classifying milk according to how it is used, and establishing minimum prices for each use.
The system brings order to a market that is naturally out of sync because of two simple realities: one, that milk is highly perishable; and, two, that cows produce milk on a different schedule than consumers drink it. Milk's perishability requires it to be sold every day or every other day at least, according to health department requirements. Seasonally, the supply and demand don't match up very well; more milk is produced in the spring, the demand is heaviest in the late summer and fall. Each week of the year we have variations in demand. Cows within a week may produce about the same amount, but consumers go to the store more often on the weekend and, consequently, the demand for fluid milk is heaviest during the latter part of the week.
Page 95 PREV PAGE TOP OF DOC So, because of this, this means that, really, in order to have a sufficient quantity of milk every day of the year, we really have to have more than we really need for most days of the year. That puts dairy farmers at a competitive disadvantage compared to invester owned processing plants when negotiating for prices. That gets into this whole argument of over-order premiums and cooperatives charging over-order premiums. And, this gets to the nuts and bolts as to why it is difficult to significantly change over-order premiums. The situation caused Federal orders to become public policy in 1937 and many of those same circumstances are unchanged today.
In the final rule, there are two main issues upon which DFA has major disagreement with the Department of Agriculture: class I differentials and the class III price. I would like to address class I differentials first.
Class I differentials play the predominant role in assuring consumers of an adequate supply of milk nationally. If farmers can't get a fair return for their product, they will go out of business. Second, it is the pricing mechanism that causes milk to be attracted from surplus areas to deficit areas. It really is one that, in theory and in practice, puts into play the location value of milk, as Mark Stephenson was referring to earlier. Because fluid markets are regional and not national, the differentials must vary regionally to reflect different population masses, milk production costs, transportation costs, and service costs.
The final rule refers to two options on class I: option 1A, which is pretty much the status quo, and option 1B. The final rule referred to a modified version 1B plus 40 cents, but it looks very much like option 1B to us.
The price surface was generated by a Cornell computer model, in which we take issue. We don't believe the Cornell model was developed for this purpose. It was developed to illustrate the fact that there is a location value to milk, but not to be micro-managed and, specifically, put into place as the Department has used it.
Page 96 PREV PAGE TOP OF DOC The map, the one the Congressman raised earlier, which I think came from my testimonyshows the red areas of class I price declines and the green areas of class I price increases. And, very much, we have a problem here. The Department has taken the class I prices down in areas where we already don't have enough milk, and effectively raise prices in areas where there are heavy quantities of milk relative to class I demand. We don't have a problem with raising the upper Midwest class I differentials; we support that through 1A, but we do have a problem with lowering the differentials in the deficit areas.
The other major issue is class III, which does impact class I prices. It is part of the foundation for the class I price, and I guess what really concerns us most about class III is that it is a part of the decision that guarantees that total returns will be reduced to all dairy farmers in the country. We don't believe there is a lot of discrimination here; the class I price reduction certainly impacts the high class I utilization markets; the class III impacts the heavy class III utilization markets. So, the Department pretty well covered the Nation on this reduction of returns to dairy farmers.
My time is up, so I would certainly take questions at the appropriate time.
[The prepared statement of Mr. Wilson appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
STATEMENT OF PAUL ROVEY, CHAIRMAN, DAIRY ADVISORY COMMITTEE, AMERICAN FARM BUREAU FEDERATION
Mr. ROVEY. Mr. Chairman, committee members, my name is Paul Rovey. I am a dairyman from Glendale, AZ and chair of the American Farm Bureau Federation Dairy Advisory Committee. I am also a member of numerous dairy and industry boards. My testimony today is presented on behalf of the 4.9 million members of AFBF.
Page 97 PREV PAGE TOP OF DOC Milk order reform is an important issue to our many dairy producer members, as it directly affects our livelihood. AFBF has been actively involved in the order reform process from the beginning. We have sought to involve producers in the process and worked to develop a system that can best serve the long-term needs of the industry.
The final rule presented by USDA includes class I differentials that were a compromise between options 1A and B in the proposed rule. In comments to USDA on the proposed rule, AFBF supported the use of option 1A differentials.
The final rule makes several changes that impact farm prices. This, coupled with the limited data, makes it difficult to accurately assess the likely impact on producer income. Concerns exist relative to several factors that impact price. It is our assessment that the class III mover will have the greatest impact on all producers, but the class I differentials and the class I movers are concerns as well.
I would like to begin by looking at the class III mover. We support the concept of component pricing as included in the rule. This is the best way to obtain prices from a competitive market environment for use in producer pricing. We are concerned that the formula included in the final rule by USDA gives an average price that is 47 cents less than the BFP for the same time period, according to USDA. The primary reason for the lower class III mover is the make allowance used in the final rule. AFBF suggests that the allowances in the proposed rule were too low, and consideration should be given to the use of a national survey, such as that of the rural cooperative business services.
The class I mover is also problematic; it is based on the higher of the class III and class IV movers, as calculated from the most recent two weeks of data. In theory, this will provide somewhat greater stability for class I prices, since the two movers may not move in concert. In reality, it is expected that the class III mover will provide the basis for the class I mover in most months. This is due, in part, to the policy decision included in the 1996 farm bill that ends the dairy price support program on December 31, 1999. With the elimination of the price support program, most observers expect nonfat dry milk prices to fall to levels much closer to the world prices. AFBF supports the use of option 1A. In the final rule, USDA indicates that the class I differentials incorporate those of option 1A from the proposed rule, but the surface of 1B. In general, 40 cents was added to the proposed 1B differentials.
Page 98 PREV PAGE TOP OF DOC After considerable evaluation, it does not appear that the result will serve the industry well. The average differential is close to the current level, but on a State and regional basis there are substantial differences. A primary function of the class I differential is to facilitate the movement of fluid milk from areas of reserve supply to those where it is needed to meet fluid needs. In order to do this, the differential needs to cover a reasonable portion of the cost of moving the milk, an adequate revenue to encourage moving it out of manufacturing plants.
Milk tends to be in shorter supply in the Southeast and short of total needs in much of the area east of the Mississippi. Yet, the Southeast and the Northeast face significant reductions in the class I differentials. This appears to run counter to industry needs. Comparing the current differentials with those in the final rule, 39 States have lower values while 9 are higher. Overall, incorporation of the 1A differentials, or something closer to them, would best serve the interest of producers, processors, and consumers.
In looking at long-term impacts, the USDA estimates that producer income will decline $2.8 million a year under the final rule. This appears extremely optimistic. Other industry sources have estimated that annual producer revenue losses range from $196 million to $583 million. The USDA projection numbers are significantly higher than all other industry projections.
In summary, the final rule on milk order reform includes a number of useful changes to the Federal milk order system, but it has several problems. In general, the 11 consolidated orders should serve well. We would have preferred to see all of Pennsylvania and New York included in the system, but, in general, the new orders are appropriate.
The move to a component pricing system and inclusion of somatic cell count levels in selected orders provides a price-finding mechanism that can function for the long term. A major problem does exist in the make allowance used in determining producer prices. The class I mover is of a concern, too, and that is based on the higher of the class III and IV movers. The class I differentials are also a concern. The differentials in the proposed rule appear to work contrary to the needs of the industry.
Page 99 PREV PAGE TOP OF DOC AFBF would support extending the Dairy Price Support Program until 2002 and continue to evaluate options for producers, during that time, reduce the make allowance in the price formulas to levels consistent with the RCBS survey, incorporate differentials similar to the modified 1A values from the final rule.
We appreciate the opportunity to provide these comments on the final rule. AFBF looks forward to continuing to work with the industry to put in place a system that will best serve the long-term interest of the dairy industry. Thank you.
[The prepared statement of Mr. Rovey appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
STATEMENT OF ROBERT JUNK, PRESIDENT, PENNSYLVANIA FARMERS UNION, REPRESENTING THE NATIONAL FARMERS UNION
Mr. JUNK. Good afternoon, Mr. Chairman. My name is Robert Junk. I serve as president of the Pennsylvania Farmers Union; also, board member for the National Farmers Union, and formerly was involved in a family dairy partnership. Today I am testifying on behalf of the 300,000 families who are members of the National Farmers Union.
We believe that the market order system has been successful in ensuring that dairy farmers are paid, and that payment is on time. Therefore, we have supported retaining the Federal order system. However, we believe that the dairy reform is necessary to ensure that dairy farmers receive a fair rate of return on their investment. This goal could be partly met by reform of the basic formula price.
We are also looking for changes to help reduce market volatility. This goal could also be met by implementing a floor price on the base price of milk. However, the final proposal for the Federal market order system announced by USDA is unlikely to accomplish either goal. Instead, the final proposal results in less income to dairy farmers.
Page 100 PREV PAGE TOP OF DOC We don't think Congress intended to order reform to reduce farmer income. Therefore, it is imperative that Congress takes action to: number one, file an objection to the proposed final rule by May 29; second, pass separate legislation to reinstate the dairy support price at a significant level to achieve price stability and enable dairy farmers to earn their cost of production plus a reasonable return on investment. And, I would just like to make a note: $9.90 is too low.
The nature of dairy production is critical. As a result, it is not unusual to have increased milk production in the spring and decreased milk production in the fall. With these changes come price fluctuation. Our concern is that dairy farmers must be able to earn their cost of production, plus a reasonable profit, on an annualized base. The current market system is falling short, and as a consequence, the number of dairy farmers continues to decrease.
On April 27, National Farmers Union hosted an Agricultural Summit to provide an opportunity for producer groups to find areas of agreement on farm policy. Members of the leadership of 29 national farm and ranch organizations participated. All policy was adopted by consensus, with a group given the opportunity to veto a particular policy. At the end of the day, the groups reached consensus on many areas, including agreements on principal governing dairy policy. Twenty-nine groups agreed on the following:
One, we support the continuation of the Federal market order system. We oppose the reductions in dairy farm income, as evidenced by the March 1999 Market Order Reform Plan announcement.
Second, we support the continuation of the current Dairy Price Support Program through 2002, to commence with the farm bill expiration. And, I am going to skip the next section for timing.
Going right to the concerns, in addition to failing to provide price stability, National Farmers Union has other concerns on the proposed final rule. The proposed differential creates a problem since it reduces farm income for many producers. We believe a better solution is to increase the differentials for regions of the country that are currently receiving low differentials, while maintaining the current differential for the balance of the country. This would level the playing field, instead of dragging producers' price down.
Page 101 PREV PAGE TOP OF DOC The increased processors make allowance is also a particular concern, since it ensures the processors receive their cost of production, but does so at the expense of the producers. Therefore, since the new proposal would result in a make allowance that is even higher than California's make allowance, producers in California may see further reduction in their price they receive for milk used for manufacturing, to enable California to sell manufactured products to the rest of the country.
National Farmers Union urges Congress to direct USDA in including California in the Federal order proposal, to at least give California dairy farmers the opportunity to vote on whether to join the Federal order system. Members of the California Farmers Union have previously petitioned USDA to join the Federal order system. This week they filed a second petition, based on USDA revised Federal order proposal. We believe that their petition meets with the provision of the 1996 FAIR Act that requires California to be included in the reform if producers from these States petition to be included.
A final concern involves individual voting. Federal law provides that cooperatives may block vote changes to the Federal order system. While that law may have merits in the case of minor changes, we believe that this major overhaul of the Federal order system is different, and should be voted on by producers as individuals. Therefore, we urge Congress to enact law to provide for individual voting for a one-time vote on this major reform.
In conclusion, we recognize that reform of the Federal Order System has been a major undertaking for USDA, requiring hundreds of hours of work for many. We appreciate the effort that has been made, particularly in the efforts to solicit public input. However, we urge that some key adjustments are made before the proposal is sent to producers for a final vote. We offer to continue support to help in the efforts to improve the Federal milk market order system.
Thank you for holding this hearing and for the opportunity to present testimony on behalf of the National Farmers Union.
Page 102 PREV PAGE TOP OF DOC [The prepared statement of Mr. Junk appears at the conclusion of the hearing.]
Mr. POMBO. Thank you. One of the things that has come up today is that option 1A is basically status quo with very few changes from current laws. Do any of you disagree with that?
Mr. KOZAK. Yes, I disagree with that. I think that if you look at the actual differentials, you will see that option 1A was adjusted from the current law. As an example, there are other areas in the upper Midwest that get a higher differential, and there are some areas that get a lower differential. So, I don't think that we can conclude that option 1A is a status quo.
In fact, I get a little confused, Mr. Chairman, because I heard a lot of rhetoric in the upper Midwest about the class I differentials; that, if you look at option 1A, the legislation that is being proposed by Mr. Blunt, the class I differential in Minnesota is $1.70; whereas, in Mr. Glickman's proposal it is $1.60.
I heard Congressman Obey and Congressman Kind testify today. We looked at their districts; we knew they had concerns. And, if you look at the differentials in 1A and 1B, 1A has about an average of $1.70, $1.71, whereas, the option 1B USDA adopted is $1.65. So, the notion that it is status quo I don't think really exists.
I think that, if you look at both of the options, that the 1A legislation we are supporting addresses the upper Midwest concerns. It increases the differentials in the upper Midwest.
Mr. POMBO. Let me ask you this, then: One of the fears that I have heard repeatedly over the past several months is that, by increasing the price and increasing the production, that you put more pressure on the manufactured milk. And, if you flood the market with manufactured milk and drive down the price on manufactured milk and areas that are manufacturing areas, regions of the country that are manufacturing areas are going to suffer under that scenario. I know that your organization is national. How do you respond to that? How do you deal with your membership that is going to receive the lower price on the bulk of their milk, because of what is being advocated?
Page 103 PREV PAGE TOP OF DOC Mr. KOZAK. If I understood your question, are you talking about the class III price issue?
Mr. POMBO. Yes.
Mr. KOZAK. OK. We have made it very clear from the beginning that when we developed our position at National Milk, it was a package position. Just like everybody else in this room, we have members who have a different opinion about a whole bunch of different things. What we strived very hard for was to move in a direction on a national perspective that would have more market-oriented approach. We were the first national organization that advocated increasing the make allowances on class III prices because we recognize that even our membership in the upper Midwest wanted to be more competitive with California. We took that bold step.
If anyone thinks that we haven't been beaten up by producers recently about making that step, they should be in my office and listen to the phone calls, listen to the e-mail. But, we thought it was the right thing to do. We thought it was a compromise position, and our package resulted in a revenue-neutral income when you looked at all the aspects.
When our board voted recently, based on what the USDA final rule was, their vote was not just on 1A, 1B; their vote was to continue to advocate the position that we at National Milk from a national perspective advocated, and that was looking at all the classes.
It is pretty clear that there are people in this room, on the subcommittee, that need to look at those class III prices. Again, using Mr. Kind and Mr. Obey, I calculated out that they are going to lose about $65 million in class III revenue as a result of the decisions that USDA made. So, today, we are focusing on the entire rule and not just 1A and 1B.
Mr. POMBO. Mr. Wilson, I would like you to respond to that as well.
Page 104 PREV PAGE TOP OF DOC Mr. WILSON. Well, certainly, I concur with everything Jerry said. We do have a major concern in DFA with the loss of revenue under class III. I have heard today a lot of folks arguing that the upper Midwest is improved somehow out of this decision. And, we just don't see it that way at DFA.
What is going to happen is that the problem the upper Midwest sees in California todaybecause California has higher make allowances than we traditionally have had under Federal orders; that manufacturing price discrepancy gets closer, geographically, to the upper Midwest. Now, the problem becomes Idaho and New Mexico, where there is significant cheese production because premiums charged won't be any higher than what they are today in those areas. There will be a literal reduction in cost of milk to those plants producing cheese in those areas. That cheese is going to find its way back East and will compete with cheese out of the upper Midwest plants. Consequently, the upper Midwest plants will be faced with either matching the lower cheese price or with losing the business, and I suspect they will match the lower cheese price. That, ultimately, has to fall back on the shoulders of dairy farmers in the upper Midwest.
And, so, this is a very big concern to DFA members because we have a significant number of members from Minnesota, Wisconsin, and the other areas of the upper Midwest. So, we are very concerned about the loss of revenue due to the lower class III price. This is a two-pronged problem to us.
Mr. POMBO. Mr. Peterson.
Mr. PETERSON. Well, to follow up on that, I mean, do any of you disagree that if we don't get closer to California, that both the make allowance and the class III pricingwhich I guess used to be 3A or 4A or whatever it wasthat we are going to end up having the cheese plants continue to move out there, I mean, because they can beat us price-wise on the cost of milk? Isn't that what the Department is trying to do with thisto get us equalized with them, so that we don't lose our cheese plants in Minnesota and Wisconsin, which is going to happen if we don't do something?
Page 105 PREV PAGE TOP OF DOC Mr. WILSON. If I may, I would disagree that there is a real price misalignment today. Most cheese sold by the upper Midwest cheese plants has a premium attached to it relative to the Chicago Mercantile Exchange price, which most people use as the benchmark price. So, if we had a real price problem between California cheese and Wisconsin cheese, for example, Wisconsin cheese plants wouldn't be able to charge that premium. This decision moves the problem from California to Idaho and New Mexico, from an upper Midwest point of view. The problem has just moved closer to us.
Mr. PETERSON. Well, you are talking about the premium on the value of the cheese?
Mr. WILSON. On the cheese. On the cheese itself.
Mr. PETERSON. What about the value of the milk going into the cheese?
Mr. WILSON. But, ultimately, that is how the upper Midwest plants are able to pay premiums to dairy farms because they collect premiums on the cheese.
Mr. PETERSON. That may not go on forever.
Mr. WILSON. I agree. That is our concern; that the cheese price has to come down because of this competing cheese from other areas of the country, because of lower class III prices. The cheese prices will come down in the upper Midwest, meaning that the premiums paid to dairy farmers in the upper Midwest will come down.
Mr. PETERSON. That is under the current system.
Mr. WILSON. No, I am saying, relative to today, this decision lowers the class III price by 47 cents.
Mr. PETERSON. I am not talking about the decision. I am talking about the current program, the current system. We have an imbalance in the current system and it has got to be changed.
Page 106 PREV PAGE TOP OF DOC Mr. WILSON. Between California and the upper Midwest?
Mr. PETERSON. Right.
Mr. WILSON. But, on the other hand, if there is really a problem today, wouldn't the upper Midwest have had to lower the premiums charged on their cheese? We really haven't seen that.
Mr. PETERSON. Well, I don't know. All I know is that I am told that there is a lot of pressure within some of these co-ops, and other people in the business, to move their plants out West because they can get
Mr. WILSON. If I could beg to differ with you a bit there, the basic reason why the make allowance needs to be higher in California is because the cost of producing cheese is higher in California. The real estate costs are higher; the labor costs are higher; the utility costs are higher; the insurance costs are much higher because they have to have earthquake insurance out there. So, much of that perceived price advantage under the order gets eaten up by higher costs of production.
Mr. PETERSON. Well, I don't know if I believe that. Mr. Hughes
Mr. HUGHES. In response to two different issues: One is option 1A status quo. I will agree, in part, with Jerry, that there were a couple of small changes, but when you apply, what I would call, a completed economic analysis, it affects the manufacturing milk values. And, so it is worse at the margin than the current system, option 1A.
In terms of the upper Midwest versus California and what USDA tried to do in this decision, I could supply for this committee a chart, and it is based on the best data available, that because of the California cost advantage on milk used for cheesethis is raw milk cost by cheese manufacturers year by yearit is putting pressure on the premium structure that Midwest manufacturers get for their cheese and it is drawing prices closer and closer together.
Page 107 PREV PAGE TOP OF DOC And, when USDA came out with their proposed rule, they relied somewhat on the BFP committee, which was some academic folks. And they said ''Well, you have to pay attention and align the system to California, but we are not going to tell you what the make allowances should be.'' They had no specific data to make any assumptions on.
So, when USDA came out with their proposed decision, people said that we were too far off from California and we were going to hurt the competitiveness of manufacturers in the Federal order system, and so USDA made an adjustment. I think we could find that that adjustment, on balance, for the Nation as a whole, was a little large. But, the impacts in the upper Midwest, I disagree very strongly with both Mr. Kozak's and Mr. Wilson's analysis because it is based on partial analysis and not the whole package.
Mr. PETERSON. Mr. Kozak.
Mr. KOZAK. Mr. Peterson, I believe you have touched on a point here about the competitiveness with California and, again, I just want to reemphasize that in our original proposal we discussed that; we reviewed it, and we moved the needle what we thought was a reasonable approach.
Mr. PETERSON. What I was saying was that this needs to be done, and you are agreeing with me. We have got to do something.
Mr. KOZAK. Yes. But, let me add, the point is that one thing USDA failed to doand I have got to be honest with you, it wasn't a very good reasonwe asked them to, along with the increase in the make allowance, to use an audited survey of the plants because we thought, rather than have this discussion about what I thought or somebody else thought, we should have this audited survey. That audited survey would have been much more expansive than what USDA used. They used the RCBS, which had six plants in plus California plants.
Our point of contention is, why doesn't USDA do an audited survey? Let's see what those make allowances are, make sure that we are not using all the inefficient plants in there and distorting what the make allowances should be. If the facts come out that USDA's make allowances are accurate, I think we are willing to live with that.
Page 108 PREV PAGE TOP OF DOC But, they turned us down because they said they didn't have enough money in a market administrator account to do surveys When you are dealing with the livelihood of farmers, they don't want to hear that. They want to make sure that we have sound information.
Mr. PETERSON. Mr. Chairman, if I could, this is solid information. We were told by Mr. Collins that you took the old data and put it into the new model and did not take into account the effect on the marketplace. Do you agree or disagree with that?
Mr. KOZAK. Well, I don't know if you were here for my statements. I disagreed strongly with Mr. Collins. What he said we did was simple arithmetic averages.
Mr. PETERSON. No, he didn't say that. He said you took historical data from before and put it into this model, and so nothing would happen.
Mr. KOZAK. Yes. That is correct. And, then I added, in my statement, that in USDA's own analysis, they showed that the supply-and-demand issue or the consumption issues were less than a .5 percent, which was relatively insignificant, and they admitted that in their own analysis. So, given that insignificance, we didn't plug that in. That is why we feel, very strongly, that our numbers work. Most economists will tell you that the best predictor of the future is the most recent past. And, we took, using their numberswhat they said that they didn't want us to doand came up with those figures.
Mr. PETERSON. Well, I don't know who to believe here, but I guess I would hope that you would be willing to sit down, as we try to get all of these analyses, to come to some resolution that we can all agree on. Are you amenable to that?
Mr. KOZAK. Oh, yes. I think we are amenable to it, but we also don't want to be trapped into a situation where we still are in a speculative mode. USDA seems to be making a lot of assumptions that we can't agree with. As long as we work together, with a much more realistic attitude as to what happened in the past, would apply in the future, so that we could respond to dairy farmers, we are certainly willing to do that.
Page 109 PREV PAGE TOP OF DOC Mr. PETERSON. Thank you. Mr. Chairman.
Mr. POMBO. Mr. Everett.
Mr. EVERETT. Thank you, Mr. Chairman.
Mr. Halnon, I want to head south again. In your testimony, you indicated that production in Kentucky and Tennessee has sharply declined in recent years. Of course, I mentioned earlier, in Alabama, we have declined since 1988 to 1998, about 140 million tons, about 26 percent. The lower prices that these States will receive in the final rule, it is not likely, in my estimation, that production will accelerate in these States. Will you discuss what the implications, both for the consumer and the farmers, the producers, are in the Southeast?
Mr. HALNON. I will be glad to. I mention Tennessee and Kentucky, primarily, because, along with Florida, those are the three most important production States in the Southeast. And, also, the States of Kentucky and Tennessee, primarily Tennessee, is the major supplier of milk to Alabama and to the other, more deficit, metropolitan areas south of them. The decrease in production that has occurred in Tennessee and Kentucky has had to be made up. Obviously, the production decrease in Alabama goes right along with that. But, while dairy farming is important to the people in Alabama, it is not nearly as large a production State as Tennessee. And Tennessee is the primary supplier of these southern markets.
We are proposing to reduce the price in the neighborhood of 50 cents a hundredweight in the Nashville area, which is in the heart of the Tennessee production area. This decrease, along with the fact that even prices now are resulting in a production decline in Tennessee, means for the future an accelerated decline. And it means that the milk for the Alabama metropolitan markets, the Georgia metropolitan markets, and, indeed, the supplemental milk that Florida depends on from Tennessee every year, and from Kentucky, is going to have to be supplied from further north.
As I pointed out in my statement, if that is true, it is also true that that milk is going to cost more because you cannot avoid the fact that transportation costs make distant milk far more expensive than locally-produced milk. So, down the road, I see some serious consequences for Alabama markets, primarily the southern market; Mobile, where they depend a lot on milk out of Tennessee. I see some serious problems for those markets. And, the lower prices, as I point out, are not going to result in lower consumer prices because the distant milk is going to cost more.
Page 110 PREV PAGE TOP OF DOC Mr. EVERETT. Mr. Chairman, this is a complicated issue and I do hope that we can find some way through it. Thank you.
Mr. POMBO. If the gentleman will yield for just a minute.
Mr. EVERETT. Yes.
Mr. POMBO. I would like to ask Mr. Halnon a question, along with what you were just asking him, just so I can understand the rationale behind this. If milk being shipped into the area is going to be more expensive to the consumer, would that not drive the local price up and make it more profitable to produce locally?
Mr. HALNON. Yes, you would think it would. Part of the problem is that the States are not deficit on a year-round basis. So, for several months of the year there is enough milk produced down there to satisfy needs. In the months in which there is not enough milk and the co-ops have to go out and buy the milk outside, they are not able at that time to charge local plants the import price on that milk. What they do, and what they have tried to do in the past, is have a price that they charge processors on a year-round basis that includes as much of this extra cost as possible. But, yes, you are right, to that extent.
Part of the problem, of course, is that in markets north of the deficit markets in the Southeast, in Ohio and western Pennsylvania, the Department proposes no price decrease at all. And, so, that is going to limit the ability of these southern markets, the States of Kentucky and Tennessee, to charge higher prices. So, it kind of has a snowball effect.
Mr. POMBO. You are saying in Ohio they have no price decrease?
Mr. HALNON. I am sorry?
Mr. POMBO. In Ohio and western Pennsylvania they have no price decrease?
Mr. HALNON. The Department's option proposes, essentially, to maintain the prices in that area of the country at the level they are now.
Page 111 PREV PAGE TOP OF DOC Mr. POMBO. So, the milk coming out of those areas would not be decreased, would be as expensive as it is now, and the shipping costs to get it into the Southeast are still there? So that would further drive prices in the Southeast, making it less competitive for someone to ship milk in and more competitive for local production?
Mr. HALNON. It makes a distant milk more expensive and
Mr. POMBO. I just don't follow along exactly with the reasoning.
Mr. HALNON. Well, I understand where you are coming from. And, obviously, if prices to the north are higher, then that enables the southern markets to get somewhat more for their milk.
Mr. POMBO. Yes.
Mr. HALNON. But they, traditionally, had not been able to capture in their over-order prices the full cost of importing milk.
Mr. POMBO. And they probably never will be able to recapture the full cost of importing milk. Therefore, it drives the prices higher in the Southeast and makes them more competitive in their area. If your competition is higher-priced milk being imported in. I wish that was our problem in California, was higher-priced milk coming in.
Mr. HALNON. I think what you say would be true if it were a year-round proposition. But, the fact is that they negotiate with their processors for a regular supply on a year-round basis, and that is the way the negotiations take place in the South, and, then, when they are short on milk, they go out of the area to buy additional milk to replace the local milk that they aren't producing locally. And, so, that milk comes in at a higher price. And, overall, I suppose prices are higher, but they are never able to get out of the processor the extra cost when that imported milk comes in.
Page 112 PREV PAGE TOP OF DOC Mr. DOOLEY. Listening to your comments there, Mr. Halnon, it sounds like you are making a good argument for forward contracting; that if you have a need and a demand in a particular area, and you have a situation where you might not be able to utilize all supply, the supply that can be generated year round, you probably could find a producer out there that would be interested in developing a contract, provide fluid milk for 12 months out of the year, and would, also, find a way to dispose of some of that surplus you might have in the flush times, or the manufacturing times. Now, why wouldn't forward contracting be a good alternative to work in the Southeast?
Mr. HALNON. It might work.
Mr. DOOLEY. That's great. And, that would be moving us to a more market-oriented direction, which most of us would love. I am impressed; we have got another convert here. [Laughter.]
Mr. HALNON. Well, it is not so much being a convert, but that could be an acceptable alternative to
Mr. DOOLEY. And, it could even overlay. I guess, where I am having a little bit of trouble here is in the arguments that were being presented here, and the problems we are facing there is that we are trying to say ''OK, we want to account for the higher prices that are going to be generated in the Southeast by subsidizing, basically, production in the Southeast versus having that cost be absorbed from transportation from farther north.'' I mean, that is the essence of the argument.
Mr. HALNON. It is the essence, to some extent, but we are not subsidizing the price in the Southeast to the full extent.
Mr. DOOLEY. To what extent, then?
Mr. HALNON. To the extent of the cost of milk from the North, plus transportation.
Page 113 PREV PAGE TOP OF DOC Mr. DOOLEY. When I look at the cost of production, I am struck by some of what I thought were free-market advocates on the committeewhen you had a cost of production averaging in the Southeast, $17.65, and you have, in the upper Midwest, $13.40 I mean, that is a fact of life, it appears to me. You have got a higher cost of production there.
And, I guess, why should the Federal Government be implementing a policy that would discriminate whether or not we ought to provide for the production down there at a higher price versus producing in a more cost-efficient area and allowing the transportation?
Mr. HALNON. Well, let's just say we didn't have any price in southeastern Florida.
Mr. DOOLEY. That might not be a bad idea for you folks.
Mr. HALNON. But, what would the price for that imported milk be down there if we bought it out of Wisconsin? It would be that $13, or whatever it is.
Mr. DOOLEY. Plus transportation.
Mr. HALNON. Plus about $6 transportation. Plus, I assume, some give-up charges. So, you are talking in the neighborhood of $20 a hundredweight. And, the price has never been that high in the Southeast. Mr. DOOLEY. What I am saying is, why should we, as a Federal policy, care? Why should we ensure that we are going to provide a fluid price for milk in a particular region that is so high that it ensures that you have no financial incentive for milk coming in from outside the area, a more cost-effective area, to be shipped down there? I mean, what we are doing, in effect, if we do what I think some of you folks down there are advocating, we are ensuring that we are going to maintain a level of inefficiency in the milk industry.
Mr. HALNON. No, what we are ensuring, Mr. Congressman, is that we are ensuring the maintenance of an industry that provides milk at a lower cost than would be available from the outside.
Page 114 PREV PAGE TOP OF DOC Mr. DOOLEY. Well, if you can provide it at a lower cost, then, why
Mr. HALNON. That is what they are doing. They are doing that now.
Mr. DOOLEY. Well, then if we can provide a lower cost and that means then the marketplace would dictate it?
Mr. HALNON. Well, it is not a lower cost in terms of cost of production, but a lower price, then, to the handler. Then, the milk coming from the North would be plus transportation. The Federal order, for a program in maintaining a stable pricing mechanism, has contributed to getting an adequate supply in the Southeast, even if the price isn't high enough for what farmers think they should get. At least it is a stable price and they know they are going to get it, and they know they are going to get accurate weights and tests. So there are some real advantages to having the Federal order program, if the price is not adequate.
Mr. DOOLEY. I guess I have a general question. I asked the last panel whether or not anyone disagreed that what the administration had proposed was moving in a more market-oriented direction from the status quo. They all said that they agreed that it was moving in a more market-oriented direction. Do you all agree that it is moving in a more market-oriented direction or does someone disagree with that?
Mr. HALNON. I would like to comment first, if you would. I think the Administrator of AMS said that, if you take the 32 markets or 33, whatever it is that is in effect now, you are raising the price from 17 and reducing in 16 and that, to me, sounds like a wash.
Mr. DOOLEY. If I have the ability to produce a particular commodity and I am a farmer, the cheaper I can produce cotton at a per-unit cost cheaper than I can produce it in Texas and, thus, I can demand a different price for it and the Government is no longer ensuring that I get an artificial subsidy on that and they eliminate that, is that moving in a market-oriented direction, even though it might be a shift in terms of winners and losers? I mean, what you are arguing is, because it is a wash, because we are recognizing that some areas have an efficiency and maybe an advantage in cost and production and the USDA is recognizing that, and it is winners and losers 50/50, that there is no market orientation to that?
Page 115 PREV PAGE TOP OF DOC Mr. Junk, you raised your hand.
Mr. JUNK. Yes, I guess I hear what you are saying, but I get kind of upset, I guess, when you looked at it saying, ''Well, if we look at this doing away with the differentials, that will put us more in a market-oriented situation.'' But, you have got to understand that a lot of the milk that is moved today is moved on a spot market. It is not a thing that happens daily, and there are times where there is not as much need for that product in those areas or there may not be the volume available to move.
So, when we are talkingand he is partially correctwhen we are talking about that price of that commodity that is moving, say, south, it is already at a naturally inflated price because they know that person is not going to be back here, probably, tomorrow.
Mr. DOOLEY. What is the volume in milk moving on the spot market? I mean, how much relevance is that to the whole thing?
Mr. JUNK. There is a lot, and that is where a lot of the premiums are paid and maybe even some of the voluntary premiums paid, in some of the areas, in other States.
Mr. DOOLEY. OK, you are arguing that we are moving not in a market-oriented direction?
Mr. JUNK. We are moving it in a market-oriented direction to the point of moving the product. OK?
Mr. DOOLEY. Which is, the product is moving to where there is somebody that wants to buy it?
Mr. JUNK. Right, or a deficiency area.
Mr. DOOLEY. Right. So, that sounds like a good thing.
Mr. JUNK. Right. And, it still can do that today.
Page 116 PREV PAGE TOP OF DOC Mr. DOOLEY. Right.
Mr. JUNK. If you do away with the differentials, what could that price be?
Mr. DOOLEY. Maybe what the market would demand.
Mr. JUNK. Maybe not.
Mr. DOOLEY. No, why not?
Mr. JUNK. Well, today we have a make allowance that is put in place to ensure a cost of producing, that manufacture price that is paid by the producers into this pool, you might as well say, that covers that cost.
Mr. DOOLEY. Would you be supportive of forward contracting? I mean, if you, as a producer, could go out and cut a deal with Bryers Ice Cream andor maybe even someone, down in the South, Southeastthat you could supply them year around with a supply of milk and you know that you might have to do something else on a spot market, occasionally, when you had too much product, do you think you ought to be able to do that?
Mr. JUNK. If I could price set the true value of that raw product, not based on a
Mr. DOOLEY. But, in specific
Mr. JUNK. Wait a minute. A specific manufactured product from that raw product. I mean, that is what forward contract is based onone product that is produced by 100 pounds of milk. Now, if I can get it priced at the true value of that overall 100 pounds of milk, including class I, II, and some of the other products that are listed, then, yes. I would say yes. I would look at that.
Mr. DOOLEY. So, I guess I am not quite sure then. If you wanted to sell your milk to someone making ice cream, you would be willing to do that under what conditions?
Page 117 PREV PAGE TOP OF DOC Mr. JUNK. If it was strictly ice cream use. Then, I guess it would have to be based on the value of that milk that would be used for ice cream.
Mr. DOOLEY. And so, you wouldn't have any problems doing that?
Mr. JUNK. I would have to say, if my milk is going to that market and if I wanted to continue to do that market, that would be fine. I mean, I guess it is an option that you would have to look at as a producer, but in a lot of the Federal order system we have what we call blended price. So we have a percentage of class I, II, III, and now we are going to have a class IV.
Mr. DOOLEY. But, you might even want to optI mean, I am thinking you would opt out of the pool.
Mr. JUNK. Well, it depends on what is going to be that benchmark that it is going to determine that contract.
Mr. DOOLEY. You mean, whatever you can agree to?
Mr. Kozak, we talked a little earlier aboutI guess my concern is that we have been paying over-order premiums for some time now on a whole lot of different milk products out there. To me, that is an indicator that the marketplace does work, to some extent. There is a value there that is being predicated upon what the market conditions are signaling. A lot of concern has been expressed about lowering the differentials out there, but if there is a market demand for that fluid product at a higher price or even a manufactured product at a higher price, why won't we see a continuation of over-order premiums and why are we so worked up over this?
Mr. KOZAK. I think there are two things. One isI would like to just quickly respondwhen you ask if the panel was interested or complimentary, if you will, to the USDA about it being more market-oriented, when we say more market-oriented, I am afraid that every time we say that we also equate it with producer loss of revenue.
Page 118 PREV PAGE TOP OF DOC Mr. DOOLEY. No, I don't buy that, though. The market-oriented is that if it is moving toward more market orientation, it is a system that is sending a price signal that is more reflective of what the supply-and-demand conditions are. That would be my definition. And, I don't think it even, necessarily, has to do anything with producer incomes.
Mr. KOZAK. OK, I accept that. My point is, I am not sure everybody looks at it that way. I am afraid that there are a lot of people who, when we try to talk to them about these issues, look at it as, if it is more market-oriented, it means producers lose revenues, and that is something we can't accept.
But, going to your question on over-order premiums, we have come a long way since last year, when you asked me how many of our members received premiums, and I couldn't answer. So, that is what troubles us in this rule; it seems that USDA is putting a lot of faith on producers recapturing the order revenue that I think they have acknowledged this morning they are going to lose by over-order premiums. And, I have looked at it and, as an example, in March 1999, the Federal order price was $18.70 and the co-op USDA publishedthe over-order premium averaged, in March 1999, was 89 cents per hundredweight. Now, in April 1999, when we took the $6 drop on the BFPnow at $12.70 the over-order premium on class I milk was $1.29, which is only 40 cents more. If you go back, historically, and look at over-order premiums, in April of 1997 the premium on class I milk was $1.06 per hundredweight and in April 1998 the over premium on class I milk was 97 cents.
So, your question is a good one, but the problem is that we can't see, based on historical data, that we can recapture the kinds of losses that the USDA is asking us to recapture as over order premiums. It is just not there, and that is a big problem with this rule.
Mr. DOOLEY. You are talking about recapturing losses, and I am not convinced that it is a loss. I mean, if the marketplace wasn't dictating that there should be that level of price out there, are we seeing a shift to becoming more of an appropriate market price to begin with? And is that, in fact, a loss or was it an artificial profit to begin with?
Page 119 PREV PAGE TOP OF DOC Mr. KOZAK. No, I don't think it is an artificial profit. I mean, if you look atagain, don't use our data, OK. I still think it is sound data, but let's use FAPRI's data. And, FAPRI says that, for a given set of cheese prices, the new class III price formula generates a price close to 50 cents per hundredweight lower than that generated by the current basic formula combination of lower class I differentials and lower minimum class III prices results in an average minimum price to producers more than 75 cents per hundredweight below the current system.
So, part of our problem is that, no matter how you cut it, USDA's rule takes 29 cents off the class I, and it takes off almost 50 cents off of class III. And, we don't see anything in their assumptions that is going to make that up in the marketplace, especially since they said that the supply/demand or the consumption equation isn't going to vary very much. And, that is our trouble.
Mr. POMBO. The gentleman's time has expired. Mr. Smith.
Mr. SMITH. There have been some complaintsthe pricing of milk depends on how much you are going to price and what the threat is of imported cheap milk coming in that can offset the negotiations. There has been some concern expressed about the Northeast Compact because of the advantages it gives producers. How would you producer representatives feel about provisions in the law that would allow every region to have its own compact?
Mr. ROVEY. As a representative
Mr. KOZAK. Let Tip answer that question. [Laughter.]
Mr. SMITH. No, I want the producer representatives to answer that question, because what that means is that it puts the producer on a level negotiating plane, if you will, with what the market will bear for milk.
Mr. ROVEY. As far as our area is concerned, a compact would be not an option for Arizona, and speaking just strictly for Arizona, because of where we are sandwiched in between supplies of milk, the compact wouldn't work for us at all and so that wouldn't be an option.
Page 120 PREV PAGE TOP OF DOC Mr. SMITH. Yes, if we had it, it would have to be an option with the vote of the producers in that area. But, to me, it seems like it would develop the kind of negotiations and allow the kind of price of milk, as it has in the Northeast.
Mr. JUNK. If I might make a comment, being from Pennsylvaniaand we are in the process of getting the compact passed through our State legislatorswe believe that there are some true benefits to compacts, to give producers the opportunity to be involved in pricing their milk. I use our State, also, as an example because we have, what we call, the Pennsylvania Milk Marketing Board that regulates milk within our Statenot only prices paid to farmers, but also wholesale prices and retail prices. We look at the value of that product, and price that commodity all the way to the consumer. We also have mandatory over-order premiums established to our State order.
If you look at the compact as another way to give farmers that opportunity to have that tool to be able to be involved in pricing their commodity at the true value of what that commodity isunder compacts, they consider supply and demand, cost production, and they also address the issue of, if there is over production, how to handle it. And, I think that is some of the things that we need to really look at when we look at compacts, is the effect that, one, it has on the supply. Because why should we have one area producing a lot of milk and causing hardship to others because of racking down prices? So, I think it is an opportunity for those farmers to take a look at how they can tap into additional dollars within that region or that area.
Mr. SMITH. A quick comment and then we have to go.
Mr. WILSON. If I could respond for Dairy Farmers of America, we would support compacts in any part of the country. A compact, to us, is nothing more than a regulated over-order premium. It does level the playing field, the imbalance of power, if you will, between buyer and seller of milk. Without regulation, the producer is always going to be at a disadvantage.
Page 121 PREV PAGE TOP OF DOC Mr. SMITH. Yes, Mr. Tipton.
Mr. TIPTON. I am not a producer representative, but there are a couple of things that I would add to the discussion. First, let me speak to the compact issue. The thing that is always left out of the discussion, it seems to me, is that the compact is substantially different than a Federal order, because the basis of the compact is to prevent any milk from the lower cost of production area from coming into the compact area without paying the higher price. It eliminates competition from any of the low-cost production areas. It stimulates additional production in the area of the compact, to the point that the chairman was making when we first started the discussion. This increase in production drives prices down in the other areas for manufacturing milk. That is the way they work. If people were talking about compacts and allowing free flow of product, so that there was some competition for product outside of the compact area, that might be a different thing, but the idea of a compact, as it is being proposed now, is to restrict the flow of milk from any place outside of the compact.
Mr. SMITH. We are approaching 3 years of experience in the Northeast.
And, Mr. Chairman, I yield back the balance of my time since we have to vote.
Mr. POMBO. I am impressed.
I want to thank you all for your testimony this afternoon and this evening. Again, I want to apologize, to this panel for the long delay in continuing your testimony. I am sure there will be further questions from members of the committee that will be submitted to you in writing. If you can answer those in writing in a timely fashion, so that they can be included in the committee record, it would be greatly appreciated.
Again, thank you all for your testimony.
The hearing is adjourned.
Page 122 PREV PAGE TOP OF DOC [Whereupon, at 6:28 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion on the record follows:]
Statement of Ben Brancel
Good afternoon, Mr. Chairman and members of the subcommittee. My name is Ben Brancel, I am the secretary of the Wisconsin Department of Agriculture, Trade and Consumer Protection. I am speaking to you today on behalf of the 22,000 dairy families in Wisconsin, the State that produces more milk than any other within the Federal milk marketing order system. As Secretary, and as a former dairy farmer, I appreciate this opportunity to comment on the USDA's final proposal for Federal milk marketing order consolidation and reform.
Dairy producers in every region of the Nation are under tremendous pressures today. There is absolutely no question about it. I want you to know that we feel those pressures in the upper Midwest as well. For each day the Secretary took to reform this broken-down order system, Wisconsin lost an average of three dairy farms.
Even though Wisconsin dairy farms are among the smallest in the Nation, each contributes an average of $400,000 annually to the local rural economy. The economic impact on our State has been enormous.
You will hear from others today, from other regions of the country, who will tell a similar story. But while those others advocate Government intervention at or in addition to the status quo, we in the upper Midwest believe the Government should reduce its involvement in setting minimum prices for America's dairy industry.
The Secretary's reforms, though modest, would move the dairy industry in the right direction. We oppose congressional efforts to step in and reverse these reforms. We also oppose efforts to replace the Federal order system with compacts.
I cannot overstate the importance of basing milk pricing on sound economic rationale. I am pleased to see that USDA has based its pricing reforms, modest though they are, on market economics.
Page 123 PREV PAGE TOP OF DOC The new set of class I differentials is more closely aligned with the marketplace, especially compared to the politically motivated changes in the 1985 farm bill, when class I differentials were set by Congress to increase with distance from Eau Claire, WI.
Secretary Glickman's new class I pricing system is based on an economic model, the U.S. Dairy Sector Simulator, which ''moves the dairy industry towards a more efficient structure, while assuring orderly marketing conditions for dairy farmers and handlers,'' as USDA says in its summary of the class I pricing decision.
Under the proposal, for example, class I differentials would increase in areas with a deficit in fluid milk production, such as Florida. At the same time, differentials would be set lower in regions with a surplus of fluid milk production. This surplus, incidentally, is the result of class I differentials set higher than necessary to meet local fluid milk needs.
The purpose of the Federal order system is to ensure that consumers' fluid milk needs are met, not to create a system of winners and losers within our Nation's dairy industry.
Some will argue that the proposed changes will be a disaster for their local dairy industry, relying on comparisons that do not reflect the real economic impact of the proposed changes. It should be noted, however, that the Secretary's own economic analysis indicates that these proposed class I differential changes will have only a minor impact on revenue generated in each order region.
Mr. Chairman, USDA has not rushed into this decision. It has been 3 years since Congress passed the 1996 farm bill, which authorized the USDA Secretary to consolidate and reform the Federal milk marketing orders.
This order reform process began in 1990. Wisconsin has lost 10,000 dairy farms since then.
Page 124 PREV PAGE TOP OF DOC In the meantime, comments were sought throughout the rule making process. In addition to gathering comments from industry and the public, USDA also called upon analytical expertise from land grant universities. Secretary Glickman and USDA staff held listening sessions all over the U.S., not just in Washington.
At USDA's listening session on the proposed order reform in Green Bay, WI, over 500 Wisconsin dairy producersfar more than appeared at all other USDA listening sessions combinedcame to speak in favor of market-based order reform.
Governor Tommy G. Thompson, the Nation's longest-serving governor, has made Government reform the hallmark of his administration. He testified at the Green Bay hearing, among others, and has consistently argued for real, common-sense reform. He asks you now not to step away from reform.
Throughout the reform process, some in the industry have tried to block the reform process authorized in the 1996 farm bill by taking their well-intentioned but misguided arguments to Congress. As you all know, as soon as the reform process began, legislation was circulated designed to gut any real reform proposed by USDA.
Regional pricing compacts move the U.S. in the wrong direction. The Northeast Interstate Dairy Compact was never intended to be a permanent fixture. It was intended as an interim measure, designed to sunset with the implementation of order reform.
But now, the compact bandwagon is gaining momentum. Some advocate not only extending the current compact, but creating new compacts. I agree with Commissioner Hugoson's analysis: Compacts lead to higher milk production, thereby reducing prices in regions outside the compact boundaries.
Compacts also form trade barriers to the free flow of milk across State boundaries. Any member of Congress who represents a milk-exporting State should be very concerned by the expansion of compacts. If compacts did not act as trade barriers, there would be no need for congressional approval of the compact. Congressional approval of a compact is necessary to gain immunity from Commerce Clause challenges.
Page 125 PREV PAGE TOP OF DOC In fact, Mr. Chairman, we in the upper Midwest wonder why there should be a Federal order system if much of it will be essentially replaced by compacts.
Compacts are not a viable option for the Midwest. Most of our milk is made into cheese and not into fluid milk products, which is the only milk production eligible for the higher compact price.
Compacts may have trade implications as well. In the last decade, Congress has made great strides toward opening up foreign markets for American products, but the creation of compacts would send us backwards. I ask you to consider whether compacts are GATT-legal.
Mr. Chairman, I thank you for this opportunity and look forward to answering your questions.
Statement of Paul Rovey
My name is Paul Rovey. I am a dairyman from Glendale, AZ, and chair of the American Farm Bureau Federation Dairy Advisory Committee. I am also a member of numerous other dairy industry boards. My testimony today is presented on behalf of the over 4.9 million members of AFBF. Milk order reform is an important issue to our many dairy producer members as it directly impacts our livelihood.
AFBF has been actively involved in the order reform process from the beginning. We have sought to involve producers in the process and work to develop a system that can best serve the long-term needs of the industry. The final rule presented by USDA included class I differentials that were a compromise between options 1A and 1B that were included in the proposed rule. The overall level ended up close to that of 1A, but on the surface is more similar to 1B. In comments to USDA on the proposed rule, AFBF supported the use of option 1A differentials. The final rule makes several changes that impact farm prices. This, coupled with limited data, makes it difficult to accurately assess the likely impact on producer income.
Page 126 PREV PAGE TOP OF DOC Concerns exist relative to several factors that impact price. It is our assessment that the class III mover will have the greatest impact on all producers, but the class I differentials and the class I mover are concerns as well. In my testimony we will address these concerns,
Class III MOVER. In seeking to evaluate the total impact, we need to begin by looking at the class III mover. This is basically the replacement for the current Basic Formula Price. We support the concept of component pricing as included in the rule. This is the best way to obtain prices from a competitive market environment for use in producer pricing. We are concerned that the formula included in the final rule by USDA gives an average price for the 60-month period from January 1994 through December 1998 that is 47 cents less than the BFP for this same time period according to USDA.
The primary reason for the lower class III mover is the make allowances used in the final rule. AFBF suggested that the allowances in the proposed rule were too low and consideration should be given to the use of a national survey such as that of the Rural Cooperative Business Service. USDA used this data, but when coupled with California data, resulted in changes approximately twice as large as those that would have come from the RCBS data. This tends to assure profits for most manufacturing plants, but gives much lower price movers for producers. In areas with limited competition this will give lower farm prices and tend to move all manufacturing milk prices lower.
Of additional concern is the probability that this estimate of the class III mover may still understate the actual difference. The formula incorporates both barrel and block cheddar prices in the calculation. This gives a larger sample, which is good, but it also requires an additional estimate to address the difference in processing costs between barrels and blocks. USDA makes the assumption that the difference in price should be three cents, so adds this amount to the barrel price and includes them in the calculation of the weighted average price. Industry personnel indicate that this is reasonable based on long-term trends; however, the NASS cheese survey has shown an average difference of 5.39 cents per pound for the period of March 7, 1997, through April 16, 1999. Prior to this, at the National Cheese Exchange during 1996, blocks averaged 5.87 cents higher than barrels and in 1995 they were 4.2 cents higher. In the estimated values used by USDA, the difference for the time period was just under four cents per pound. It also appears that the values used by USDA in their estimates of mover included several months of price inversion, where the barrel prices were higher than the block prices. This can occur, but it is infrequent and not likely to be as great as the nine to ten cents included in the estimated data. Looking at actual data from the National Cheese Exchange, it did not occur during 1996 when USDA's estimated data showed it to be occurring. Again, use of data with these price inversions would underestimate the reduction in the mover. Given these factors, it appears likely that the true estimate would be greater than 50 cents.
Page 127 PREV PAGE TOP OF DOC Cheese plants in the upper Midwest have paid producers for milk used in cheese at a level that was higher than the BFP in recent years. This is a major reason that their mailbox prices have been among the higher in the Nation. This significant reduction in the class III mover would put these plants at an even greater competitive disadvantage compared to areas where existing cheese plants have limited competition for milk than in the past and seems certain to lower prices substantially for producers in all areas of the Nation.
Class I MOVER. The class I mover is also problematic. It is based on the higher of the class III or class IV mover as calculated from the most recent two weeks of data. In theory this will provide somewhat greater stability for class I prices, since the two movers may not move in concert. In reality it is expected that the class III mover will provide the basis for the class I mover in most months. This is due in part to the policy decision included in the 1996 farm bill that ends the dairy price support program on December 31, 1999. With the elimination of the price support program, most observers expect non-fat dry milk prices to fall to levels much closer to world prices. Butter prices may not drop to the same degree, but it is unlikely that their combination in the class IV mover will give a price comparable to cheese. If this is the case, the price will track the class III mover, and likely be even more volatile than in recent years. One method to address some of these concerns would be to extend the dairy price support program, at least until 2002. This would be consistent with other commodity programs, and would provide additional time to assess other alternatives for producers.
USDA has estimated that for the period of January 1994 through December 1998, the new class I mover would have averaged 20 cents higher than the current BFP. In looking at the movers calculated by USDA (table 1) several unusual patterns can be found that raise questions relative to this estimate, such as by looking at the number of times that the class I mover was higher than either the class III or class IV. In order for this to occur, it would be necessary for the most recent two-week average prices to have exceeded those for the month. It can be seen in the table that this occurred in 28 of the 36 months from 1994 through 1996, but only six of the 24 during 1997 and 1998. One obvious difference in these time periods was that the 1997 and 1998 data was from almost entirely from the NASS survey, while the earlier data was estimated. It is questionable how often producers will experience the higher two-week values that went into obtaining the USDA estimates.
Page 128 PREV PAGE TOP OF DOC Table 1 also shows the number of times that the class I mover exceeded the current BFP. This happened 28 of the 60 months evaluated, but tended to occur primarily in the past 2 1/2 years. During this time period butter fat and non-fat powder were each in short supply at times leading to higher estimates for the class IV mover. As noted previously this is less likely to occur after the end of the price support program.
Class I DIFFERENTIALS. As noted earlier in comments on the proposed rule, AFBF supported the use of option 1A. In the final rule, USDA indicates that the class I differentials incorporate the levels of those of option 1A from the proposed rule, but the surface of 1B. In general 40 cents was added to the proposed 1B differentials. After considerable evaluation, it does not appear that the result will not serve the industry well. On a weighted basis the average differential is approximately equal to the current level, but on a State and regional basis there are substantial differences.
A primary function of the class I differentials is to facilitate the movement of fluid milk from areas of reserve supply to those where it is needed to meet fluid needs. In order to do this the differential needs to cover a reasonable portion of the cost of moving the milk and also adequate revenue to encourage moving it out of manufacturing plants. Milk tends to be in shortest supply in the southeast and short of total needs in much of the area east of the Mississippi River, yet the southeast and the northeast face significant reductions in their class I differentials. This appears to run counter to industry needs.
Table 2 provides a comparison of the unweighted individual county differentials in each State for the current situation as well as those from the final rule and from the modified 1A differentials determined by USDA. It provides a rough indication of the impacts of the class I differentials on producers in each state. Comparing the current differential with those in the final rule, 39 states have lower values, while nine are higher. The greatest decrease is 91 cents in Maryland and the greatest increase is 57 cents in Wisconsin. Comparing the current with the Modified 1A differentials, 16 states are negative, one unchanged and 31 are positive. Overall the unweighted averages show 32 cents for the differentials in the final rule and +five cents for 1A. Overall incorporation of the 1A differentials, or something closer to them, would best serve the interests of producers, processors and consumers.
Page 129 PREV PAGE TOP OF DOC Estimation of Impacts. In looking at long-term impacts (i.e. 2000 to 2005) USDA estimates that producer income will decline $2.8 million per year under the final rule. This appears extremely optimistic. Other industry sources have estimated annual producer revenue losses ranging from $196.2 million to $583 million. These losses appear possible, because the USDA baseline product values included in the final rule appear unrealistically high, especially in the out years of the analysis. Table 3 provides a comparison of USDA product price estimates with those from the Food and Policy Research Institute baseline. Differences are particularly dramatic for nonfat dry milk and also for cheese. Both of these items will also have implications for the price movers in the final rule. The FAPRI estimates are consistent with other industry projections such as those used by the US Dairy Export Council in developing their projections.
SUMMARY. The final rule on milk order reform includes a number of useful changes to the Federal milk order system, but it still has several problems. In general the 11 consolidated orders should serve well. We would have preferred to see all of Pennsylvania and New York included in the system, but in general the new orders are appropriate.
The move to a component pricing system, and inclusion of consideration of somatic cell count levels in selected orders, provides a price finding mechanism that can function for the long term. A major problem does exist in the make allowance used in determining producer prices. These allowances are too large, resulting in farm prices that are too low while assuring that most manufacturers have their production costs covered. These need to be modified.
The class I mover is a concern too, in that it is based on the higher of the class III or IV mover. Elimination of the price support program, with the expected movement of powder prices toward world levels makes this option one-dimensional and will lower producer prices. Extension of the price support program would address this to some extent. Modification of the make allowances will have a positive impact here as well as with the class III mover.
The class I differentials are also a concern. They are intended to facilitate movement of milk from areas of reserve production to deficit markets. The differentials in the proposed rule appear to work contrary to this and will lower producer prices in most areas. Differentials should moved to the modified 1A version, or something close to it.
Page 130 PREV PAGE TOP OF DOC Reiterating, we would support:
Extending the dairy price support program until 2002 and continuing to evaluate options for producers during that time.
Reducing the make allowances in the price formulas to levels consistent with the RCBS survey
Incorporating differentials similar to the modified 1A values from the final rule.
We appreciate the opportunity to provide these comments on the final rule. AFBF looks forward to continuing to work with industry to put in place a system that will best serve the long-term interests of the industry.
Statement of Jerome J. Kozak
Good morning Mr. Chairman and subcommittee members.
I'm Jerry Kozak, the chief executive officer of the National Milk Producers Federation (NMPF) in Arlington, Virginia. NMPF is the national voice of nearly 60,000 dairy producers on Capitol Hill and with Government agencies. We develop and carry out policies to advance the interest of U.S. dairy producers and the cooperatives they collectively own. The 27 NMPF member cooperatives market milk in every Federal milk marketing order area; and, in total market the majority of the U.S. milk supply.
I'm here today to discuss NMPF's reaction to the USDA's final rule on Federal Milk Marketing Order reform. That's no small assignment, given that the final decision is over 650 pages long. However, I will focus today specifically on how the rule will negatively impact dairy producers from a nationalnot just regionalperspective.
Before commenting on the final rule, I want you to know that NMPF strongly supports the Federal Milk Marketing Order program and wants Federal Orders to continue as a regulatory framework for designated marketing areas and provide minimum class prices for milk according to the way that milk is utilized. The Federal Order program is meant to cost-effectively provide a needed product to consumers, while ultimately serving the needs of dairy producersthey're the only ones who vote on it. But USDA seems to have forgotten this fact in some of its decisions. They have assured that producers will receive lower prices, while processors will have higher margins. We think that's a serious mistake, and drastically changes the foundation of the Federal Order program.
Page 131 PREV PAGE TOP OF DOC Before I review our assessment of the final rule, I think it's important to look at what USDA's assignment was. When Congress directed the USDA to reform the Federal Order system, it gave the Department four primary requirements:
Consolidate from 31 Federal Orders into not less than 10 and not more than 14;
Expedite the reform process by using informal rulemaking procedures;
Don't base the new class I differential structure on the differentials in the Food Security Act of 1985, and;
Implement the reforms by October 1, 1999.
Using these criteria, I think we can agree that USDA complied with the congressional requirements. The final rule makes many reforms that will improve the milk order program, and USDA did accept several modifications that NMPF had suggested last year.
Howeverand this is a big howeverthe final rule does something enormously consequential that Congress did not suggest: it reduces the prices dairy producers receive for their milk by hundreds of millions of dollars annually. Specifically, the USDA proposal slashes class I differentials, and provides cheese manufacturers with a make allowance that exceeds their manufacturing costs and virtually assures them of much more significant profits, while placing greater financial risk upon dairy producers.
NMPF has estimated, based on USDA's own data, that if we would have had this program in place during the past 5 years, dairy producers would have received nearly $1 billion less in revenue that they in fact received under the current system. Our calculation of an annual loss of $196 million per year combines USDA's own data with our own thorough analysis of the production and prices the industry experienced between 1994 and 1998. We have used the past as a clear guide to what the future holds for the Federal Order program, and the final rule does not bode well for dairy producers in the future.
Page 132 PREV PAGE TOP OF DOC In fact, Mr. Chairman, it is our contention that the consequences of USDA's final rule will be enormously negative for producers, and that the Congress needs to rectify these changes in order to avoid a dire economic situation for dairy farmers.
Let me specifically address the problem areas I just mentioned.
Class I differentials. Last year, when I testified before this subcommittee regarding the proposed rule that the USDA issued in January 1998, I expressed NMPF's support for USDA's option 1A to reform class I differentials. On page 226 of the USDA final rule, the department reports that of the comments it received on class I prices, 3,579 comments supported adopting option 1A, and 436 comments supported adopting option 1B. Mr. Chairman, that's an 8 to 1 ratio.
Now, the USDA tried to have it both ways in its final rule. Let me quote from the Department's press release on March 31: ''The final decision adopts a national price surface that meets fluid milk demand by generating sufficient revenue for dairy farmers. It also provides incentives for greater structural efficiencies in milk assembly and distribution. These goals are achieved by using generally higher differential levels as proposed in option 1A, while retaining the pricing surface of the preferred option [1B].'' Mr. Chairman, you can put lipstick and a dress on a cow and call her Madonna, but she's still a cow. And despite USDA's attempts to gloss over the fact that they tried to achieve a compromise on class I differentials, they've given us a dressed-up version of option 1B.
In fact, the final rule adopts option 1B with a $0.40 per hundredweight increase over what the USDA originally proposed. Despite USDA's attempt to paint this 40-cent change as moving class I differentials closer to option 1A, it doesn't go nearly far enough. When the NMPF Board met last month, our members reaffirmed the Federation's support for option 1A class I differentials as initially proposed. As a result, NMPF is now actively supporting H.R. 1402, a bill that would require the USDA to set class I differentials at the option 1A level, as advocated by 85 percent of those who commented to USDA in support of option 1A.
Page 133 PREV PAGE TOP OF DOC And I might add that, compared with option 1B, Rep. Blunt's option 1A legislation increases class I differentials not just east of the Mississippi River, but also in the upper Midwest states of Minnesota and Wisconsin. Commissioner Hugoson's dairy farmers will see an average of $0.19 per hundredweight more in class I differentials, while Commissioner Brancel's farmers will see an increase of $0.03 per hundred. If option 1A is a rising tide that lifts the boats virtually throughout the country (including the upper Midwest)then option 1B is a torpedo.
In comparing the final decision's class I differentials with current class I differentials, the USDA's Regulatory Impact Analysis states (page 17): The estimated weighted average class I differential for all current Federal order markets will decrease by $0.29 per hundredweight.
The amount producers lose from lower class I differentials can be calculated by multiplying the total quantity of milk in class I by $0.29 per hundredweight. In 1998 class I milk in all Federal order markets amounted to 450 million hundredweight. Multiplying the 450 million hundredweight by the $0.29 lower class I differential shows that producer would lose $130 million annually due to the lower class I differentials.
I will close my assessment of class I differentials by reminding this committee that option 1B is based on an economic model prepared by Cornell University. And Mr. Chairman, you may recall that last year, Mr. Novakovic's colleague at Cornell, Dr. Mark Stephenson, explicitly told this subcommittee that the Cornell model was never intended to be used by USDA to form the basis for its class I differential plan. But that's exactly what has happened.
Mr. Chairman, USDA's use of option 1B plus represents a significant problem with USDA's final rule, because an overwhelming majority of dairy farmers are negatively impacted by it. This is a situation Congress must remedy.
Page 134 PREV PAGE TOP OF DOC Make AllowanceCheese (class III). At this subcommittee's hearing last year on the initial USDA rule, I testified that the class III make allowance in the proposed rule were too low based on our members' manufacturing costs. In an effort to move closer to market conditions without substantially decreasing producer income, NMPF submitted comments to the USDA demonstrating how the proposed rule could be improved. Our proposal contained a recommendation to increase class III make allowances to support reasonable manufacturing costs.
NMPF recommended that the make allowances in the USDA proposed formulas for class III and class IV prices be based on actual manufacturing costs determined through plant cost surveys. By using surveyed plant costs, the proposed formulas for class III and class IV milk prices would be more consistent with California class 4A and 4B prices, which are determined based on audited plant cost surveys.
NMPF proposed that an initial survey be conducted to collect and analyze manufacturing cost data for the first year after the reformed orders are implemented. After the data is published, USDA should propose changes in the Federal Order make allowances to reflect the actual manufacturing costs collected during the survey. Since manufacturing costs can change over time, USDA should periodically (about every 5 years) re-survey manufacturing costs and propose appropriate changes in Federal Order make allowances. Proposals to modify the Federal Order make allowances should be considered at a hearing, and any modifications in the make allowance should be based on the evidence presented at the hearing.
The comments NMPF submitted to the USDA specifically opposed any modification to the class III price formula that would lower milk prices below historical levels. Nevertheless, the USDA final rule adopted a class III price formula that lowers the prices to dairy producers for milk used to produce cheesewhich is the largest utilization category for raw milk.
A comparison made by USDA, published in the final decision, shows that for the January 1994 through December 1998 period, the class III price under the final rule would have averaged $0.47 per hundredweight less than what the actual class III price was during that 60 month period. Dairy producers would lose about $188 million annually due to the excessive manufacturing allowance for plants that manufacture cheese. Once again, USDA has clearly placed dairy farmers at high risk, by assuring processors a guaranteed profit margin regardless of their input cost. USDA went far higher in the make allowances than NMPF proposed. Our proposal would have resulted in a revenue-neutral position for dairy farmers, while modestly moving these make allowances for processors.
Page 135 PREV PAGE TOP OF DOC Mr. Chairman, this represents a significant problem with USDA's final rule, and one that the entire industry should be deeply concerned withespecially producers in Mr. Brancel's and Mr. Hugoson's states, where the majority of milk produced goes into class III. What's more, the loss of class III revenues will have a negative ripple effect in other classified price areas.
Impact on class I Price. In the final rule, USDA bases the class I price on the higher of either the class III or class IV price. Therefore, the excess manufacturing allowance in the class III price formula will result in a lower class I price whenever the class III price is above the class IV price. Cheese has been the bright spot for the U.S. dairy industry. Cheese consumption is at a per capita record in the U.S., and it is the driver of dairy demand. Hence, most dairy industry observers expect this growing cheese demand to cause the value of milk used in class III to exceed the value of milk used to produce class IV products, which are not growing rapidly. Therefore, a reduced class III price will create a double whammy for dairy producers, who lose revenue from both class III and class I as a result of the final rule.
Conclusion. Mr. Chairman, I realize this Federal Order reform process has been contentious and difficult. I commend this panel's continual oversight of and concern about this issue as the process has evolved. And I also want to recognize the USDA's efforts to reform Federal Orders. It wasn't an easy assignment. But unfortunately, they have not made things any easier with some of their key decisions.
No matter how many rosy projections USDA has put forth using unrealistic economic assumptions, they can't explain away the fact that by dropping the class I price 29 cents and the class III price 47 cents, dairy farmers will lose significant revenue. How can USDA confidently assert that with the world price of 60 cents to 70 cents per pound for nonfat dry milk, the U.S. price will rise to $1.40 in the year 2005? And that's without a price support program. We can't afford to risk the livelihoods of hardworking dairy farmers on this type of manic speculation. Mark Twain said ''There are two times in a man's life when he should not speculate: When he can't afford it, and when he can. ''Dairy farmers can't afford to speculate on whether USDA's overly optimistic analysis will be good for them; this committee and this Congress cannot allow USDA to risk the future of dairy farmers through this proposal. America's dairy industry has too much riding on this program.
Page 136 PREV PAGE TOP OF DOC And I want to close with one other thought. Yes, we are discussing a voluntary program. Federal Orders are meant to benefit dairy producers, but their existence is not mandatory. Indeed, producers in three months will have the opportunity to vote on the USDA's final rule.
But given the final rule as it has been proposed, the Federal Order referenda this August will give our producers a choice between the lesser of two evils: either no Federal Orders, or a severely compromised, poorly constructed program that reduces their income. Dairy farmers are counting on this Congress and this committee to rectify the problems I just addressed, so that dairy farmers have something they can vote for, and not just an unregulated market that they vote against.
With all of the problems facing American agriculture today, let's not compound the problem by undermining the future of dairy farmers in this country. I believe Congress can make some basic changes that ensure that the Federal Order program continues to serve producers, processors, and consumers, well into the next century. We can do this without slashing dairy farmer revenue and hastening the exodus of our family farmers and undermining the economic infrastructure of rural America.
Statement of John E. Frydenlund
Mr. Chairman and members of the committee, I appear before you today on behalf of Citizens Against Government Waste (CAGW) and members of the National Consumer Coalition's (NCC) Food Group. The NCC is a coalition of two dozen public interest groups supporting the principle that a market economy benefits consumers by expanding choice and competition, fostering innovation, improving health and safety, and lowering costs. Consumer Alert and the Competitive Enterprise Institute have specifically asked to be associated with this statement.
Page 137 PREV PAGE TOP OF DOC CAGW is a 600,000-member, nonprofit, nonpartisan organization which grew out of President Reagan's Private Sector Survey on Cost Control, better known as the Grace Commission. The organization's mission is to work for the elimination of waste, mismanagement, and inefficiency in the Federal Government, with the goal of creating a government that manages its programs with the same eye to innovation, productivity, and economy that is dictated by the private sector. CAGW has made reform of the complex Federal milk-pricing system a high priority.
The Center for International Food and Agriculture Policy institutionalized CAGW's long-standing goal of dismantling Depression-era agricultural price supports and regulations. In addition to a belief that Congress should build on the accomplishments of the 1996 Freedom to farm bill and achieve a truly free market for agriculture, the Center advances the philosophy that the best way to wean America's farmers off the Federal dole and assure them a prosperous and secure future is to promote a more open global food economy by dismantling barriers to free trade.
Thank you for this opportunity to testify on the U.S. Department of Agriculture's Final Decision on Federal Milk Marketing Order Reform. I want to assure you that this is an issue that transcends the USDA bureaucracy, segments of the dairy industry and some members of Congress who are apparently all intent on maintaining the status quoan overregulated, overmanaged and overprotected dairy industry.
CAGW was very disappointed that USDA's new milk-pricing scheme failed to remove the regulatory morass that encumbers this Nation's $70 billion dairy foods industry. The Federal milk marketing orders needed a massive overhaul. However, the new regulations will do little to enhance industry competitiveness, while continuing to artificially inflate the price of most dairy products. As a result, the Federal milk marketing order system imposes what amounts to nothing more than a consumer milk tax.
After many years of failed dairy policy, a glimmer of hope for reform developed when Congress finally called for the gradual elimination of dairy subsidies in the 1996 farm bill. However, now that USDA has issued its final rule on milk marketing order reform, this system will continue to provide a vehicle through which meddlesome proponents of the status quo keep a dominant Federal hand in the dairy industry.
Page 138 PREV PAGE TOP OF DOC Government-managed pricing systems, such as the Federal Milk Marketing Order program, undermine the most basic free market concept of negotiating contractual agreements between buyers and sellers. By dictating the terms of dairy commerce, from the milk prices to how and when farmers will be paid, the milk market administrators act as the milk price police, which costs the industry $40 million annually.
Free market competition in almost every other business sector has created the most robust economy in the world and raised the standard of living for all Americans. Why not let free market capitalism work for the dairy industry as well?
USDA's final rule fails to eliminates minimum pricing, the milk classification structures or the regional differentials. On the other hand, elimination of the system would result in milk marketing being more responsive to consumer demand and free the industry to pay greater attention to the marketplace. Milk would be produced where it can be done most efficiently and competitively and manufactured into the products that are wanted by the consumer.
Congress must recognize one crucial, common-sense truth: the Federal Government should have no role in the production or manufacture of milk or dairy products in this country. Excessive Federal Government regulation is preventing our Nation's dairy industry from achieving its full potential in the marketplace.
Although USDA estimates indicate that the cost of the Federal milk market order tax will be reduced by just over $100 million annually, that is just the tip of the iceberg. Even under USDA's new plan, the Federal milk marketing orders will continue to impose at least a $1 billion annual milk tax on consumers. The Federal milk marketing orders also add at least $80 million annually to the cost of the school meals program.
The Federal dairy program pits region against region, fracturing the country, and preventing the industry from making the changes necessary to take advantage of an expanding global marketplace. Milk cartels, whether federally or state-sponsored, have no place in a free market. It is long past time, after 60 years of Government price manipulation, to get the Government out of the milk business.
Page 139 PREV PAGE TOP OF DOC Unfortunately, there are many in Congress who have failed to recognize the longer term advantages of moving to a freer market for the dairy industry. In fact, there is legislation looming in the 106th Congress that would override USDA's plan and impose even higher class I differentials. This would overturn even the minimal reform included in the USDA plan, which somewhat reduces the blatant disparity in the price differentials. The commitments made in the 1996 farm bill, including a phase out of the dairy price support program and a sunset to the Northeast Dairy Compact, should be kept.
One of the most important things to come out of this rule-making is USDA's recognition that many of the existing class I differentials are too high and that they can be reduced without jeopardizing an abundant supply of milk in all regions. Therefore, it is incongruous to then raise class I prices through more compacts. Interstate dairy compacts represent a threat to the long-term viability of the dairy industry. There is no justification for another Government-sanctioned layer of regulatory bureaucracy to fix prices regionally.
Whether Congress mandates higher class I price differentials or spreads dairy compacts from coast to coast, the result will be the same. It will eventually put the dairy industry into the same chaos that developed in the late 1970's and early 1980's when the dairy support prices were sent through the roof, all in an attempt to gain political favor.
Artificially high milk price supports led to excess milk production, declining sales of milk and Government purchases of surplus production that cost taxpayers $17 billion during the 1980's. Any artificial milk price increase beyond what the market demands will simultaneously drive down milk consumption and increase milk production and repeat the mistakes of that decade.
If Compacts are allowed to swallow up a vast percentage of the country, the results will be devastating. The cost to consumers would dwarf the $55 million that has been imposed on New England's consumers. While the New England region produces less than 3 percent of the Nation's milk supply, adding additional states to the Northeast Compact and creating a Southern Compact would bring more than 40 percent of the Nation's milk supply and 60 percent of the Nation's consumers, under the power of a milk-pricing cartel.
Page 140 PREV PAGE TOP OF DOC Congress must heed the lessons of the past as it makes decisions impacting not only the future of the dairy industry, but the entire country's consumers and taxpayers. Rather than expanding the Federal Government's role in milk-pricing, as proposals to mandate higher milk prices or create additional compacts would do, Congress must stay on the path begun in the 1996 farm bill to phase out the Government's role in the dairy industry.
Statement of Paul W. Halnon
Mr. Chairman and members of the committee. My name is Paul Halnon and I appear here today on behalf of Southeast Milk, Inc., a cooperative association representing all of the producers regularly
supplying handlers in the Florida market. We appreciate the opportunity to present this statement on the Department of Agriculture's final rule on milk marketing reform.
As we have previously indicated to this committee, our position has been from the outset that we did not believe the Federal order program was in need of major reform. While the final rule accepts this position with respect to the non pricing provisions of milk orders, the pricing provisions included in the final rule, in our view, will cause serious marketing problems for producers, especially producers in the Southeast.
The committee will hear testimony today concerning the level and relationship of all class prices included in the final rule. Since the industry in the southeast is one that primarily produces for the fluid market, I will limit my testimony to the level and relationship of class I prices. However, we do support the National Milk Producers' efforts to obtain more realistic class III, class IV and basic formula prices.
The Department's final rule includes a pricing plan that is patterned after pricing option 1-B of the earlier proposed rule. While the resulting price levels are generally somewhat higher than the 1B option that was included in the earlier document, it nevertheless is one that drastically alters the level and relationship of prices throughout the system. In the southeast, where production is not sufficient to satisfy fluid demand on a year round basis, the decision will reduce class I prices, in many cases by significant amounts. In earlier testimony we stated our concerns about this action and we urged the Department to adopt pricing option 1-A in the final document.
Page 141 PREV PAGE TOP OF DOC Class I pricing option 1-A is a pricing alternative that does not drastically change the current system, which has worked well for over 60 years in assuring the Nation's consumers of an adequate supply of fresh milk at reasonable prices. Option 1-A has the support of an overwhelming majority of the Nation's dairy farmers as evidenced by the submissions to USDA in response to the proposed rule.
The Nation's dairy farmers have endured several years of difficult economic conditions. The situation in the southeast has been especially difficult and farmers have been leaving the dairy industry at an alarming rate. Over the past several years the deficit situation in the southeast has become more critical as evidenced by USDA's annual milk production data. USDA's annual reports show that milk production for the 10 states that comprise the major production areas for the southeast has declined over 15 percent in the last 6 years with declines occurring in every single year, including last year when fluid milk prices reached all time record high levels. Production declines have been the most severe during the past 6 years in the states of Kentucky and Tennessee, two of the most important areas of production for the southeast and two states that will suffer sharp class I price declines under the final rule. In theses states, production has dropped more than 20 percent.
These production declines have occurred even though the population of the southeast has continued to increase at a rapid pace. The combination of declining milk production and increasing population has meant that greater and greater quantities of supplemental milk have had to be imported from more distant areas to fulfill consumer demand.
In the face of this critical supply-demand situation, the Department's final rule would reduce class I prices throughout the Southeast, with the exception of Florida. In justifying this reduction, the Department suggests that producers should rely more on negotiated over-order prices. In this connection, it should be pointed out that dairy farmers in the southeast have always had to rely on over order prices, but it has been done with mixed results. The ability of producers to obtain adequate negotiated prices depends in large measure on the extent to which they are organized in cooperative associations. With the exception of Florida, there has always been a sizable number of producers in the Southeast that have not been represented by cooperatives. Therefore, they must negotiate individually with processors. In this situation, over-order price negotiation has had mixed success and the resulting market prices are seldom uniform among all handlers. There is no reason to believe that producers would be able to bargain for even higher over-order prices to compensate for the lower class I prices included in the final rule. Even in Florida where all producers are organized in a cooperative and where over-order prices have traditionally been the highest, the final negotiated price must recognize the prevailing prices in surrounding markets, so any reduction in prices in other southeast markets will be immediately reflected in Florida negotiated prices.
Page 142 PREV PAGE TOP OF DOC Producers' inability to bargain effectively for a reasonable price for their milk supply is one of more important reasons for producers to seek a milk order. The uniform market prices that have resulted from Federal regulation have contributed in large measure to the orders' success. It seems to us that reducing class I prices, either through lower class I differentials or a lower basic formula price, in areas where it is acknowledged that present prices do not generate adequate supplies, will recreate the very market instability that orders were designed to correct.
It should be clearly understood that reducing class I price in the southeast, as the Department's final rule does, will not mean lower consumer prices. It will mean, however, that the decline in production in the southeast will be accelerated with a resulting increased reliance on milk imported from other areas. Because of its bulk and perishability, transportation costs for fluid milk invariably make imported milk more expensive than locally produced milk, so further declines in local production will necessarily mean higher milk costs for processors, resulting in higher retail prices for consumers.
The final rule finds that the adopted class I price structure will establish class I milk prices that will result in a sufficient supply of milk for the national system of reformed and consolidated orders. While this may be true on a national basis, the resulting class I prices do not adequately take into account regional supply-demand conditions that are essential to ensure that each individual market will be assured of an adequate supply. It is little comfort to the industry in the deficit southeast if the only supplemental supplies available are located in distant markets at prohibitively high prices.
The supply situation in the southeast will be further impacted in a negative way because the basic formula price that is used as a basis for all Federal order class I prices as adopted in the final rule will result in a lower class I price than provided at the present time. While we recognize the need to develop a replacement for the competitive pay price now used to determine the basic formula price, any change in the method of computation should not result in an additional price reduction to producers. The recommendations of the National Milk Producers Federation address this problem and we support their efforts in this regard.
Page 143 PREV PAGE TOP OF DOC Section 608c(18) of the Agricultural Marketing Agreement Act requires the Secretary to establish class I prices for each order at levels that reflect supply and demand conditions in the marketing area. The final rule reduces prices in marketing areas that are already in a deficit situation. This raises the question as to whether the Department's action fully complies with this section of the statute.
Mandating the use of option 1A in the reform of milk orders will help reverse the decline in the southeast dairy industry and we urge the Congress to consider this option.
We appreciate the opportunity to present this statement.
Statement of Robert Junk
Good afternoon. My name is Robert Junk. I serve as president of the Pennsylvania Farmers Union, board member for the National Farmers Union, and formerly, was involved in a family dairy partnership. Today I am testifying on behalf of the 300,000 families who are members of the National Farmers Union.
We believe that the market order system has been successful in ensuring that dairy farmers are paid, and that payment is on time. Therefore, we have supported retaining the Federal order system. However, we believe that dairy reform is necessary to ensure that dairy farmers receive a fair rate of return on their investment. This goal could be partially met by reform of the basic formula price. We are also looking for changes to help reduce market volatility. This goal could be met by implementing a floor price on the base price for milk. However, the final proposal for the Federal milk market order system announced by USDA is unlikely to accomplish either goal.
Instead, the final proposal results in less income to dairy farmers. We do not think Congress intended order reform to reduce farm income. Therefore, it is imperative that Congress takes action to: (1) file an objection to the proposed final order by May 29, and/or (2) pass separate legislation to re-instate the dairy support price, at a sufficient level to achieve price stability and enable dairy farmers to earn their cost of production plus a reasonable return on investment.
Page 144 PREV PAGE TOP OF DOC A price stabilizer is necessary. The nature of dairy production is cyclical. As a result, it is not unusual to have increased milk production in the spring and decreased production in the fall. With these changes, come price fluctuations. Our concern is that dairy farmers must be able to earn their cost of production, plus a reasonable profit, on an annualized basis. The current market system is falling short, and as a consequence, the number of dairy farms continues to decrease.
Agricultural Summit included Dairy Agreement. On April 27, National Farmers Union hosted an Agricultural Summit to provide an opportunity for producer groups to find areas of agreement on farm policy. Members of the leadership from 29 national farm and ranch organizations participated. All policy was adopted by consensus, with any group given the opportunity to veto a particular policy. At the end of the day, the groups reached consensus in many areas, including agreement on principles governing dairy policy. Twenty-nine groups agreed on the following:
We support the continuation of Federal market order system. We oppose the reductions in dairy farmer income as evidenced by the March 1999 Market Order Reform plan announcement.
We support the continuation of the current dairy price support program through 2002 to coincide with the farm bill expiration.
SUMMARY OF KEY PROVISIONS IN THE PROPOSED FINAL ORDER
1. The current 31 orders are consolidated to 11 orders.
2. The final order flattens the disparity in the differential by increasing the minimum differential to $1.60 per cwt.a $.40 increase for some regions. However, in other areas of the country that were benefiting from a higher differential, the amount of the differential has been decreased in varying amounts. Consequently, farmers in those areas will experience a drop in income.
Page 145 PREV PAGE TOP OF DOC 3. Butter and nonfat dry milk create a new class IV.
4. Prices for class III, cheese, and class IV are based on component pricing.
5. class II, soft manufactured products, will be based on class IV plus 70 cents per cwt.
6. Prices for class I, milk used for fluid, will be the higher of class III or IV, plus the differential.
7. The proposal does not contain transition payments for producers, although payments were proposed in the earlier version.
8. The proposal uses multiple pricing points.
9. The proposal is projected to result in a net decline of cash receipts of $2.8 million, per year, for the next 6 years, according to USDA. (The baseline for annual cash receipts is $16.9 billion.) Projections from other economists show greater losses.
10. The proposal increases the make allowance for processors. The make allowance is the amount of manufacturing costs that processors are allowed to deduct from the price paid to producers. A higher make allowance results in a lower price to producers. The proposed make allowance is $1.62 for nonfat dry milk, and $1.73 for cheese. This is higher than California's current make allowance, which is $1.57 for powder and $1.72 for cheese.
Concerns. In addition to failing to provide price stability, National Farmers Union has other concerns on the proposed final order.
The proposed differential creates a problem since it reduces farm income for many producers. We believe a better solution is to increase the differential for regions of the country that are currently receiving low differentials, while maintaining the current differentials for the balance of the country. This would level the playing field up, instead of dragging producers down.
Page 146 PREV PAGE TOP OF DOC The increased processors' make allowance is also of particular concern, since it ensures that processors receive their cost of production, but does so at the expense of producers. Further, since the new proposal would result in a make allowance that is even higher than California's make allowance, producers in California may see a further reduction in the price they receive for milk used for manufacturing, to enable California to sell manufactured products to the rest of the country.
National Farmers Union urges Congress to direct USDA to include California in the Federal order proposal, to at least give California's dairy farmers the opportunity to vote on whether to join the Federal order system. Members of the California Farmers Union have previously petitioned USDA to join the Federal order system. This week they filed a second petition, based on USDA's revised Federal order proposal. We believe that their petition meets with the provision of the 1996 FAIR Act that requires California to be included in the reform if producers from that State petition to be included.
A final concern involves individual voting. Federal law provides that cooperatives may bloc vote on changes to the Federal order system. While that law may have merit in the case of minor changes, we believe that this major overhaul of the Federal order system is different, and should be voted on by producers as individuals. Therefore, we urge Congress to enact law to provide for individual voting for the one-time vote on this major reform.
We recognize that reform of the Federal order system has been a major undertaking for USDA, requiring hundreds of hours of work for many. We appreciate the effort that has been made and particularly the efforts to solicit public input. However, we urge that some key adjustments are made before the proposal is sent to producers for the final vote. We offer our continued support to help in the effort to improve the Federal milk market order system. Thank you for holding this hearing and for the opportunity to present testimony on behalf of the National Farmers Union.
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Statement of E. Linwood Tipton
Mr. Chairman and members of the subcommittee, I appreciate this opportunity to present comments on behalf of the International Dairy Foods Association and its three constituent organizations; the Milk Industry Foundation, the National Cheese Institute, and the International Ice Cream Association. Altogether, these organizations represent 85 percent of the fluid milk, ice cream and cheese products in the $70 billion U.S. dairy industry.
Our organizations have consistently advocated administrative as well as legislative reforms of the milk pricing system for many years. Today we continue that plea, but first and foremost, ask that Congress at least allow the modest reforms that were made in Federal dairy programs in the Federal Agricultural Improvement and Reform Act of 1996 to be implemented.
A major component of the reforms called for by the 1996 Fair Act was to require the U.S. Department of Agriculture to revamp the complex, depression-era Federal milk marketing order system. This component of the FAIR Act came only after Congress grappled with numerous proposals to legislate specific reforms, or even total elimination, of the Federal milk marketing order system. In the end, Congress contented itself with providing direction to USDA, mandating that reforms take place only after a deliberative process, which included industry input, outside analysis, and an informal rule-making procedure. Our organizations participated fully in this reform process, providing to USDA comprehensive input and analysis from the industry at every opportunity. Significant time, effort and resources were spent by the entire dairy industry, and by USDA, to provide a thorough review of the many complicated provisions in the Federal milk marketing order system. Now, 3 years later, we are here to discuss the final decisions reached by USDA through this very painstaking process.
Our member companies sought far greater reform of this system than is reflected in USDA's final rule. We are pleased that the final rule does make several significant changes that have turned milk pricing in an economically justifiable direction, even though we do not agree with all of the specific actions taken.
Page 148 PREV PAGE TOP OF DOC Manufacturing milk prices. In the final rule, USDA brought closer alignment between Federal order minimum prices and those under State regulation in the number one production state, California, for milk used in manufactured dairy products like cheese, butter and nonfat dry milk.
This is an important and very necessary reform. During the 10 years, 1988 to 1998, milk production grew by 9 billion pounds in California. That growth is equivalent to the total annual production of milk in the State of Minnesota. In addition, California is the second largest cheese producing state, second largest butter producing state, and produced nearly one-half (45 percent) of all the nonfat dry milk produced in the United States. Manufactured dairy products produced under Federal order regulation compete with these California produced productsUSDA recognized this in the final rule. Failure to implement the final rule reforms to class III and class IV price formulas would disadvantage companies with manufacturing plants regulated under Federal orders, especially in those Federal orders in the western United States.
Class I prices. The Federal order minimum price for class I milk has two components, the class I price mover (which is the same in all Federal order markets) and a class I differential, which varies geographically. Under current regulation, the class I price mover is the Basic Formula Price lagged two months. The basic formula price is the class III price, primarily milk use for making cheese.
However, the final rule uses the higher of the class III or class IV minimum price formulas. USDA's 5-year analysis (199498) shows that the final rule class I price mover would have been 20 cents (4 cents per gallon) higher than under current regulation. An analysis of the most recent 3 years, 199698 reveals that the final rule results in a 63 cents price enhancement compared to current regulations. This is an enormous increase in class I prices due to the final rule's class I price mover. Adding either the final rule class I differentials or the current class I differentials to a 63-cent higher class I price mover results in significant price enhancement.
Page 149 PREV PAGE TOP OF DOC For example, USDA reported that the class I price mover under the final rule formula would have been $14.78 on average in 1998. Using the final rule class I differential for Boston, $2.75, would have resulted in an average class I Federal Order minimum price in Boston in 1998 of $17.53, 75 cents higher than under current regulation. If instead of the final rule class I differential you add, as some are proposing, the so-called option 1A class I differential to the final class I price mover, the Boston class I price becomes $18.03 for 1998, $1.25 higher than under current regulation. A similar analysis for other cities appears in table 1 of my testimony.
This is only one example of why focusing political attention on only one aspect of USDA's final rule, in this case class I differentials, can have very unintended economic consequences. The final rule is a package, and pieces of the package cannot be amended without considering the effect of the entire package.
Class II prices are higher under the final rule. USDA calculates that over the five-year period from 19941998, the final rule regulations would have resulted in slightly higher class II minimum prices on average (1-cent) than under the current price regulation. However, an analysis of the most recent 3 years (199698) reveals that the final rule class II price formula would have resulted in a minimum price 70 cents higher than under current regulation. This level of price enhancement in the final rule will add significantly to raw ingredient costs for manufacturing plants processing class II products like ice cream and cultured dairy products.
The Final Rule Adds Complexity to Milk Markets. Although IDFA supports implementation of USDA's final rule as a significant step in the right direction, it does not go as far as IDFA would have liked to achieve a significantly reduced role for Government intervention in milk pricing. USDA's final rule results in more formulas for pricing milk, and more complex pricing formulas than currently exist.
Page 150 PREV PAGE TOP OF DOC Table 2 shows the large volume of data on milk prices and sales volume collected by USDA's National Agricultural Statistics Service (NASS) necessary for calculating minimum prices each month. Then, Table 3 shows all the calculations necessary with this data in order to calculate minimum prices each month. These tables clearly demonstrate the enormous complexity added by USDA's final rule. This is unfortunate, especially since the system is already too complex to comprehend.
Better risk management tools, such as forward contracting, are not available under the final rule. At a time when many policymakers are calling for more and improved risk management tools for dairy producers, this final rule does not permit buyers of farm milk to forward contract with dairy producers for milk prices to be paid in the future. The final rule regulations set minimum prices which buyers of milk must pay to individual producers and cooperatives. This does not permit such buyers and sellers from mutually agreeing to buy and sell milk at a price agreed to beforehand. While Federal milk marketing orders regulate the minimum price which milk buyers must pay cooperatives or non-cooperative producers, they do not regulate the price which cooperatives in turn pay its member producers. Therefore, only cooperatives and their producer members may enter into forward contracts.
Impact of final rule on actual prices paid to dairy producers. Some industry analysts are claiming that the final rule will decrease actual milk revenues to dairy producers by several hundred million dollars. This is just not correct. Any analysis of the final rule which assumes the change in the minimum regulated price will fully change the actual price paid to dairy producers is inherently flawed. In fact over order premiums (prices over and above the regulated minimums) averaged 86 cents in 1996, $1.16 in 1997 and 98 cents in 1998.
USDA says that actual milk prices paid to dairy producers will not change significantly as a result of the provisions of the final rule. Compared to a baseline of continuing the current Federal order pricing system, USDA estimates the final rule will add on average $3.2 million per year to the over $24 billion per year paid to dairy producers over the 6-year period from 2000 to 2005. A similar analysis conducted by the University of WisconsinMadison concluded that the final rule results in a decline of only $72 million per year on average compared to continuing the current pricing system, about one-quarter of one percent of the total dollars paid to dairy producers.
Page 151 PREV PAGE TOP OF DOC Some in the industry are advocating that Congress legislate the so-called option 1A class I differentials. USDA also estimated that the impact of adopting option 1A class I differentials with the other provisions of the final rule would increase dairy producer revenue by $77 million per year compared to current pricing. The University of Wisconsin analysis also concluded that adopting option 1A class I differentials with the other provisions of the final rule would increase dairy producer revenues by $125 million per year compared to continuing current pricing. Those who claim that option 1A class I differentials merely return monies taken away by other provisions of the final rule are not supported by the USDA's regulatory impact analysis nor by the third-party analysis conducted at the University of Wisconsin.
Congress should stay the course on the dairy policy commitments made in the 1996 farm bill. In the next few months, it should also honor its promise to phase out the dairy price support program and sunset the Northeast Dairy Compact. If Congress reneges on these promises, it will set in motion a chain reaction that will harm consumers, milk processors, taxpayers and dairy farmers.
"The Official Committee record contains additional material here."