SPEAKERS CONTENTS INSERTS
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USDA'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,
Washington, DC.
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.
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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.
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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 complex—a 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.
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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 rule—by most analysis—is 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 enough—with its complexities, turns and twists—without 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.
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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.
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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 1–B proposal. Many of us in Congress believe the option 1–A proposal would have been a much more sensible step towards reducing class I differentials. The option 1–A 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
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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 1–A option. I have strongly supported the 1–A option during this process and expressed my support for 1–A, 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 1–A 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 1–A. 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 agriculture—and our dairy industry is a major contributor to this sector.
Today, Wisconsin has 22,000 dairy operations—more 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 operations—most of which are small family farms. It is important to note that the loss is not solely limited to the farmer—the 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.
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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 areas—known 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, WI—a 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.
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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.
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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 processors—not politicians who do not understand the complexities of the dairy market.
Of course, many of you have concerns—and legitimate concerns—over 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.
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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.
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The Secretary's proposal, in our view, is far from perfect, but it is a modest—very modest—step 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 1–B, 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.
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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 bill—I believe it was—for 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 order—as Mr. Gunderson believed there ought to be, a long time ago—and a number of other items associated with this issue.
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I thank the Chair for the time.
[The prepared statement of Mr. Obey appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Klink.
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 believe—and our farmers don't believe—the 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 reform—every kind of thing. But the comment that really set every one off—the subject—was 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.
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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 elsewhere—full-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 farmers—I agree with Mr. Obey—regardless 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 1–A, 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.
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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.
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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 1–A 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.
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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 hearing—especially 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 1980—only 19 years ago—Wisconsin 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.
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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.
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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?
[No response.]
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.
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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 cheese—both in barrel form, as well as block cheeses—to 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.
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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 place—not 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.
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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 model—your economic model, in estimating out that? How much confidence do you have in going by prior estimations—projections—the 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.
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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 1–A, 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 1–A is legislated, or does it just impose it? Say that Congress changed your rule, legislated 1–A, would there be a referendum in August on 1–A?
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?
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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 1–A?
Mr. COLLINS. Yes, sir.
Mr. PETERSON. If compacts under 1–A 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 1–A 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 1–A 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.
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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 1–B and a modified 1–A in comparison to our final decision. The 1–A and the 1–B 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 change—almost no change at all—in 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 whole—this is my estimate; I haven't seen them do a farm income estimate, but they do have an all-milk price effect—roughly $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.
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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 numbers—roughly 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?
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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.
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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.
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Mr. EVERETT. And if those over-order premiums do not take place, what happens in a State like ours—in 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 consumers—be they in Alabama or any other place in the country—a 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 1–A did you receive and how many in support of option 1–B?
Mr. FIGUEROA. Mr. McKee will look for that number, sir. It was clearly the number of comments that we received in support of 1–A was significantly larger than the comments in support of 1–B. 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 1–A and only about 400 in support of option 1–B. 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.
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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 1–A 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 does—and this is the ultimate justification for what we use to establish class I differentials—is 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.
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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 agreements—about 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.
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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 July–June 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 point—today. 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?
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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 should—if it prevails—reduce 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.
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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.
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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?
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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 right—the 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.
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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 1–A to 1–B 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 1–A 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 1–A 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.
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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 remember—if I am incorrect, I hope someone will straighten me out on this—the 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 way—I think we just heard from several questions here—to sort of redistribute income. In the process of redistributing income, let me just say up front, my State—not unlike some of the others—lost 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 rapidly—North Carolina. It is a fast growing State with a major consumption.
I heard someone earlier—I don't know which one of you—talk 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.
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I guess having been involved on the administrative side for 8 years; having responsibility of developing models—I 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 question—someone 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.
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I want to restate, as I stated to Mr. Riley, we developed our final decision having in mind the country's needs as a whole—the needs from the producer community; the processor community; the distributor community, and the consumer community—to 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 consumers—I 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 losing—big 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 milk—which is what we are really trying to get at with this thing—there is very little change in terms of what the producers get.
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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 of—there may be, and probably will be more—only 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 period—1994 to 1998—our 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.
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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 formula—if it is in fact 50 cents lower—is 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.
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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 price—I am not sure that is accurate—but 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 price—the 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.
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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 for—7 times 12—84 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 1998—the celebrated period that all these analyses are using—and 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.
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I really think, in the end, these results on a national average basis—I am not talking about regionally—are 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.
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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.
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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.
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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 assumptions—not ''assume'' that gets us into trouble—but 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.
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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.
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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 done—goodness knows we have heard reference to that today—we 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.
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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 farmers—3,800, to be exact—over 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 place—and was a surprise to a lot of people, not only in Minnesota, but really around the whole United States—was 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.
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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.
Mr. Anderson
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