SPEAKERS CONTENTS INSERTS
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REVIEW OF OPTION 1–A, FEDERAL MILK MARKETING ORDERS
THURSDAY, JUNE 24, 1999
House of Representatives,
Subcommittee on Livestock and Horticulture,
Committee on Agriculture,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:08 a.m., in room 1300, Longworth House Office Building, Hon. Richard W. Pombo (chairman of the subcommittee) presiding.
Present: Representatives Boehner, Goodlatte, Lucas of Oklahoma, Schaffer, Calvert, Gutknetcht, Riley, Combest [ex officio], Peterson, Holden, Condit, Dooley, Berry, Stabenow, Etheridge, Boswell, Lucas of Kentucky, and Stenholm [ex officio].
Also present: Representatives Ewing, Smith, Minge, and Sherwood.
Staff present: Christopher D'Arcy, subcommittee staff director; John Goldberg, professional staff; Brent Gattis, Wanda Worsham, clerk, and Callista Bisek, Howard Conley, and John Riley.
OPENING STATEMENT OF HON. RICHARD W. POMBO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. POMBO. I would like to call this hearing to order.
Today, this subcommittee will receive testimony on H.R. 1402, introduced by our colleague and a former member of this subcommittee, Roy Blunt of Missouri. This bill would require the Secretary of Agriculture to implement the class I milk price structure, known as option 1–A, as part of the implementation of the reform of Federal milk marketing orders. This hearing is another step in the ongoing process of reforming 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.
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On May 5, this subcommittee held a hearing on the administration's final decision for the reform of Federal Milk Marketing Orders. At that time, I noted that all too often a debate on dairy policy becomes a battle of economists, with each using their own economic model for analysis and each using different economic assumptions. The result was a maze of contradictory and conflicting information, making an already complicated issue all but impossible to understand. In light of all that, Ranking Member Collin Peterson and I asked all interested and involved parties to meet and agree on one single unified model to analyze the economics of dairy reform. I was cautiously hopeful that this could be accomplished.
I am glad to report that all but one of the participating organizations, including the FAPRI, the U.S. Department of Agriculture, Cornell, Texas A&M University, and the University of Wisconsin have endorsed the model of analysis that will be presented by FAPRI this morning as a reasonable and useful economic model. While these organizations may differ on some of the specific details, each accepts the overall model as credible and sound. The broad consensus that this model has achieved clearly makes it the standard by which this subcommittee will judge and scrutinize dairy policies and proposals.
I want to offer sincere thanks to the economists, many of whom are present today, for their hard work in this undertaking.
The regional and political support of H.R. 1402 has signaled that the Department of Agriculture's so-called ''final decision'' is, in fact, far from it. This bill would change the price formulation for class I milk from that Department's proposal. Support of this bill has, indeed, been broad, but today we will judge how deep that support is, how rational, how reasonable, and how farsighted.
Most importantly, I want to know what this legislation means for the long-term viability and competitiveness of American dairy. Does it move us from a government-directed to a market-oriented approach? And how could this pricing policy affect other agricultural commodities? Only when these questions are asked and answered can members make an informed decision on a proposal that is so vitally important to our Nation's dairy farmers and processors.
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Finally, we have an obligation to provide a framework and a road map for America's $50 billion dairy industry. One way or another, we need to move this process forward allowing adequate time for policy implementation with the minimal amount of disruption. The number and the stature of our witnesses here today speak to the importance of these matters and the seriousness of the decisions before us.
I welcome all of our witnesses and guests and look forward to today's testimony.
I would now like to yield to the ranking member, Collin 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. And thank you for calling this hearing.
As we examine the proposed legislation before us today, I think it is important that we review the amount of work that has gone into this by USDA and the final rule that they came up with on overhauling Federal milk marketing orders system.
As we all know, the 1996 farm bill directed the Secretary to consolidate and reform the Federal system by April of 1999. Through a very thorough process, USDA sought public input, held public meetings throughout the country and in time released a final rule. The Department followed the process Congress outlined, and they have put an enormous amount of time and energy into answering all of our questions at every step of the way. I also believe, Mr. Chairman, that through your leadership, the subcommittee has been very accommodating to all viewpoints.
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When the final rule was released, a barrage of wild economic forecasts followed. Where there was conflict in the economic models, you wisely sought common ground. As you said, Mr. Chairman, they have now come mostly together on this. At your request, USDA worked closely with the economists and producer groups to reach the consensus on what the true economic impacts of this rule are.
In sum, I believe USDA's final rule on the Federal Orders reform sits on very solid ground. It is unfortunate that political wrangling would attempt to change that. And I think it is also disappointing that we are once again attempting to circumvent the process that we set up.
Although today's debate will focus on class I differentials, and there is continued talk in the other body on regional dairy compacts, the most important reform issues are often ignored. In my judgment, the most important aspect of this rule is the replacement of the current basic formula price with a new manufacturing price system based on the components of milk that more accurately reflects the manufacturing marketplace on a timely basis. It is also significant that USDA plans to consolidate the current 31 Federal orders into 10 and that took a lot of work.
But, in short, consolidation will help eliminate some of the utilization distortions that have skewed the market and although the new system is not expected to correct all the future volatility, it should help prevent enormous price drops, like we recently experienced, that are based on old and inaccurate market information.
Multiple component pricing also adds to the greater market reality by pricing the value of milk in a more complete manner. The added benefit of this method is that it moves us closer to the California system and because of California's strong influence on the national manufacturing milk price, our dairy industry benefits by having the Federal system reflect elements of the California system. And we would benefit more if California would vote to join the Federal system, which is another issue that might come along someday.
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Mr. Chairman, in my opinion, the differences between 1–A and 1–B and the importance of this bill I think have really been overblown. The difference is not as dramatic as many would report. FAPRI will offer testimony later on the projected effects of the final rule versus option 1–A. And in the aggregate, the effect that they will show us is very small. And I think it has been somewhat of a disservice to our Nation's dairy farmers to spread all the misinformation about how big of an impact this all might have.
I believe it would be in the best interest of everyone if we simply delayed all these legislative proposals until after we have let USDA complete the process and we have had the referendum that is going to take place in August. In my opinion, the farmers and the dairy co-ops that are going to vote on this referendum are going to overwhelmingly approve it and put it into place. And I think that kind of answers the question as to whether there is support for this rule or not. And if I am wrong, then I think at that point it would be relevant to consider legislative proposals to address some of the concerns.
I would also challenge those who support 1–A and these dairy compacts while at the same time they sing the praises of the free market, of free trade, and of freedom to farm. I do not understand how these opposing viewpoints meet in the dairy barn. We passed Freedom to Farm, which pushed us further into the world market without, in my opinion, an adequate safety net. And I can tell you that this has not worked very well up in the northern part of my district where we have farmers in terrible trouble.
So we are here today saying, ''Well, that is all well and good, but dairy is different.'' Well, if the free market is healthy for American agriculture, why are we attempting to legislate market distortions? USDA has issued a final rule with class I differentials that are based on the cost of moving fluid milk to deficit areas. Legislating higher levels goes against that market.
Some push for free trade saying, ''American agriculture will succeed in the global market. We are the lowest cost producer, and we are not afraid to compete.'' Yet, somehow, those same people don't trust our own domestic dairy market to provide the right results. We push for national agriculture policy while demanding regional compacts that offer local benefits at the expense of others.
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Mr. Chairman, I can understand why many of the major cooperatives support this legislation, but I am still confused as to why free marketers support this proposal. The bill stops our movement forward. It pushes our dairy farmers and our industry backward. And while proponents of option 1–A complain that the current system means the demise of their farmers, what they are basically proposing to do here is to legislate the current system into law.
I believe it is critical that we move our dairy industry into a brighter future, one that is able to respond to the market forces and not hindered by government distortion. The final rule moves us in that direction, and I believe we must shy away from proposals that offer regional advantages while fracturing our national dairy industry.
I have traveled around the country talking to dairy producers and co-operatives. The one issue that unites producers and co-ops across the country is the extension of price supports, which are set to be eliminated January 1, 2000. In my opinion, it would be in the best interest of the national dairy industry if we enact a proposal that I have introduced that extend the price supports through 2002 like we have on the rest of agriculture, and that we put all of these bills, the bill on 1–A and compacts and all these other proposals on the table and let the final rule go into effect.
Mr. Chairman, again, I thank you for calling this hearing and look forward to hearing our witnesses. And we have the Governor here; I don't know if we are going to introduce this panel or how we are going to do this, but I appreciate your having this hearing.
Mr. POMBO. Thank you. I would like to ask unanimous consent that a copy of H.R. 1402 and all Members' opening statements be included in the record at this point.
[H.R. 1402 follows:]
"The Official Committee record contains additional material here."
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PREPARED STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Thank you, Mr. Chairman, for holding this hearing on H.R. 1402. I am a cosponsor of this legislation and am grateful for the commitment you and Chairman Combest have made to take early action on this bill. It is supported by dairy farmers from much of the United States as a necessary step towards accomplishment of the milk marketing order reform directed by the 1996 farm bill.
Mr. Chairman, by requiring USDA to use option 1–A price differentials in implementing order reform, H.R. 1402 will allow a reasonable fulfillment of the farm bill's mandate. It is clear that the final rule issued by the administration lacks the Congressional and public support it needs to be a sustainable choice. While this point was made clear by communications from Congress and public views filed during the comment period, USDA did not listen and, instead by its action, has challenged Congress to Act.
Some who testify today will make the point that it is not the business of Congress to legislate such details. I agree with them and attempted to avoid such a course by joining with my colleagues in helping USDA to interpret Congress' meaning. Since public sentiment in this area was ignored and USDA has exceeded its mandate, we are prepared to act on this legislation.
Mr. Chairman, many participants in our debate have adopted the stance that option 1–A represents the status quo. I hope that our hearing today will help to clarify whether or not that is in fact the case. For many years, it was a goal of upper Midwest organizations to encourage a consolidation of milk marketing orders—so much so that the farm bill's requirement for consolidation was that region's main accomplishment in the Dairy section of that bill. Option 1–A would accomplish that goal to the same degree as option 1B. Under the old rhetoric then, even with option 1–A, the final decision would be a significant accomplishment. But apparently the debate shifted and we are faced with a new measure of success.
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It was also a goal of the upper Midwest to bring an end to the accepted notion that each order's class I differential is related to its distance from Eau Claire, WI. Option 1–A recognizes three surplus zones as the basis for determining class I prices. In Texas, this result itself means a significant lowering of the differential for producers currently in the Texas order. For my producers, option 1–A hardly represents the status quo. So again, under the old rhetoric and the old standards of success for the upper Midwest, option 1–A represents a significant victory and apparent change from the status quo.
Mr. Chairman, producers who are supporting option 1–A were prepared to accept these changes in Federal Orders that would have made the system more equitable for the Upper Midwest. The final decision, however, will lead to a substantial negative impact on dairy producer income in Texas and in many other areas. In short, the final decision goes too far and unduly threatens the value of dairy farm investment in the United States.
Mr. Chairman, since our hearing last month, I have devoted considerable attention to another controversy relating to the final rule: the class III pricing formula. Several witnesses at the May hearing raised concern that this formula will have a significant negative impact on all producer prices. As we proceed forward on H.R. 1402, our committee will be asked to revise the bill to address Class III pricing. While a number of options on this issue are conceivable, I hope that dairy industry participants with differing views can find a way to come together and develop a mutually agreeable solution.
Mr. Chairman, USDA did a great deal of work in developing the rule on milk marketing order reform. The statute we passed required little more than a consolidation of orders—a reform which, by itself, was considered to be an important step at the time. In addition to consolidation, the Department has used this rulemaking as an opportunity to base manufacturing class prices on milk components rather than on grade B prices, and to establish several surplus production regions as basing points for determining minimum prices. H.R. 1402 is designed to preserve all of these reforms and to make reasonable adjustments to class I price differentials. It represents responsible progress towards an improved system and should be viewed as such against the background of our current program.
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Again, Mr. Chairman, I appreciate this hearing and look forward to working with you and members of the committee in the process that lies ahead.
PREPARED STATEMENT OF HON. TIM HOLDEN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA
I would like to thank our subcommittee chairman, Mr. Pombo, for holding this hearing and for providing me with the opportunity to submit this testimony in support of H.R. 1402, legislation to mandate implementation of option 1–A of the Federal Milk Marketing Order System.
As a 6-year veteran of the House Agriculture Committee and this subcommittee, I serve as a representative of the dairy farmers in the Sixth Congressional District and across Pennsylvania. In Pennsylvania, dairy is the largest agricultural enterprise in the state-representing a $1.5 billion industry. Pennsylvania is the fourth largest dairy State in the country, with dairy products accounting for 40 percent of agricultural outputs in Pennsylvania. In the last 10 years, the number of dairy farms has declined by 3,200, to only 10,500, and the number of dairy cows has declined by 90,000, down to just 640,000. In Pennsylvania, it has been estimated that 17,000 jobs are tied directly to the dairy industry, and another 12,500 jobs—such as building, trucking, banking, et cetera—are indirectly tied to the dairy industry. It has been estimated that a 2 percent decline in Pennsylvania's dairy industry would translate into a loss of almost 600 jobs. Dairy is important to Pennsylvania, and the entire Northeast, because of the economic contributions it makes—both in dollars and jobs.
On March 31, 1999, Secretary of Agriculture Dan Glickman announced a major overhaul of the 60-year-old Federal Milk Marketing Order Program. In relation to many other markets, the dairy industry was a unique creature prior to any Federal Dairy Program: the chronic imbalance between supply and demand and its perishable nature place dairy producers in a difficult marketing position that has the potential to lead to instability in the supply and price of milk. In 1937, amendments to the Agricultural Marketing Agreement Act of 1937 created the current Federal milk marketing orders. Federal milk marketing orders ensure the fair marketing and pricing of milk by: (1) classifying milk by use; (2) setting minimum prices that handlers must pay for each class of milk; and (3) paying average prices to all dairy farmers who supply a particular region.
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During consideration of the 1996 farm bill, there was considerable debate regarding the need to reform the Federal Milk Marketing Order system. In response, Congress charged the Secretary of Agriculture to streamline and improve the Nation's wholesale milk pricing system. The Secretary was to reduce milk marketing orders and change them if necessary to respond to current market conditions.
In doing so, USDA proposed two separate options commonly known as option 1A and option 1 B. Under option 1–A, projected annual income of dairy farms would increase $32 million. This is less than one half of one percent of total dairy farm income. Under option 1–B, however, U.S. dairy farmers would lose $365 million per year or $1 million per day.
The pricing structure for class I (fluid) milk is extremely important to dairy farm income, rural community economic stability, and the regional supply of fresh fluid milk. The phase-down of farm income proposed by option 1–B would clearly hurt the financial condition of farmers, with small family farms bearing the greatest burden. In fact, the proposed rule stated that ''small businesses, particularly producers, would experience significant economic impacts.'' This ran counter to the USDA's National Commission on Small Farms Report, ''A Time to Act,'' which states, ''the small farm is the cornerstone of our agricultural rural economy.''
In an effort to encourage the Secretary to support option 1–A over option 1–B, 238 House Members and 61 Senators signed an April, 1998 letter to Secretary Glickman showing tremendous support in Congress for option 1–A in the pricing of class I milk.
Unfortunately, when USDA issued its proposed final rule, it came back with what is now being referred to as a ''modified'' option 1B that penalizes dairy producers again to the tune of $150 million in most every region of the country. Unfortunately, the Secretary chose an option that will only continue to increase the high prices Upper Midwest farmers already receive, and does not address the needs of the Northeast. Not only does it substantially reduce dairy farmers' income, it will create major fluid price discrepancies in a number of regions of the country. The proposed rule does not meet any of the tests necessary to effectively price fluid milk, including transportation and marketing costs and local supply and demand needs. It does, however, discriminate in providing fair and equitable prices to dairy farmers in most regions of the country. In both the short and long run, it will hurt consumers by reducing supplies of locally produced fluid milk and driving up prices at the supermarkets. Option 1–A has the support of the vast majority of dairy farmers and their cooperatives across the country.
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In the Northeast the effects will be devastating, especially in Pennsylvania, which is the most adversely impacted state in the Northeast region under the proposed final rule. In my district and across Pennsylvania, scores of dairy farmers close their farms and go out of business every year. Dairy farmers were just hit with the largest drop ever in USDA's basic formula prices—a 40 percent drop in farmgate prices translates into a loss of almost $300 million in monthly income for dairy farmers in the Northeast and South. Pennsylvania farmers will lose over $64 million a month over the next 2 to 3 months in milk receipts. Over the course of the year that amounts to well over $400 million.
Should the proposed modified 1–B go into effect October 1 of this year, dairy farmers in my state will lose over $35 million a year, based on the reduction in class I differentials. However, USDA claims that the reduction in the class I differentials will be recovered in part with proposed modifications to and increased pricing of class III (manufactured) products (i.e. cheese.) On paper this sounds great. In reality, it is not. We all know that the class I differential reduction is an actual loss of dairy income. In my district the class I reduction will mean, that come October 1 of this year, an 80 to 100 cow farm will lose between $6,000–$7,000 in farm income a year. This can be the difference between breaking even or losing the farm. While the proposal would make us believe that the changes in class III pricing will make up for this $6,000 to $7,000 loss, the class III modifications are based on assumptions—market based assumptions over which dairy farmers have no control. There is no guarantee that this loss will be made up by the proposed changes in manufactured dairy product pricing. The only guarantee is that dairy farmers in Pennsylvania will lose income, continue to go out of business, and the supply of local fresh fluid dairy products will diminish.
It is for these reasons that I am an original cosponsor of H.R. 1402, which will implement the widely supported option 1–A—providing equitable pricing for fluid milk, ensuring affordable dairy products to consumers and preventing the further erosion of many small communities' economic well being.
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I encourage my colleagues on this subcommittee to pursue further consideration of H. R. 1402 so that we can ensure our nation's dairy farmers receive a fair pricing system and consumers have an adequate supply of fresh dairy products.
PREPARED STATEMENT OF HON. DEBBIE STABENOW, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
I am pleased to have the opportunity to participate in today's hearing on legislation introduced by my colleague and friend, Congressman Roy Blunt. I am proud to be a cosponsor of his bill, H.R. 1402, that would require the Secretary of Agriculture to implement option 1–A as part of the implementation of the Final Rule to consolidate Federal milk marketing orders. I would like to take this opportunity to thank Chairman Pombo for recognizing the importance of this legislation and for holding today's hearing. I would also like to thank all of today's witnesses for their expert testimony. Let me also extend a warm welcome to a fellow Michigan, Mr. Elwood Kirkpatrick, first vice-president of the National Milk Producers Federation.
Last year, I was one of the 238 Members of Congress who expressed strong support for option 1–A in letter to Secretary Glickman. I know that during the comment period on the Proposed Final Rule, eight out of 10 of the over 4,000 comments received supported option 1–A. The groups that represent our nation's dairy farmers are unanimous in their support of option 1–A. Finally, Secretary Glickman's own Pricing Structure Committee recommended option 1–A. It is unclear to me, in light of the overwhelming support for option 1-A, why the U.S. Department of Agriculture has proposed a modified version of option 1–B.
I am very concerned about the impact of option 1–B on my dairy farmers in Michigan, and throughout the Nation. I know that there are conflicting economic analyses about the impact of option 1–B. Nonetheless, I am convinced that those farmers who are currently suffering, which includes dairy farmers in Michigan, are those who will be hardest hit by option 1–B. I believe it will drive entire regions of farmers of business and in the end hurt consumers with higher prices. That is why I am a cosponsor of H.R. 1402, I feel Congress must override the USDA's decision and mandate option 1–A.
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I welcome the comments from today's panels. Chairman Pombo, thank you again for convening this important hearing.
Mr. POMBO. I will introduce our first panel, two of our colleagues, Mr. Roy Blunt and Mr. Mark Green, and the Governor of Minnesota, Mr. Ventura.
Roy, we will start with you. I have to tell you I am very impressed with the number of people you have turned out at this hearing and the interest that you have generated for your legislation. [Laughter.]
You may begin.
STATEMENT OF HON. ROY BLUNT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MISSOURI
Mr. BLUNT. Thank you, Chairman Pombo. I have been telling you for months the American people care about milk policy and it is pretty obvious here today that that is the case. This panel may or may not be the battle of economists, that you suggest that these debates often are, but that may occur later in the day. I am certainly pleased to be on a panel with my good friend, Mark Green, who cares about these issues, and we have discussed them often.
And certainly it has helped draw attention to this debate that the Governor of Minnesota, Governor Ventura, is here today. Congressman Peterson suggested that maybe I could just challenge the Governor to some feat of physical strength and we would decide this issue based on the outcome of that. I remembered then that Congressman Peterson is not for my legislation. [Laughter.]
And it is pretty obvious to me. I asked our own wrestling coach, the Speaker, if he had any advice, and his advice was: Don't challenge the Governor to any feat of physical strength. But based on what I have seen of the Governor, I don't think I want to challenge him in a physical or mental way. So it is great to have him here today.
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I saw our former colleague, Gerry Solomon, this morning, who you know has cared about these issues for a long time. His advice, and he already knew that Governor Ventura was going to be here, was don't ask the Governor to step outside. So I definitely won't do that.
I am grateful for you having this hearing, for the attention that you have personally given this issue. I am honored to see the chairman of the full committee here, Chairman Combest here.
And, as both of you and every member of this committee, as I look around the room, knows so well, that in 1996, this committee was responsible for crafting, and I think carefully crafting legislation commonly referred to as Freedom to Farm. As a body, the Congress attempted to capture a set of guidelines that not only coincided with advances in technology and recent trends in agriculture but offered a clear foundation for the future viability of the family farmer.
With this in mind, Congress directed the Secretary of Agriculture to do two things with regard to Federal milk marketing orders. One, was to consolidate the current Federal milk marketing orders to not less than 10, nor more than 14 orders. Second was to designate the State of California as a Federal Milk Order if California dairy producers petitioned for, and were approved for, such an order. Contrary to some of the statements that have been made about what was required of the Secretary, those are the only two things in Freedom to Farm that the Secretary was required to do was to make those consolidations of orders.
In response to this directive, the Department ultimately proposed two separate options subject to public evaluation. In examination of the public comment, the Secretary's own Price Structure Committee, among numerous others, recommended differentials similar to option 1–A. Eight out of 10 of the more than 4,000 comments on the proposed rule recommended option 1–A. Most importantly, those groups representing the dairy farmers of America spoke in an almost unified fashion in favor of option 1–A. When the final tally was in, almost all of those groups said we want 1–A. Similarly, 238 Members of the House and 62 Senators wrote the Department unequivocally supporting option 1–A.
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Unfortunately, despite the prominent role of the industry and the Congress, the administration elected to go with a slightly modified version of the proposed option 1–B. It is important to understand that the product that dairy farmers provide sets them apart from other producers. Their product has to be sold in a fresh way. It has to be reasonably close to the point of consumption. It takes not just months, but years to have a cow ready to produce that fresh quality of raw milk. Dairy farmers, unlike other farmers, can't decide they are going to hold on to their product. They can't decide they are going to wait for a different market. They have to market their product the day that the American people expect that product to be available to them. And in the case of fluid milk, to be available to them in a very short period of time.
Aside from the perishable nature of raw milk, there are other more ominous forces at work against dairy farmers. Rapid consolidation of the dairy industry is putting market power in the hands of fewer and fewer each year. I would only direct you to the problems we now have with market concentration in poultry, in beef, and in the pork industries, and contend that dairy is headed down that same road if we don't do something to prevent that from happening.
Simply put, option 1–A reforms the Federal Order system through a variety of means that include reclassifying milk products, consolidating the current 31 orders into 11 and including several previously unregulated areas. Further, option 1–A reduces market volatility and continues to assure that there will be enough fresh milk in all markets of our Nation. It does so by keeping in place what are called price differentials, a system that has worked for many years, guaranteeing us an adequate supply of fresh milk. As the Government withdraws from the purchase of dairy products to balance the market, we have to leave in place these mechanisms that assure a continued local supply.
In spite of these concerns, opponents of this legislation, like my friends here on the panel and like the people who will testify later today, and I want to say about all those testifying today that more often than not we have a common interest in not only the production but the consumption of this great product, a product that the Federal Government has taken special interest in because of the uniqueness of the way it has to be produced, packaged, and offered to consumers. Everybody on all of these panels has that in common, and I appreciate their interest in these issues.
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But those who argue that the current system, or any reflection of the current system, result in really putting dairy farmers in the upper Midwest out of business, I think that the facts do not indicate that that is the case. In fact, there is quite a bit evidence below the surface rather that in 1997 and 1998, the total number of dairy farmers in existence in Minnesota, Wisconsin, Illinois, and Iowa did decline. In fact, they declined by 8.34 percent. The decline in the South, including West Virginia and Texas, however, was slightly higher, 8.39 percent. In spite of the fact that there is a decline in dairy farmers in the upper Midwest, a decline in dairy farmers in the South, the production in the upper Midwest increased by 474 million pounds or 2.1 percent, while production in the South decreased by 3.5 percent. There is something wrong with a system where that happens.
For those of us who are not economists, these numbers show that the farmers who are suffering the most under the status quo are the same farmers who will receive a further decrease in income under the proposed final rule.
To continue discussion of the arguments in opposition to H.R. 1402, I noticed that we are going to be joined here by some of our friends who represent consumer interests. And I would only say in response to that, to go through some of my testimony that is being included, that as you decrease competition, as you do things that discourage the production of this product around the country, I believe, and there is evidence to support the fact, that eventually what you do is drive up the price in a significant way.
On the next panel, Dr. Scott Brown, whose testimony will include the FAPRI material, Mr. Chairman, that you have already mentioned, points out that retail fluid milk prices are unchanged from the baseline, generating no change in either fluid milk consumption or any significant change in fluid milk costs.
In summary, the class I differentials in the final rule create more losers than winners. They threaten the economic viability of dairy production in the areas of the country where local milk supply is already the tightest and making sure that milk is either produced near or drawn to where there are consumers to buy it. Unfortunately, there is no getting around the fact that the class I differentials in the final rule could do just the opposite. It makes no sense that the Department of Agriculture still maintains that a system that will result in concentration of milk production to a small region of the country is the right system.
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And when witnesses argue that we should let the farmers decide by voting, as we have already heard here today, we have to remember that option 1–A is not on that ballot. The only option available to farmers in that ballot is option 1–B or no Federal program at all. The milk marketing areas make sense. The raw nature of this product has led to a system that has worked well over the years.
Finally, when evaluating the testimony you hear today, I urge you to note the extremely limited region of the country where the witnesses come from. Also, I would like to you to note that Land O' Lakes, which is a dairy processing giant in the upper Midwest, publicly supports 1–A. Knowing this, it logically follows that if the processor in the area supports option 1–A, a large number of farmers in the upper Midwest do as well, though their voices don't appear to be represented on the panel today.
I spent a lot of hours growing up in the dairy barn with my father and my grandfather; I can assure you that this legislation is about the future of family dairy farms in America. I can also assure you that the future of family dairy farms are the future of both raw supply of this product and competition and a price that is the right price for consumers.
Two hundred and twenty-five Members of Congress agree with that and have sponsored H.R. 1402. I am pleased to be here today to represent a bipartisan majority of our colleagues who are cosponsors of this bill, who look forward to committee action on this bill, and look forward to seeing this bill on the floor of the House in the near future.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Blunt appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Green.
STATEMENT OF HON. MARK GREEN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN
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Mr. GREEN. Thank you, Mr. Chairman. My colleague, Representative Blunt, referred to some advice he had received from the Speaker earlier today on how to handle the witness to my left. What he didn't tell you is that part of that advice was, ''Well, since you are going to disagree with Governor Ventura, why don't you place Green between you two.'' [Laughter.]
I appreciate the opportunity to testify before the subcommittee on H.R. 1402, which I would characterize, quite frankly, as an anti-dairy reform proposal. Now this issue is of critical importance, not just to the Midwest and our dairy producers, but consumers and dairy producers all across the Nation. It is important to the dairy farmers in the upper Midwest.
In the past 2 years, Wisconsin has been losing an average of five dairy farms each and every day. That tells you how important it is to us. In fact, between 1997 and 1998, Wisconsin lost more dairy operations than Alabama, Arkansas, California, Colorado, Idaho, Indiana, Iowa, Ohio, Michigan, North Carolina, Oklahoma, Pennsylvania, and Virginia combined. That covers every State represented by members of the subcommittee, with the exception of the Minnesota delegation, which because of this unfair policy is in the same situation that my own State is. I would just say with respect to, and in due respect to my colleague, if 1–B wouldn't help Wisconsin dairy farmers and Minnesota dairy producers, I doubt that you would see leaders like Governor Ventura traveling the distance that he has to be here. It is true that the panelists in opposition are from a concentrated area in the Nation, but it is also true that that is where most dairy farms are, located in the upper Midwest.
Defeating H.R. 1402 is also important, not, again, just to upper Midwest dairy farmers, but the Nation as a whole. The 1995 Congressional Budget Office report indicated that reforming the Milk Marketing Order Program could save taxpayers $149 million each year. In fact, that program, the Milk Marketing Program is the third program mentioned in the Citizens Against government Waste booklet, ''Prime Cuts: 44 Ways to Leaner Government.''
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The current system also hurts taxpayers by reducing the strength of programs like the WIC program and non-partisan groups, like the Citizens Against government Waste and Americans for Tax Reform agree that any effort, such as Representative Blunt's, to restore this system is an anti-taxpayer proposal.
Now as Representative Blunt, my friend and colleague, has mentioned, during the 1996 farm bill debate, Congress was unable to build a consensus on dairy reform and that impasse threatened to kill the underlying legislation. As a result, dairy interests from across the Nation and across the spectrum agreed to leave dairy reforms out of that bill, and they directed the Agriculture Secretary to develop a reform plan with the understanding that all sides would abide by that final rule. H.R. 1402 would directly contradict the Secretary's rule and violate the 1996 understanding. Furthermore, since the Secretary's reforms require approval by two-thirds of the dairy farmers within each new proposed order, this legislation would also deny the right of our dairy farmers to vote on this dairy reform.
Now let's be clear, from the perspective of the upper Midwest, Secretary Glickman's announced reforms are modest, very modest. However, they do represent the first step, baby step, in the right direction in over 62 years and that is why we support them. They are a move towards more of market-oriented dairy system, one that benefits taxpayers by lowering the price of milk and, quite frankly, moving government policy out of the Dark Ages.
The plan that is before us would restore the very policy that has driven so many family farmers out of their livelihoods and forced consumers to pay artificially inflated milk prices. It actually reaffirms the practice of pricing milk based upon its distance from Eau Claire, WI. Now I know Eau Clair, WI. I love Eau Claire, WI. I went to school in Eau Clair, WI. But for a government policy created in Washington or any other State to come in and tell us in Wisconsin that Eau Claire must be ground zero in the dairy reform war is wrong. I think it is fundamentally wrong.
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Now the milk pricing system is one of the most difficult issues that any of us is asked to understand. In fact, I have to rely on a little crutch that I have created or that I have copied to illustrate the true unfairness of the Milk Marketing Order program. Now my staff member here is putting up a cartoon for you that actually appeared in the St. Paul Pioneer Press, and it shows you a little bit about government policy. As it points out, which should be actual Federal dairy policy, that all computers are priced based upon their distance from Seattle or oranges based upon their distance from Florida or country music based upon its distance from Nashville, Tennessee or instead milk adjusted on its distance from Eau Clair. Well, unfortunately, obviously, we all know the answer and the proposal before us today would reinforce and restore what I think is an absurdity.
H.R. 1402 requires taxpayers to prop up dairy producers in one area at the expense of more efficient dairy operations in another. And I submit to you that that is not a pro-dairy farmer policy. Instead, it is just the opposite because what it does, unfortunately, is pit one group of farmers against another group.
I think it is also important to address some of the costs associated with the Secretary's reform proposal. And I have been personally approached by a number of colleagues who have indicated that they have been told that the Secretary's proposal could cost dairy farmers across this country from $200 million to $600 million, in fact, many of those who have signed on to this plan as a cosponsor. Unfortunately, those figures are inaccurate and misleading because they are only based upon guaranteed minimum prices. They fail to take into account the actual price that a dairy producer is paid for their milk.
As you are probably aware, all dairy producers are guaranteed a minimum price for the milk that they produce. This is referred to as the class I fluid price. It represents a payment floor for all producers within a given order. The actual price that dairy producers receive is called the mailbox price. And a mailbox price is subject to market influences and it is required by law to operate at or above the minimum class I fluid price. As a result, any economic analysis of the Secretary's proposal that fails to take into account the actual price, the mailbox price, I think is based upon a flawed methodology.
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In summary, in my own view and the view of the Wisconsin Department of Agriculture, and I think most dairy farmers in the upper Midwest, this proposal is a bad idea because: (a) it violates the understanding that we had back in 1996 during the farm bill; (b) it will cost each and every taxpayer and consumer in this Nation money; and, finally, because, quite frankly, it will drive more and more family farms out of business each and every day.
Thank you for the opportunity to testify.
[The prepared statement of Mr. Green appears at the conclusion of the hearing.]
Mr. PETERSON. Mr. Chairman and members of the committee, let's get ready to rumble. We have with us the Honorable Jesse Ventura, Governor of the State of Minnesota. And I have to tell you that, for those of you who don't know the Governor, he is a shy and quiet man, but he believes strongly in Minnesota and agriculture. And we really appreciate him coming out.
He has been here yesterday and today meeting with Secretary Glickman and other agriculture leaders pointing out the problems that we are having in agriculture in Minnesota, not only in dairy but in wheat and other commodities. And the Governor has been a big supporter of the dairy industry. He even has a ''Got Milk'' button. He told me earlier that he had agreed to help the dairy promotion people, but he was told by the Ethics Commission that he couldn't actually sanction it. So he didn't get to be photographed by Annie Leibowitz, but we are all going to miss that. That would have been a good photograph, I think.
But, anyway, we are glad to have the Governor here with us. I think he has—Roy, I hate to tell you this, but I think it maybe has something to do with him being here, rather than you, that we have all this attention. The chairman and I and others have spent a lot of time on dairy, and we haven't got a whole lot of attention up until today.
So, Governor, we appreciate your being here and helping us with this and look forward to your testimony.
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STATEMENT OF HON. JESSE VENTURA, GOVERNOR OF MINNESOTA
Governor VENTURA. Thank you. Mr. Chairman, Ranking Member Peterson, and members of the subcommittee, thank you for the opportunity to speak today on behalf of Minnesota dairy farmers, the people who process and bring their dairy products to market, and every single one of us who drinks and eats dairy products every day of our lives.
I have come to Washington, DC with one thing on my mind: It is imperative that Congress reform policies across the board so American farmers, including Minnesota farmers, can compete with each other here at home and with farmers in nations around the world on a fair, open, and level playing field.
As a new Governor, I have dedicated myself to learning as much as I can about agriculture as urgently as possible because our State is so dependent upon agri-business for our economic health.
In Minnesota, we are doing everything we can to provide short-term relief and long-term competitive advantages to our farmers. I believe that government should only do that which individuals cannot do for themselves. And far too often, government intrudes attempting to fix something only to make matters much, much worse. To that end, I have asked six departments to work together as a farm cabinet in Minnesota. I have brought together Agriculture, Trade and Economic Development, Revenue, Finance, Pollution Control Agency, and Commerce to identify what stands in the way of farmers being successful and self-sufficient. I want Minnesota farmers to be the most productive, the most innovative, and the fastest to adapt to change so they can compete worldwide.
Whatever we can do at the State level, I am pledged to do over the next 3 1/2 years. Yet, time and again, I hear that what really stands in the way are two things: Federal policy and partisan politics. I hear despair in the voices of every farmer I talk with, those who are still successfully surviving in this changing economy and those that are simply giving up. I hear exasperation in the voices of leaders of farm associations, multi-national corporations and cooperatives who are tired of waiting for leadership. And I hear anger in the voices of Minnesotans on Main Street, in rural schools, and everywhere else I go because they, too, want a new direction. With one out of four people in my State depending on agriculture for their living, that is a lot of angry voices. Minnesotans care deeply about farm issues, including me, and I grew up in the city.
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It is time to end two-party partisan deadlocks on farm bills and focus on results for the people. Washington needs to stop using the farmer as a political pawn. Every day, three dairy farms go out of business. Nearly one-third of all Minnesota dairy farms have disappeared since 1993. Across the Nation, half of all dairy farms lost in the last 7 years are from the upper Midwest.
And it is interesting, Mr. Green next to me comes from a State whose license plate says, ''America's Dairyland.'' I am interested to see what they will change it to if something is not done.
I don't mean to suggest that this is entirely due to Federal policies, but the outdated Federal Milk Marketing Order system has been very much a contributing factor. That is unacceptable and warrants action by this subcommittee to begin reform at the earliest possible time.
The issue before this subcommittee today is a significant issue, but still a detail of a much bigger picture for American agriculture that will be addressed in the Millennium Round of Trade Negotiations in Seattle.
Soon you will vote on whether to support option 1–A or option 1–B for a pricing structure. It goes without saying that option 1–B, which represents modest reform by the U.S. Department of Agriculture is the only of the two choices that Minnesota will accept.
The people are best served by getting rid of all this government intrusion into the free marketplace and channeling the energy now put into controlling prices into opening world markets. Nothing you can do in this room today will permanently improve the lives of farmers or the taste of milk except improving world trade conditions.
What we need, without question, is to end the nonsense that has the price of milk tied to how far away the cow is from Eau Claire, WI. Now that there are refrigerated trucks readily available, it makes sense to abandon a 50-year-old thinking and find a new way to look at the millennium dairy industry, one that reflects today's economic realities and most of all at least is fair.
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Last week, I began promoting Beaumont, TX as the new center of the dairy universe, and I offer it to you today to consider. It certainly beats Eau Claire for mileage from St. Paul. My staff did some checking, and I was advised, after a long pause on the other end of the phone, that there aren't any dairy cows in Beaumont. A little checking on the Internet showed that Minnesota dairy farmers would receive 1,100 miles' worth of benefit from this move. For the record, New Hampshire is 1,800 miles away from Beaumont and California beats us all with 2,000 miles.
This sounds borderline ridiculous doesn't it? It is no more so than the original law that designated proximity to Eau Claire, WI, which is only 83 miles from St. Paul, MN.
Congress is inexcusably inconsistent in pushing for deregulation of other parts of agriculture, but not dairy. If market forces are good enough for corn and wheat, why not cows? I truly believe that the people of this country are waiting for common sense to take hold here.
Regional political maneuvers, like compacts, are the worst approach to take. This serves to do nothing more than solidify caucus voting on policies, such as the one before you today, and place at a terrible disadvantage the elected representatives of States like Minnesota and Wisconsin, who will never have the votes to launch genuine reform.
Regional favoritism also erodes public trust in government and makes people cynical about government. If there is one reason why I am sitting before you today, as the first Reform [Party] Governor in the United States of America, it is because the great center of the voting public is weary of politics and business as usual. The farmers who I talk with are fed up. The public is fatigued with a farm crisis that never seems to end. Every year, it is a tweak here, another tweak there; take what you can get because it is better than nothing, option A or option B. Minnesotans, as I have said before, are best served by ''option C'' none of the above, and the beginning of a truly free market new day in agriculture.
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What reform principles will help not just Minnesotans but all farmers in America? Reform No. 1 starts at home. It is the responsibility of the Members of Congress and the President to deliver a new kind of level playing field across America, one that allows the free market to work through the absence of artificial price supports. Minnesota dairy farmers are losing money, plain and simple, and they will lose more under the status quo pricing system. I am here today in person to appeal to your better judgment.
Three years ago, Congress left dairy policy out of the 1996 farm bill and dumped it on the Secretary of Agriculture. Secretary Glickman has come up with a plan that tries to correct some of these 50-year-old problems and it deserves your support. I urge you today to support the recommendations of the administration and decide if you wish to be full participants in this discussion from this day forward.
We need to work as a unified Nation to fund land grant research that is available to any innovative farmer or entrepreneur through a federally-supported extension system.
We need to work as a unified Nation to abandon the cobweb of price subsidies and controls and let American ingenuity work on farms, in processing, and also in grocery stores.
Finally, we need to work as a unified Nation to give incentives for farmers to be flexible and adapt to changes. Your efforts to save small farmers are not working. Half of all the dairy farmers lost in the last 7 years were from the upper Midwest. Even with the Dairy Compact in the Northeast States, most of Vermont's losses are herds with fewer than 100 cows. So it is time, ladies and gentlemen, for a fresh approach.
Reform No. 2 is international. It is your responsibility to open the world markets by insisting that free market work instead of direct or indirect subsidies and then speak with one voice for the American farmer worldwide. This task is made all the easier and more powerful if you allow farmers to sit at the table at the upcoming Seattle trade talks and other places where their future is at stake.
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I believe that all people the world over respond best to policies that provide incentives, not punishments. We can no longer afford for the Federal Government to use food as a weapon. Instead of sanctions, our President should jump on a trade mission to sell and pack some dairy products in his suitcase before he leaves.
Mutual opening of markets is a win-win for America and the trade partners. Mutual protection is a lose-lose for everybody. It is the responsibility of each State to make the best of trade opportunities once they are open. That is why I am going to Japan in November and have my commissioners of agriculture and trade and economic development looking for other marketing opportunities. But our efforts and other States' efforts will fall short if Federal trade policies with Asia and Europe fail. American farmers need their American congressional members to be bold reformers in order to pressure an end to unfair subsidies in Europe and elsewhere.
Reform No. 3 is specific to dairy: vote to let the USDA to go forward with its reform plan. As with all Federal farm policy, a person needs a graduate degree in at least four subjects to understand the complexities of the issue and dairy is the most complicated of the complicated.
As Governor, it is my job to appoint the best people and then let them do their jobs. Commissioner Gene Hugoson advises that this is the better of the two, 1–B, for a dairy-producing State such as ours that is not protected by a compact. But I still prefer alternative C.
Our ultimate objective is to ensure a competitive marketplace for our farmers. A strong farm economy serves the public good of this Nation. Therefore, I appreciate your support for this testimony today, and I appreciate this time before the subcommittee.
And, as I like to say in Minnesota, I am here for results, not politics. Thank you.
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[The prepared statement of Governor Ventura appears at the conclusion of the hearing.]
Mr. POMBO. Thank you, Governor, and thank my colleagues for your testimony. I had a few questions to ask of the panel.
Mr. Blunt, a more of a technical question dealing with your bill, in section 1(a) of your bill, you refer to a modified version of option 1–A. And I am sure you are aware that as provisions of this reform package were amended, the assumptions built into option 1–A were also changed. Since the final version of option 1–A was never published in The Federal Register, was it your intent to refer the version cited in the Regulatory Impact Analysis prepared by the Secretary of Agriculture and released at the same time as the final decision was published?
Mr. BLUNT. Mr. Chairman, that was my intent. And I had assumed that the final regulation had been published in The Federal Register like I think it is required to have been. I have learned since, it was not. I have asked my staff and your committee staff to work together to be sure that we are talking about 1(a) as it has been modified by the Department, whether that was properly published in The Federal Register or not.
Mr. POMBO. Thank you. I know that if this legislation does move forward, that that will take a technical change in the legislation for that to happen.
Governor Ventura, I would like to correct one statement that you made in dealing with agriculture. If there is one committee in this whole place that operates on a bipartisan basis or a non-partisan basis, it would be the Agriculture Committee. And normally, when it comes to agricultural issues, it is usually us against everybody else over there. And that is usually the way it breaks down.
Governor VENTURA. Mr. Chairman, I will humbly stand corrected. It is my first time here. [Laughter.]
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Mr. POMBO. Sometimes I wish it was more partisan because maybe we would win once in a while, but it comes to agriculture issues, it is usually us against everybody else.
I would like to ask you a question. A lot of times agriculture policy that we deal with fiddles around the edges, and we do something that at the time sounds good and in the real world it doesn't actually work in the way that I think any of us intended. But in the regulatory environment that we have created in this country and the tax environment that we have created in this country, there are many of us that believe that the greatest thing we could do for American agriculture would be to offer tax relief and regulatory reform for our farmers. How would you respond to that as the Governor of an agricultural State?
Governor VENTURA. I would respond in the affirmative to that. I think that the key for us is to take down the obstacles, not put them up, not to make farming more difficult, but to make it far easier to allow our farmers to go out and compete. And more or less, I feel strongly to get government out of the way. Government should become a partner, not a dictator. And I am not a farmer, but I find it mind-boggling when government tells farmers how much they can plant, how much they are supposed to get for a crop, and all of this, when we supposedly live in a free society.
Mr. POMBO. Thank you. Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman.
And, again, Governor, thank you for that excellent testimony. You mentioned Commissioner Hugoson, but we do have Commissioner Gene Hugoson from the Minnesota Department of Agriculture, who does an outstanding job for us back home and has really been a leader on this dairy issue.
Mr. Blunt, I will be brief. In your testimony here, you state that ''The upper Midwest, which currently receives among the highest class I prices in the country,'' I don't know where you are coming from on that. Our differentials, as the Governor said, are among the lowest in class I milk. And in Minnesota I believe it is 14 percent or somewhere in that neighborhood that we have class I utilization. Eighty-five percent, or somewhere in that neighborhood, of our milk goes into manufacturing. So even if there were high class I prices, that is not the majority of what prices milk in the upper Midwest.
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And what I tried to make clear in my testimony, and I want to reiterate, is that from our perspective, the important part of this rule is not so much the fight over 1–A or 1–B, but the change to a new kind of manufacturing minimum, manufacturing price, which we think moves us much more in a market-oriented fashion, moves us closer to California. And, frankly, one of the biggest issues in dairy right now is harmonizing with California. We would like to see them come in. I think they are a ways from getting there, but eventually that would be the best for the country, if we had one Federal Order and everybody lived under the same rules. So I don't agree that we have the highest class I prices. I don't know where you are coming from.
Mr. BLUNT. I have some figures, Mr. Peterson, that indicate that the mailbox price, which has been claimed by our friend, Mr. Green.
Mr. PETERSON. Well, I would agree with that. But I just want to correct, if you said mailbox, we are right in the ballpark with everybody else.
Mr. BLUNT. That would have been clearer way to say it and the difference has been well-explained by Mark this morning. So that is what I intended to say.
Mr. PETERSON. Thank you very much also. Even though we don't always agree, I think that all of us have the best interest of the dairy producers at heart, and that is what we are all trying to do is get more money for our dairy farmers, trying to keep as many of them out there on the farm as possible and keep the industry strong. So, again, thank you. Thank you, Mr. Green. And, Governor, again, thank you for your excellent testimony.
Governor VENTURA. Thank you.
Mr. POMBO. Mr. Boehner.
Mr. BOEHNER. Mr. Chairman, thank you. And I appreciate the witnesses being here. And as I was listening to the testimony this morning, I was thinking and appreciating my father, who passed away right after I was elected, and probably the greatest gift that he gave me, genetically, and that is a large dose of patience. But I can tell you that having been on this committee now for 8 1/2 years and having fought to keep the dairy program from becoming more complicated and spending some time trying to actually reform the program, my patience is wearing very thin.
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Whether we pass 1–A or we pass 1–B, we all ought to admit to ourselves it is going to make a hill of beans of difference to dairy farmers around the country. It is going to make any difference. Look at all the numbers you see in the FAPRI studies that are out. It is going to make few cents here or a few cents there. But in the end, it really isn't going to make any difference.
And the fact is that we tried in 1996 to have Freedom to Milk. Why shouldn't dairy farmers around the country have the opportunity to milk their cows and to sell it in any form they want to whoever they want? But, no, we couldn't go that far. And the fact is the more we look at the dairy program, the more it looks even more bizarre than anything the Soviet Union ever created in their command economy. And we can continue to try to tinker with it, it isn't going to help. And the fact is that if we want to have a little fight over this little minute issue, we can do that. Or we as a committee and we as a Congress can stand up and say, ''Enough is enough.'' Let's just take this elaborate system that is in place and scrap it, just plain scrap. Why should we have a Northeast Dairy Compact for those farmers? Of course, now the Southeast farmers want a compact. California wants to have their own system. They don't want to get involved in all this high jinx that comes out of Washington.
And while all this is happening over the last 50 years, who has taken the brunt of the hit? Not consumers. Frankly, they have done pretty well. It has been American dairy farmers who have taken the hit of trying to figure out a way to operate within these rules that we have developed and made worse and worse over the last 50 years.
And so if we are going to mark up this bill, Mr. Chairman, I am here to announce that I will have an opportunity, I will have an amendment to just scrap the dairy program and allow American dairy farmers the opportunity that they have been looking for for a long time, to succeed or to fail. When we grow up and we are born in this country, we all have a shot at the American dream, every single one of us. There isn't a government program that allocates who gets a shot at the American dream and allocates who doesn't get a shot. We all get a shot.
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And the fact is I think that American dairy farmers will be a whole lot better off. I think American consumers will be a whole lot better off if we didn't have a dairy program. Our farmers for the first time would be able to compete in a world market. They would be able to have a chance at success, but we continue to stand in the way.
And so let's have a discussion about it. Let's have a real debate about whether we are going to continue to have this program. Mr. Blunt, I would like to ask you what objections would you have to eliminating the dairy program all together?
Mr. BLUNT. Mr. Boehner, I think I made some points in my testimony, and I don't want to reiterate them all. I think this is a different product than other farm products. I think the fresh supply of the product does matter. I do think there is reform in the market order changes that reflect some of the new abilities of transportation of that product. We have gone from 31 market orders to 11. I believe that is a reflection of that. I believe that consumer prices would rise substantially if you move away totally from a system that continues to encourage a local supply of this product.
The Governor mentioned refrigeration which is a powerful and important thing, but I have an almost new refrigerator at my apartment, just a couple of miles from here, I poured out a little milk last night because I am coming and going, I can't drink it quite as fast as it goes bad in that refrigerator. And the refrigerated truck is the same kind of problem.
Mr. BOEHNER. We can get lettuce from south Florida to Minnesota virtually overnight. We can get lettuce from the west coast to the east coast in several days, 3 days, we can move it from coast to coast. And there isn't any reason why we can't move milk from where it makes the most sense to produce it, where farmers want to produce it, where they want compete to any market in the country or, for that matter, any market in the world. I just don't understand the difference.
Mr. BLUNT. Well, I think there is a difference. And I think while I almost always try to agree with you, I think 225 of our colleagues, along with me, think there is a difference. I believe that this Congress reflects that difference. And I think this is a program that we need to continue.
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You mentioned a minute ago, a few cents here or there. I remember the milk check coming to the mailbox and the farmers who are going to testify later know what a few cents here or there means to whether they stay in business or not. The numbers are real in what is happening in farming. An elimination of some kind of marketing system will accelerate that move and the decline of those dairy farms I am convinced in a dramatic way.
Mr. BOEHNER. Thank you, Mr. Chairman.
Mr. POMBO. I have been informed that the Governor has another appointment. He is going to have to leave. I wanted to ask the full committee chairman, Mr. Combest, or Ranking Member Mr. Stenholm, if they had any questions of the Governor at this time?
[No response.]
Governor, we appreciate your being here. I understand you have a very busy schedule while you are here, so if you need to go, go.
Governor VENTURA. Thank you very much. I appreciate your allowing me to come here and testify on behalf of the Minnesota farmers. Thank you very much.
Mr. POMBO. Thank you.
I would like to recognize the ranking member, Mr. Stenholm, for questions that he may have at this time of our colleagues. Do you have any questions of our colleagues?
Mr. STENHOLM. No, Mr. Chairman.
Mr. POMBO. Mr. Combest, did you have any questions of our colleagues at this time?
The CHAIRMAN. No, thank you, Mr. Chairman.
Mr. POMBO. Mr. Calvert.
Mr. CALVERT. I just have a quick question for Mr. Blunt. The consensus economic analysis that I have looked at is that the final USDA decision could range from a much better to about the same as option 1–A. Then why do you support 1–A versus the alternative?
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Mr. BLUNT. I think that the FAPRI, Dr. Brown who is from FAPRI, who is going to testify next, will address that with the specifics of all those economic analyses with more capacity than I can. I think what those analyses do not appreciate what a dramatic difference a very small change in the price to farmers makes to whether those farmers continue to be able to produce milk or not. In my district, I believe your district is one of the very top dairy-producing districts in the country, Representative Calvert, my district used to be the eighth biggest dairy-producing district in the country. I don't know that we are in the top 20 today because people who had farms with fewer than 200 cows, just simply don't have those farms any more. They have the farms but they do something different than dairy on those farms because a minimal change in that price makes a dramatic change in whether they make money or lose money.
There are all kinds of analyses of this. I think the FAPRI analysis is the one that this committee has decided to look at. What it shows fundamentally is there is no consumer change. I don't think it establishes the fact that there wouldn't be either way. It doesn't establish the fact that there is not dramatic change in where dairy products are produced if we deviate from the current system.
Mr. CALVERT. But, realistically, don't you believe that there is a consolidation taking place in the industry that the small dairy of 100 or 200 cows just isn't economically viable in today's economic reality out there? Most of my dairymen, heck, it used to be a large dairy of 500, now we have dairymen that are milking several thousand cows. Isn't that where we are going? And by this type of legislation you have maybe just slows the process down a little bit?
Mr. BLUNT. I don't think that is inevitable. And I think that in most of the country, there are some parts of the country where those big dairy herds really can be accommodated without impact. In most of the country, particularly in most of the traditional dairy parts of the country, that large concentration of dairy herds creates all kinds of additional concerns and problems that don't have to be created if we continue to encourage family dairy farmers to operate their farms.
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Mr. CALVERT. Thank you, Mr. Chairman.
Mr. POMBO. Mr. Etheridge.
Mr. ETHERIDGE. Thank you, Mr. Chairman. I am sorry the Governor left because I had a number of questions I was going to ask him, but he is now gone. Let me thank you very much for holding this hearing. So that no one misunderstands where I am coming from, I am an original cosponsor on both bills. In my State of North Carolina, we have lost half of our dairy farmers in the last 10 years.
And so, Mr. Green, I am going to give you a couple of those questions I was going to ask the Governor. One of them is a little unfair, so I won't ask it of you because the Governor wanted to go to the total free market system, and I was going to ask the question if he didn't want the monies that we were sending to his farmers last year who were about to go broke not to go to them. I don't think he would have agreed with that.
But I am sick and tired of people telling me, ''Well, let the free market reign,'' when I look into the teary eyes of farmers and their families when they lose their farm. It is easy to sit here if you come from a city or somewhere else and make those statements. But I think we do have an obligation, Mr. Chairman, to make sure that people who live on the land have an opportunity to continue to live there. Now if we want to be a part of continually providing for consolidation in this country, count me out of that group because I don't think that that is what it is all about. I don't think that is what America is all about.
Mr. Blunt, let me thank you for your leadership and let me ask you the first question, if I may. As we look at the loss of dairy farmers in the Midwest, as we have, and we have also lost them in the Southeast, it seems to me there is a different dynamic working here. From what information I have in the Midwest, they are increasing production and going out of business. And in the Southeast, we have less production and they are going out of business.
Mr. BLUNT. That is exactly right, Congressman. The decline in percentage numbers is about the same but in the face of that, in the upper Midwest the production increases while in the Southeast, the production, the fluid milk production has decreased. So we are already seeing the impact of what happens when dairy farms go out of the country, go out of business in most parts of the country. For whatever reason, that does not appear to be the case in the upper Midwest but it is the case where you and I buy our milk. And in most of the States in the country it is the case. And that is probably why we have such a broad base of support for this legislation.
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Mr. ETHERIDGE. I would agree.
Mr. Green, you talked about the issues in the Midwest and I can appreciate that. And all of us represent our districts as we absolutely should. But with that same question, as you look, can you explain why we are losing as many farms as we are in the Midwest with production going up versus the Southeast where we are losing about the same and our production is going down?
Mr. GREEN. Your statement actually proves my point. Our farmers are among the most efficient anywhere in the world. The problem is the current system artificially puts them out of business. My friend, Congressman Boehner, who talked about moving away from a government-regulated system, why so many of the farmers in my State, in my district would support that is because they are efficient. They are productive. It is government-mandated pricing and its absurd pricing scheme that is forcing so many of them out of the business.
Now we lost in the last 10 years more farmers than nearly every other State in the Nation ever had. Now some of those farmers, years ago, went out of business because they weren't productive and they weren't efficient. And that is the market. That is the way it works. Now we are losing farmers, five, each and every day because of government-mandated pricing schemes, which punish them. When their price is based upon their proximity to Eau Claire, WI, an honor, I assure you, Eau Claire does not want to have; that is why they are going out.
I agree with you. I am against consolidation of the farms. It is unnecessary. The average farmer's in Wisconsin dairy herd is 60 to 70, very different than we have in many other parts of the country. Those farmers are very productive. We don't need, we don't want consolidations, but we do want fairness in the pricing scheme. I think Congressman Boehner's point about moving—and Governor Ventura's—about moving towards away from regulation, many of the farmers in my district believe the current system is neither fish nor fowl—either move to a fully government-regulated system or move away from it. The problem is——
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Mr. ETHERIDGE. Excuse me, Mr. Green. I only have so much time, and I just wanted a quick answer, not a long-winded one.
Mr. GREEN. It is my opportunity to respond to some of the points made.
Mr. ETHERIDGE. Thank you, and I appreciate that. But the point I want to get to and hope you will touch on this one because if you move to what Mr. Boehner and the Governor talks about, you are talking about no government involvement at all. And we are throwing the farmers to the wolves dealing on a total free market when there is no such thing. There is no such thing as a free market out there because we are dealing with a world market that the farmers, each individual farmer then becomes a—he has got to deal with other governments that run monopolies. Do you disagree with that?
Mr. GREEN. I would just point to the testimony that we have had at a previous hearing from the commissioner of agriculture in Minnesota and the secretary of agriculture in Wisconsin, both of whom are dairy farmers, and both disagree with your premise. They believe that they can compete.
Mr. ETHERIDGE. Thank you. Thank you, Mr. Chairman.
Mr. POMBO. Mr. Riley.
Mr. RILEY. Thank you, Mr. Chairman. Mr. Chairman, we have heard a lot today about how complicated this process is, how it takes an Einstein to understand it, how you have to have a Master's degree. This is probably one of the most simple things I have had to deal with since I have been here. This all boils down to whether or not we are going to allow fluid milk production to be a part of the Southeast.
Mr. Green said a moment ago that they could produce milk cheaper in Wisconsin than they could in any place in the country. That is true. It costs more to produce it in Alabama. And it makes absolutely no sense to me to say, ''Well, it costs more in Alabama, so we will reduce your price so we can give the people who produce it cheaper an increase in price.'' And that is essentially what we are doing.
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Mr. Boehner said a moment ago, ''Well, what we do is not going to matter any way.'' Well, if that is the case, leave it alone. What you are talking about is not a Milk Marketing Order or maybe it is, but it should be re-titled. It should be re-titled, ''The Southeastern Dairy Farmers Elimination Order'' because essentially that is what is going to happen. You are going to create a system where the cheapest production in the United States gets an increase in price, where it costs us more, we have got to take a reduction. Now it doesn't take a rocket scientist to figure out. And you said this is the first step, you are absolutely right, this is the first step toward a total elimination of a segment of our economy, a segment of our society.
I have heard everything about we shouldn't base this on Eau Claire, WI. I don't have a problem with that, but you tell me a product that doesn't have those same restraints? When I was in the egg business for 20 years, every time I bought corn, I bought it based on Evansville, IN. If you buy oranges, I promise you it costs more to get those oranges in Alaska or in Minnesota than it does in Orlando. So I don't understand why everyone is so uptight on where we base—transportation is a part of it.
We want a fluid milk supply in Alabama. We only produce about 20 or 30 percent of what we need. Your program, or what you are proposing, would eliminate even that 20 or 30 percent. There is absolutely no way that I think anyone in our State could agree with your proposals.
You talk about the number of people that have gone out of business in your State. Your asking me to go home to Alabama and say, ''Because it costs you more to produce, we are going to cut your price.'' Tell my next door neighbor that. ''So that a person that can produce milk cheaper can get an increase.'' Now there is something just basically irrational about that. If you want to go to the marketplace, that is fine.
I wanted to ask Governor Ventura this morning, I am sorry he left, if you truly believe in a free market economy, there was one other program that we really didn't deal with in the last farm bill and that is sugar subsidies. Minnesota is the largest sugar beet producer in the United States. Yet, we set quotas on the amount of sugar that comes into this country to protect those farmers, and I am not saying that is wrong. We set support prices to protect those farmers in Minnesota. Now if the Governor wants to do away with milk supports, then fine, let's talk about sugar beet production and see if we still talk about free market economies.
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I don't believe there is anyone—if Mr. Boehner, or anyone else on this committee, wants to do away with price supports, that's fine. But no one has the right to go and tell Alabama or any other State in the Union that they can't set up their own Milk Marketing Order. And I think that is the crux of it. Alabama wants the ability to produce its own fluid milk. You have transportation today. There is no doubt about that. You have refrigerated trucks. I have been Minnesota three times in my life. Every time I went, it snowed. [Laughter.]
And if there is ever a snowstorm that causes you to not to have the ability to ship milk out of Wisconsin or Minnesota into the South without a domestic production in our own State, we do without. You have got 2 days to ship this milk. I am not too sure that we want to depend on the weather for all of our production of fluid milk.
Thank you, Mr. Chairman.
Mr. POMBO. Mr. Dooley.
Mr. DOOLEY. Yes, it is kind of interesting when we have seen essentially planned economies all over the world collapse, when we come into the Agriculture Committee, we almost try to extend and re-create essentially planned approaches to how we are pricing a lot of our agriculture commodities, and I find it somewhat interesting and frustrating too.
I guess some of the recent comments is that, and Mr. Riley's comment about in his business where you pay more for oranges in Alaska than you might pay somewhere else or grain more based on where it is being shipped from, that is very accurate and very true. But you don't have the government mandated price differential. And you talk about the 225 people who are a cosponsor of your bill, Mr. Blunt, they are a cosponsor of it because they know by the government interference into the marketplace, it redistributes income and revenues that is not consistent with what would happen in the marketplace, and they have a benefit for doing that.
And what Mr. Green is saying and some other folks are saying is that is it the appropriate role of the Federal Government, when you have areas of the region, which have a relative advantage in the production of a particular commodity, that they should not realize that advantage? When we have down in the Southeast, when we have the average cost of production of milk that is $17.50 a hundredweight, and we have the average cost of production in the upper Midwest that is about $12.25, in California, it is a little bit lower than that, what we are trying to say is that we think it is the appropriate role of the Federal Government to interject themselves into the marketplace to ensure that we will have fluid milk production in the region, which wouldn't be justified by the marketplace.
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And I guess I find it somewhat remarkable that some of my more conservative Republican friends, who tend to be advocates of free market economies, are saying that, no, we need the government to come in and dictate that we are going to require the production or have government rules that ensure the production of a particular commodity in an area which otherwise wouldn't occur if the marketplace was allowing the allocation of resources.
And, Mr. Blunt, you talk about the reduction in the dairy production and the farmers in Missouri, I guess the policy you are in part advocating, if you go back to the turn of the century, we had 50 percent of Americans that were on the farm. And if you try to apply almost the same policy that you are advocating today is that we would still have 50 percent of the Americans on the farm.
And I guess I ask you is this going to ensure that this country is moving in a direction that is going to allow us to be competitive, providing consumers with a high-quality product at a price that is dictated by the marketplace? I have a hard time understanding why you think that it is the appropriate role of the Federal Government to step in and interfere with the marketplace?
Mr. BLUNT. Well, Mr. Dooley, let me say a couple of things. One is that I am sure as a friend of mine and a colleague of the 225 Members who cosponsored this legislation, you have absolutely no idea what their motivation is. And to suggest that their motivation is redistribution of wealth or some sinister purpose is just not right. Somebody mentioned earlier the shipping of lettuce across the country in a day. Well, the lettuce I bought last week in my refrigerator is still just fine. The milk I bought last week was not. A day makes a difference in this product.
The government has had a commitment to a fresh supply of this product——
Mr. DOOLEY. Mr. Blunt, if I may interrupt you for just a second, seeing that it is my time, is that why not allow the marketplace to dictate, if there is not an adequate supply of fluid milk, fresh fluid milk, why not allow the marketplace to dictate how high that price has to go in that region in order to ensure that that production is there? Why not allow the marketplace to determine how much of a local production is needed that cannot be met by the transportation of fluid milk from an area that has a lower cost of production? Why do we need the Federal Government to step in and mandate a plan which is going to almost result in a lower price in one area and a higher price another? Why not let the marketplace dictate what should happen there?
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Mr. BLUNT. Well, Mr. Dooley, you are on this committee and you know how long it takes for a dairy farmer to make the decision to get milk to the grocery store shelves. It is a different timeframe. It is a different decision. It is a fundamental difference of deciding what you are going to do than deciding what grain crop you are going to plant that year.
Mr. DOOLEY. Well, I am sorry, I have a little bit of trouble here——
Mr. BLUNT. Do you want to answer the question or do you want to ask the question?
Mr. DOOLEY. Yes, it is my time, and so I will take some liberties here. How much milk is controlled by co-ops in this country? Do you know what the percentage of it is?
Mr. BLUNT. I believe co-ops are controlled by dairy farmers.
Mr. DOOLEY. So to produce their own co-ops, they are not controlled by dairy farmers?
Mr. BLUNT. That is what I said. I believe they are controlled by dairy farmers.
Mr. DOOLEY. They are controlled by dairy farmers.
Mr. BLUNT. So all the milk in the country is controlled by dairy farmers.
Mr. DOOLEY. Right. So if they control in excess of 75 percent of the milk produced in the United States, dairy farmer-owned co-ops, why can't they collectively make decisions in terms of ensuring the product is going to reach a market, whether it is fluid or manufactured? And why don't they have such a strong market power when they control such a large percentage of the production that once again you don't need the Federal Government stepping in here?
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Mr. BLUNT. I think you understand dairy farmers, Mr. Dooley, and I do, too. And those dairy farmers who control 100 percent of the milk of the country are not in a situation where they can control where their milk goes. Dairy consumers are not in a situation where they can control where their milk comes from. I think, and many of our colleagues think, that that milk that is local and fresh is a better product and we have some interest in that.
Mr. DOOLEY. Let the marketplace decide.
Mr. BLUNT. Well, once the marketplace decides, dairy farmers are no longer going to be in a position to re-create their presence in that market.
Mr. DOOLEY. Consumers are the marketplace.
Mr. BLUNT. That is exactly right.
Mr. DOOLEY. So let them decide.
Mr. BLUNT. Once they decide, dairy farmers are no longer in a position to re-create the system and the distribution of production that we have right now.
Mr. POMBO. Mr. Goodlatte.
Mr. GOODLATTE. Thank you, Mr. Chairman. Mr. Chairman, I want to commend Mr. Boehner and Mr. Dooley for their free enterprise spirit and if such an amendment is offered by Mr. Boehner, I may well support it. I am not a big fan of these programs. What we are debating here today is whether we are going to have one government support program, 1–A, or whether we are going to have another one, 1–B. They both involve government interference in the marketplace. And when I am given that choice, I am going to choose the one that helps my dairy farmers the most. And I am sure that is what Mr. Blunt's objection is as well.
Now I am more concerned because I think both of these plans are a step in the right direction from where we have come, and I would hope everybody would agree with that in terms of moving away from more government interference towards less. But I am very concerned about our heading in a wrong direction that we haven't talked about very much today and that is that there are some other options out there that go along with these that can be considered by this Congress that I think go in the wrong direction.
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And on this, I would probably disagree with you, Mr. Blunt, and that is on these compacts that have been proposed. One slipped through a few years ago, the Northeast Dairy Compact. Now there is a strong proposal for another one, Southern Dairy Compact. My dairy farmers strongly support it, and I strongly oppose it, not because I don't want to help my dairy farmers out, but because I am very, very concerned about turning over the regulation of interstate commerce to the States. The Northeast Dairy Compact is, to my knowledge, the first time in American history that Congress has ever turned over to a group of States the ability to regulate interstate commerce.
We went through a great ordeal in this country, with the founding of this country with States imposing tariffs on goods going in and out of those States from other States. And we resolved that with a famous Supreme Case of Ogden v. New York, in which the State of New York was attempting to impose tariffs on goods shipped across the Hudson River from New Jersey. And the Supreme Court ruled that Congress had the power to regulate interstate commerce. And for 200 years that has been the law of the land. We have not allowed the same kind of balkanization of trade that has taken place worldwide to interfere with the growth of our economy in this country by allowing individual States or groups of States to impose those kinds of restrictions on goods flowing in and out of their States.
And now we have taken what I think is a terrible step in that direction. I am already hearing reports of a Midwestern Grain Compact, which, quite frankly, if that were formed, it would be quite contrary to the interests of my dairy farmers, who have to buy that midwestern grain at certain times of the year. And there is nothing to say that a part of the country that wanted to protect and shelter and allow to grow its software industry, its automobile industry, its mining industry, almost any product that you can think of that you manufacture, even services could be restricted by the States and why do we go down this road with dairy when we certainly I would hope wouldn't want to go down that road with a wide array of other types of products that are produced. And I think it is a horrendous trend that I see the same people supporting the 1–A version also signing on board to support compacts.
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Now if you are going to have government interference in the marketplace, let's at least have it controlled by the Federal Government and not go down the road of having individual States being able to set themselves up in groups or individually to regulate commerce flowing into other States.
Mr. Blunt, what do you have to say about that?
Mr. BLUNT. Well, let me say a couple of things about that, Mr. Goodlatte. I think the cosponsors of those two pieces of legislation, as you know, are not exactly the same, and I appreciate your support for 1–A. That is not what we are debating here today but I would say in that regard that I think if we go to a different system, if we give dairy farmers this fall the only option of 1–B or no Federal program, that what you really do is increase the level of demand for those compacts if you don't do something that works differently.
Not to debate the Ogden case, our friends in the Northeast, that land mass is smaller than the State of California that does control their entire price in their own way so that would be how they would defend that if they were here. We don't have a compact in Missouri. I don't know if that Southeast Compact is going to be developed or not. I do know that if we go to the 1–B option, that the demand for those compacts from dairy farmers, including yours, will be much greater than if we don't.
Mr. GOODLATTE. Well, I agree with that. But I would say to you that if we are going to continue to have meddling in the marketplace, and I am sure that we will in the end, as much as I like Mr. Boehner's approach, it does not only exist in dairy, it doesn't only exist in agriculture, we get involved in markets in all manner of ways here in the Congress. But let's not set up a balkanization of trade in the United States, which is a major impediment to our growth and our ability to deal products to other countries and have that same problem existing with the United States.
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Mr. Green, do you want to comment on that?
Mr. GREEN. Yes, I think it is important to point out here that this whole system was created back in 1937 when there was actually a need for the government to get back involved. That is because you had very few States that were surplus States.
With respect to your comments and Representative Riley's, the key difference is we now have 35 States that are surplus dairy producers. So if Wisconsin and Minnesota are shut down by a snowstorm, which hasn't happened in years in dairy production, there are more than enough States to pick it up. You will never have to worry about a dairy supply.
Mr. GOODLATTE. But what do you think about compacts?
Mr. GREEN. Compacts don't help the dairy farmers in Minnesota and Wisconsin one iota and that is because the vast majority of the milk that we produce goes into manufactured dairy products.
Mr. GOODLATTE. What do you think about the concept of regulating interstate commerce amongst States in and of itself? Leave aside the problem we have with dairy, I am concerned about the precedent that we have set by allowing the Northeast Dairy Compact to go forward. Let's assume that dairy farmers have a host of problems, and we want to help them address it in some way, shape, or form, but that is a separate point from the precedent that we have established by allowing to slip through the Congress a few years ago the establishment of the Northeast Dairy Compact.
Mr. GREEN. Mr. Goodlatte, I find it very hard to reconcile this growth of compacts with the Constitution. My own view is it is an unconstitutional restraint of trade between the States. I think it is clear from the text of the Constitution, as well as the Supreme Court decisions, that the whole movement of compacts is contrary to the very constitutional principles that we have all recognized for so many years. I agree with you.
Mr. GOODLATTE. Good, thank you. Thank you, Mr. Chairman.
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Mr. POMBO. Ms. Stabenow.
Ms. STABENOW. Thank you, Mr. Chairman. I have had laryngitis all week, so I apologize as I whisper along here. I, in fact, with all due deference to my good friends opposing the Blunt bill, I am one of the cosponsors and I am very pleased to be one of the cosponsors. And I do believe the issue is 1–A versus 1–B. But I would also say that we are not in a purely free market system. We have not been. We will not be. Even with Freedom to Farm, we have safety nets of crop insurance. We have other issues. We have sugar subsidies. And this is a blend, it is a partnership that has occurred.
Mr. EWING. Would the gentle lady yield? We don't have sugar subsidies.
Ms. STABENOW. Well, we, in fact, are supporting sugar, absolutely. I come down and vote on it every year. And so while we know that we have——
Mr. POMBO. We will save that debate for later. We will deal with dairy now.
Ms. STABENOW. As somebody who has been supporting sugar, I know that we have, in fact, made decisions, public policy decisions, to support family farms, to support agriculture, that have ended up in a blend. And I would say that what is before us today is an issue of 1–A versus 1–B. And for the life of me, I cannot understand when we have the group that represents the Nation's farmers unanimously in support of 1–A, when we have seen Secretary Glickman's own Pricing Structure Committee recommend 1–A, we have seen overwhelming support for the option 1–A, why, in fact, that has not been the recommendation from the USDA. Clearly, I speak as somebody who represents dairy farmers in Michigan. But throughout the Nation, we are hearing from dairy farmers that this is the option that best supports them in that industry. I don't think there is anything wrong with that. I think we are here in fact to be supporting that industry, as well as other farmers and other industries across this Nation. And I am very concerned that the dairy farmers in Michigan will be harder hit by option 1–B. And I at this point would strongly hope that we would in the end, after all the debate and the philosophy, be supporting Representative Blunt's bill.
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Thank you. I yield back.
Mr. POMBO. Mr. Ewing, it is your time.
Mr. EWING. Thank you, Mr. Chairman. And this is a very interesting hearing and a very interesting subject. To both the gentlemen, the question I have and you have already answered is about the compacts. And can you give me a yes or no whether you support the compacts?
Mr. BLUNT. Yes, I support the compact concept.
Mr. GREEN. I do not.
Mr. EWING. We have a division here. I yield back.
Mr. POMBO. Mr. Smith.
Mr. SMITH. Mr. Chairman, thank you very much and just a couple of comments as an old dairy farmer from Michigan. My family has been trying to make a living milking cows since 1836 on the same farm that I am on now. My impression, when we started these government programs in the 1930's was to try to develop, if you will, a level playing field for bargaining between the producer and the purchaser manufacturer. At that time, we had about 200 dairy farmers producing for every one dairy that was buying and manufacturing. A farmer could make a contract with a dairy on a price of milk, for $4, $5, whatever. That company could come back to that farmer 8 months later when they got more milk than they really needed and said, ''Look, sorry, we can't keep our end of the bargain.'' The farmer says, ''Well, I have talked to my attorney. We can sue you.'' The company says, ''Well, sue me. I don't care. But we are going to have stop picking up your milk, of course, if you sue us.''
So what happened is that farmer had a tremendous disadvantage as a producer. We started these farm programs to try to make a competition, to allow co-ops to have a little more leeway in developing a competition negotiating position with those dairy farmers. It seems to me that that still has to be our concentration. How do we make sure that the marketplace is working—Mr. Dooley is not here—by allowing those farmers to negotiate for price in a reasonable fashion to ensure that the supply and demand concept can continue to work.
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We still have about 200 dairy farmers for every one dairy manufacturer that is buying that milk. So those dairy farmers are still at a disadvantage if they are asked to try to price their milk independently. So we have asked government to do this. A substitute for government would be stronger co-ops. Our co-ops have gotten a little lazy, gentlemen, I think over the last 50 years. One option if we were to go to a free market would be to pass legislation to strengthen the ability of those co-ops to reasonably market and bargain in an effort to give the farmers a fair price to assure that our dairy farmers in this country stay in business.
I yield back the balance of my time, Mr. Chairman. Thank you.
Mr. POMBO. Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman. We do have a vote. And so I will use my auctioneer skills to get through this in 3 minutes if I can.
I want to associate myself to the comments made by Governor Ventura, and I thought he represented the dairy farmers in our State and the upper Midwest very well. But, more importantly, I think the comments he made hopefully all the members of this panel will at least take to heart.
Mr. Blunt, you talked about the percentages and the numbers of dairy farmers that have been lost. I am told by reliable sources that just since 1997, we have lost 3,100 dairy farms in the upper Midwest, 2,000 from Wisconsin alone. Now you indicated that we have lost dairy farms in other parts of the region, perhaps at even a higher percentage. All of that has happened under the current dairy program. And for those who would defend the status quo, it seems to me we ought to at least take a fresh look because if the past is prologue, it seems to me that you are making a crying argument that we ought to do some real reform and we ought to allow some real changes.
I also wanted to indicate that where I come from, and I think in farm country all over the United States, there is a term that every farmer understands and that is that a deal is a deal and a bargain is a bargain. And we see in farm country $100,000 combines being sold with a handshake. Back in 1996, and I must say, Mr. Blunt, you were not part of that bargain, but there was a bargain struck that we would allow the Secretary to move forward with more marketed-oriented dairy policy. In fact, just last week, this full committee had a hearing on LDP's and on whether or not we would go to a national LDP, which many of us believe would create unfair regional differentials. And, as a result, the Secretary came under a good deal of scrutiny from members of this committee about creating that LDP calculation, which would basically set up LDPs based on how far you are from terminal markets.
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But, finally, I just want to respond to something Mr. Goodlatte said. And I think it is a very important point, I think all of us need to consider this and that is whether or not we are going to allow these compacts, not only to continue, which, again, was part of the bargain, that they would be phased out, in fact, they were extended last year beyond what they originally were supposed to be extended. The whole concept of allowing States to set up these regional barriers to trade, it seems to me is ridiculous because at the very time we are all saying what we have to do is open up markets for American farmers in Asia, in Europe, in Central America, and around the rest of the world, we are trying to do the opposite as it relates to dairy policy within the United States. It just strikes me that if we ever want to be serious about opening markets in other parts of the world, we ought to open up markets in the Northeast.
And, finally, I would just say that I think that if you look at it, at least the information that I have, they are allowing markets to set the price of milk in Moscow. It seems to me that maybe we ought to try it here in the United States. And the strong would survive and flourish and some would fall by the wayside. But the truth of the matter is we are losing farmers every single day under the current policy. And the program that the Secretary has proposed is a very modest in fact, I think we are going to hear from the economists later and we will look at the charts, at the end of the day, there isn't all that much difference. Representative Boehner is correct. But I would hope at least we would live by the bargain that we made 3 years ago, that we would allow the compacts to expire and that we would allow the Secretary to move ahead with very modest dairy reform which would move us a little bit towards more market-oriented agriculture as it relates to dairy.
And with that, I would yield back my time. It is not really a question, but we have to run in vote.
Mr. BLUNT. Mr. Chairman, could I comment on that, use a little bit more of Mr. Gutknecht's time?
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Mr. POMBO. Just a second and then I am going to let him respond if he wants to.
Mr. BLUNT. I hear that. I would just like to say in response—I know you have spent a lot of time on this issue, Congressman, I respect your commitment to agriculture. I do think a very small difference in price does make a tremendous difference to farmers. This is a decision about 1–A or 1–B, not about 1–A or some worldwide competition. Interestingly, I never hear anybody talk about letting American dairy farmers compete with New Zealand dairy farmers or assuming we can overcome the dairy barriers to the European Union in the likely life of whichever order is here.
The other thing I would like to say while I have some time is that I will even concede in spite of Land O' Lakes that 1–B may be better for Minnesota and Wisconsin. I think it is not better for the rest of the country. And if we were going to measure distance, I do want to get on the record that I wouldn't want to measure country music from Nashville, I would want to measure it from Branson.
Mr. GREEN. If you would like to, we can set up a Federal order to measure it from Branson, I am all for that.
Mr. BLUNT. We would be for that.
Mr. GUTKNECHT. But you would have to concede, Representative Blunt, there is not another product in the United States that the Federal Government artificially sets a price for based on where it comes from and what it goes into. I have searched and searched and searched, and I cannot find another product anywhere that is based on where it comes from and what it goes into where the Federal Government sets the price. It is an arcane system. It is a system in which even one of the Supreme Court justices has called Byzantine. And the reforms that the Secretary has called for by any measure are modest.
And all our dairy farmers are asking is to level the playing field. And, obviously, any time you level the playing field, it means if you level the playing field, some are going to go up a little relative to others and some are going to go down relative to others. And any argument about leveling the playing field is all about somebody getting a little less relative than the other person.
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What Representative Green and a lot of us have been saying is because of these regional differentials, we have been at the low end of that playing field for too long, 50 years. All we are asking for is a little bit of fairness. And I don't think it is too much to ask.
Mr. POMBO. I am going to have to cut you off there so the Members can go; we have a vote going on. But just so the other members of the audience understand, we have a series of votes that are going on on the floor right now. We are going to recess the hearing until the end of that series of votes and then we will reconvene the hearing. So it may be as much as a half hour that we will be out, but we will return as quickly as we possibly can. Thank you.
Mr. GUTKNECHT. Thank you, Mr. Chairman.
[Recess.]
Mr. POMBO. The SUBcommittee will come to order.
Mr. Brown.
STATEMENT OF SCOTT BROWN, FOOD AND AGRICULTURAL POLICY RESEARCH INSTITUTE (FAPRI), COLUMBIA, MO
Mr. BROWN. Thank you, Mr. Chairman and members of the subcommittee, for the opportunity to brief you on the recent consensus analysis of reform of the Federal Milk Marketing Order system. At the May 5 hearing, the assembled dairy economists heard your message and started an effort to provide this committee with a consensus economic analysis of the impact of USDA's recent final rule. The culmination of this activity is the report that you have in front of you today.
The activity we conducted was an open forum where dairy economists from across the country were able to express their views regarding USDA's final rule. These ideas and views were drafted into assumptions that could be incorporated into the FAPRI economic model of the U.S. dairy industry. The results that were produced were then examined in detail before the finished product presented here today was assembled. I wish to thank all who participated in this process. Although the results had to pass many hurdles before being deemed acceptable, it made this analysis much more robust.
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As always, we wish time would have been available so that other individuals could have been a part of this work. Unfortunately, time was not available for that extended activity. For those of us who worked on this analysis, we hope it provides a common point from which the merits or demerits of the final rule can be discussed.
There were several assumptions debated by the assembled group of economists. Although a decision was reached on each of these assumptions, one should not assume that everyone agreed with the final assumption. The assumption that was the most difficult was with regard to the new minimum class III price or the minimum price of milk for cheese. The majority of economists felt the new minimum class III price would average less than the current basic formula price for a given set of dairy product prices, cheese prices, butter prices, non-fat dry prices.
The assumption used in this analysis today is for the minimum class III price to average 30 cents a hundredweight below the current basic formula price before any market adjustment occurs. This assumption is one of the factors that led to the National Milk Producers Federation not to sign on to this analysis. They remain with their original position of the new minimum class III price, yielding 50 cents per hundredweight less than the current BFP does.
The next assumption dealt with is where does the additional revenue end up by cheese processors only paying this new minimum class III price. That is, the 30 cents per hundredweight difference between the new minimum class III price and the current BFP must be distributed. The assumption made in this analysis is that 75 percent or 22 of the 30 cents would be returned to dairy farmers through additional premiums on that class III milk or increased cooperative dividends. It is assumed that the remaining 8 cents moves forward to processors, retailers, and consumers.
The next area of assumptions with the pricing of fluid milk. The final rule sets the class I mover to be the higher of the new minimum class III or class IV prices. That differs from the current system where the class I price mover is the basic formula price. This higher of concept can result in the annual average class I mover to be higher than the annual average of either the class IV or class III price. The closer the annual average class III and class IV prices are, the more likely the class I mover under the final rule will contain some price enhancements. This analysis adds 10 cents per hundredweight to the class I mover because of this enhancement feature. Some have suggested numbers even much higher than was come up with in this consensus analysis.
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The remaining assumption deals with fluid premiums. Our numerous conference calls that we had with the different dairy economists across the country, this was also one that there was a lot of uncertainty with how to deal with changes in fluid premiums. The consensus of the group was that class I premiums will adjust as class I differentials change under the final rule. However, the premium change that will occur under the final rule will depend upon the area of the country where the milk is produced.
So to try to bracket the potential change in class I premiums that could occur, we ran two scenarios for the final rule. One scenario is run where there is no change in class I premiums. The remaining scenario is one where 50 percent of the change in the class I differential is offset by changes in class I premiums. That is, if the differential is set to decline by $1 under the final rule in a particular region of the country, under this option, the class I premium will be increased by 50 cents.
We also made some adjustments to California fluid prices in order to keep them in reasonable alignment with neighboring States as their current State legislation suggests.
I might point you to my testimony. Table 1 on page 10 summarizes the empirical results of this consensus analysis. It is an average over the 2000 and 2006 period of the three scenarios. The first one, no premium, is USDA's final rule with no change in class I premiums, while the 50 premium scenario is USDA's final rule with 50 percent of the class I differential change offset by increases or decreases in premiums in areas of the country where class I differentials rise under the final rule. And the last scenario on the table is the modified 1–A option. It is USDA's final rule with the exception that modified 1–A differentials for fluid milk are used.
Table 1 shows that none of the options examined result in large changes to the aggregate dairy sector. In fact, the aggregate changes that are shown are well within the error of the model. U.S. milk receipts are expected to decline anywhere from $60 to $110 million, depending on which scenario we look at.
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To put this in context, milk receipts should average over $21 billion over the 2000 to 2006 period. The largest decline in aggregate milk receipts does occur under the final rule with no change in class I premiums, while the smallest decline occurs under the modified 1–A option. The class III price is shown to be less than the BFP in this table as well under all three of the options. It should be noted that this price, this class III price reported in this table, is the minimum class III price. And to arrive at the effective class III price, one must add 22 cents per hundredweight. That is 75 percent of the 30-cent difference between the BFP and the minimum class III price.
When we look at consumer milk prices under each option, they are lower under all of the options, the reduction is the greatest under the final rule with no changes in premiums and the reduction is the least under the modified 1–A option.
Table 2 on the next page of my testimony provides the state-level impacts of each of the 3 scenarios. The first thing to notice is that the 50 premium run does not result in a one-half of the change shown for the no premium run. As dairy product markets adjust, the impact of each of these two scenarios has on all milk prices depends on the utilization of milk that occurs in that State. States with low fluid milk utilization could experience lower milk prices under the 50 premium run than the no premium run since class II, class III, and class IV prices are lower under the 50 premium run.
When comparing the State-level results between the no premium run and the modified 1–A run, one can find some significant State-level differences. For example, Texas. All milk prices decline on average 46 cents per hundredweight under the no premium run. And by only 20 cents under the modified 1–A run. However, the assumption on class I premium changes under the 50 premium run tends to lead to the final rule showing similar changes at the State-level as the modified 1–A run does. If we take that previous example for Texas, all milk prices decline on average 26 cents per hundredweight under the 50 premium run. That is a 6-cent larger decline than is shown under the modified 1–A run, so a very small difference between those two.
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In summary, all three options yield changes to the aggregate dairy sector that are nearly identical. The difference in milk receipts between the 50 premium analysis and the modified 1–A analysis averages about $20 million, around one-tenth of 1 percent at the aggregate level. The major difference between the different scenarios occurs at the regional level. In many instances, the modified 1–A scenario yields results that are closest to the baseline. However, if cooperatives are successful in increasing class I premiums, the final rule yields results quite similar to the modified 1–A results. It should be emphasized, however, that the two scenarios are quite different. The modified 1–A option regulates higher class I differentials while the final rule relies on the market to return class I premiums to producers.
Again, thanks for the opportunity to provide this analysis to the subcommittee. I look forward to answering any questions remaining on this consensus analysis.
[The prepared statement of Mr. Brown appears at the conclusion of the hearing.]
Mr. POMBO. Thank you, Mr. Brown. In reviewing your analysis that you have put together, under the final rule decision, how are States that are manufacturing States that have a high percentage of their milk going into manufactured milk, how do they fare as compared to a modified 1–A, such as is in the bill that we are discussing here today? What is the difference to the States that have most of their milk going into manufactured milk?
Mr. BROWN. Well, I might suggest that you look at—there is handout, a single page, that was included with our testimony that looks at the changes between—and I believe that the graph is shown, that is correct—is the difference between the modified 1–A option versus the 50 premium option. If you look at the left-hand vertical axis, it shows each State and they are listed by their order of importance in milk production. So you can see with California, we are expecting them to produce 20 percent of the Nation's milk supply over the 2000 and 2006 period. You see that bar moves to the right. So that suggests they do better off under modified 1–A than under the 50 premium run. However, if you look at some States that move to the left of zero, you find a lot of States where manufacturing use is higher.
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So when you look at modified 1–A, what we have resulting is increases in class I differentials results in a smaller increase in fluid use. That milk has to find a home somewhere. It is going to find it in the manufacturing side. So as that milk finds a home in the manufacturing side, it starts to drive down some of the increases we see in dairy product prices. That results in States with having manufacturing use not faring as well under the 1–A option as they would under the final rule.
Mr. POMBO. But in looking at your graph that you have handed out on this, it appears that almost all of the States that are identified here are within 10 cents a hundredweight?
Mr. BROWN. That is correct. It is an important point that if, in fact, cooperatives are successful in generating additional class I premiums, and I am sure we will hear from other folks today about that level of success that can occur, we are showing not a lot of difference between the final rule and modified 1–A. In fact, I would be hesitant to say our model, if we are plus or minus 5 cents on either side of zero, our model really says there is a difference between the two. If cooperatives are not successful, there are some States that show a much larger gap between the final rule and modified 1–A. You can look at Texas, some of the Southeast States and the Northeast as areas of the country that if co-ops are not successful in extracting additional premiums, that we will see lower milk prices under the final rule than modified 1–A.
Mr. POMBO. We have heard concerning testimony over particularly the Southeast, where a high percentage of their milk is sold as fluid milk, about what the impact is going to be when we look at the final rule versus the modified 1–A. What is your analysis show as the impact on the class I price in the Southeast, the difference between the two?
Mr. BROWN. If you look at some of the results in the Southeast in terms of class I prices, we have a couple of effects that decide the movement of that class I price. At the very back of the testimony are some graphics that I have included. In the very last one that is entitled, ''What Happens When Premiums or Differentials Increase for Class I Milk,'' it is important to note that there are a couple of things that occur. One, we do see differentials higher in the Southeast and that is going to be a plus for class I prices. However, as we talk about less milk being utilized in the fluid side at the aggregate level, that means that milk is going to find a home somewhere else. And it does find a home in the manufacturing side. So that drives down this minimum class III price that is used as the mover for class I prices. So it tends to offset a portion of the increase in differentials that we get under modified 1–A.
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So when you look at some of these States in the Southeast, if we look at Alabama, for example, under the no premium run, we talk about all milk prices declining 15 cents. Yet, under the modified 1–A option there is really no change at all milk prices in Alabama. We would have seen a larger difference had we not seen these class III prices move down under the modified 1–A run.
Mr. POMBO. Thank you. Mr. Stenholm.
Mr. STENHOLM. No questions, Mr. Chairman.
Mr. POMBO. Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Mr. Chairman.
And, Mr. Brown, I do want to thank you very much for doing this work. It is one of those areas where I think, no matter what you do, you are going to get beat up by somebody. I do have some relatively technical questions.
Mr. Chairman, if we might, and if I can impose on Mr. Brown, perhaps we could send you some written questions in the next couple of days? If it would be all right with the chairman, I would like to do that.
I want to come back just real briefly to the methodology that you used because I am still not completely clear. And I will say that I did take statistics in college, and I barely passed it, so I will start with that. But I do remember something called regression analysis, and we do have some idea, we can in some respects predict the future based on the past. And I am trying to understand exactly, did you use that methodology? Did you go back and look at what has happened in the past when class I milk went up and some of those thing?
Mr. BROWN. The FAPRI system that we used to do this analysis is, in fact, based upon historical relationships at all market levels of the dairy industry. And, yes, we do use regression techniques in coming up with the coefficients that we use to attempt to mimic the structure. As we look at this analysis, what we have done is first run a baseline that is a continuation of current law. If nothing changes to Federal orders, this is what we would anticipate to happen, and then we will go in and impose this different regulation. And so what that allows us to do is to talk about the kinds of changes in front of us that we would expect to occur.
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Mr. GUTKNECHT. The ultimate law of the economic universe is a law that this Congress cannot change and it is the law of supply and demand. And can you talk a little bit more about under H.R. 1402, if that were to be adopted, the language in 1402, with the higher class I differentials, what is your analysis in terms of what that would do to supply and demand?
Mr. BROWN. When you look at supply and demand at the aggregate level, whether you look at modified 1–A or the final rule, there are very little changes. We talk about a little less milk being used in the fluid side under modified 1–A than under the final rule.
Mr. GUTKNECHT. And why do you come to that conclusion?
Mr. BROWN. As you look at class I differentials being higher than they would be under the final rule, we do show some higher prices to consumers under modified 1–A than the final rule.
Mr. GUTKNECHT. And that would result in what?
Mr. BROWN. That would result in slightly less consumption of fluid milk.
Mr. GUTKNECHT. So at the very time what we desperately need to do is increase consumption, if we went with the language in 1402, we would have in economic terms, we would have the net practical effect of reducing consumption of fluid milk in the United States? That is your conclusion?
Mr. BROWN. Let me make sure I clarify it. It is not that we would expect fluid milk consumption to fall. It is that relative to modified 1–A, we would expect consumption to be less. Now, again, we must recognize that fluid milk is a fairly inelastic product. Prices can change substantially and we won't get as large of a consumption change as we might in some other agriculture commodities. So that tends to limit the kind of declines that we would see between these options, but, yes, we would expect some minor declines in fluid consumption.
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Mr. GUTKNECHT. I have heard this term before, and I guess we all sort of nod in approval and agree with that, that the demand for fluid milk is relatively inelastic. But you are suggesting in your analysis that there is some elasticity and that by moving the differentials up, that you do cut demand?
Mr. BROWN. Yes, we don't assume a zero elasticity for fluid milk.
Mr. GUTKNECHT. And as long as you are here—and, again, we thank you for sharing your expertise with us—I have long believed that the real competitors for fluid milk are the bottled soft drinks. Without naming any product names, they spend enormous amounts of advertising and, if I am correct, that every year they gain a larger and larger share of the ''beverage market.'' In fact, driving by a store right in the heart of dairy country on Sunday, there was a grocery store advertising I think it was Coke, four 12-packs for $8.88. What effect does that have on milk consumption or have you ever analyzed that?
Mr. BROWN. When you look at the range of results that economists have found in terms of substitute products for milk, it is very hard a lot of times to find in a time series approach much of a relationship between these other kinds of products. I will say though if you look at some of the recent cross-sectional data that is out there, it may suggest that this is an area where the dairy industry needs to look much harder, how we compare to other products out on the market. And, in fact, there may be more substitution than we have traditionally thought.
Mr. GUTKNECHT. I want to thank you for that comment, Mr. Brown. I would hope that perhaps we could get Congressional Research Service or others to do a little more research on this because I think for a long time we have made an assumption about what is happening out there in the consumer market that I don't think the people in Atlanta and other parts of the country that are busily trying to gain larger and larger market shares, I don't think they make that assumption. I think they are very aggressive.
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And at the same time, we are spending so much of our time with these regional battles over what ultimately, according to your own charts, amounts to really pennies. There are people out there who are very aggressively going after the beverage market on many fronts, both price, advertising, promotion, all kinds of things. And I think it is an area that this subcommittee and, frankly, the Congress and the USDA need to work more to try and help determine what we can do to be much more competitive in this marketplace.
Thank you very much.
Mr. POMBO. Mr. Riley.
Mr. RILEY. Thank you, Mr. Chairman.
Mr. Brown, a moment ago, you referred to Alabama in the difference in the retail and that is my question, were you referring to a retail price or a price paid to the producer for milk when you said there was relatively or an insignificant change?
Mr. BROWN. I was referring to the price paid to producers. If I said a 15-cent change was insignificant, I might have mis-stated myself. There is a difference between those two.
Mr. RILEY. Well, then can you explain to me, because the numbers that I have seen up until this date, if you look at the mailbox prices and the change in the mailbox prices, according to what I have seen up until now, it is not 15 cents. There is like a 98-cent swing between what Alabama would receive now and what Minnesota receives at the present time. So all of a sudden there is not just a difference in Alabama, but when you compare that decrease in Alabama to the increase in other States, you are up to $1 a hundredweight.
Mr. BROWN. Let me state that what we are trying to look at here is the kinds of changes we would expect to occur in Alabama all milk prices relative to a baseline that assumes continuation of current law. So we are not saying Alabama prices are 15 cents less than Wisconsin. What we are stating is that under the final rule, Alabama all milk prices will be 15 cents less than they would have been if we made no changes to the Federal Order system.
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Mr. RILEY. OK. I guess you can prove anything with the numbers that I have seen from the people at Auburn University says it is more like 40 cents rather than 15. What is the increase in the Minnesota-Wisconsin area?
Mr. BROWN. If you look at Wisconsin results under the final rule, all milk prices are expected to be 15 cents above the baseline. If you look at Wisconsin results under modified 1–A, the results are 2 cents higher than the baseline.
Mr. RILEY. The baseline being what?
Mr. BROWN. The baseline being a continuation of current law, which is a continuation of the current Federal Order system. It eliminates price supports after this year. All policies are frozen at their current levels.
Mr. RILEY. Assuming—and I know it is a great concern to my good friend from Minnesota, Mr. Gutknecht—but assuming these drastic prices do cause a sharp drop in demand of milk consumption, what would the overall effect be long-term for Southeastern dairy producers as compared to the midwestern dairy producers?
Mr. BROWN. If the question is posed if fluid milk demand is to decline dramatically, what happens?
Mr. RILEY. No, I was being facetious. I really don't think this is going to happen. Overall, how do you think that the ability for another region to compete, specifically the Southeast, how will we be impacted in our competitiveness as related to other midwestern producers? Will we have an advantage, a disadvantage? Will we have more or less opportunity to produce milk in the Southeast?
Mr. BROWN. When you look at the final rule compared to our baseline, we expect Alabama milk prices to decline, and we would expect production to be less than would occur under the baseline. If we look at most midwestern States, we expect some increases in all milk prices under the final rule and that milk production will be slightly higher than we have projected in our baseline.
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Mr. RILEY. Based on that assumption and the cost in the Southeast is considerably higher than it is in California or in the Midwest, ultimately where does that put most of the Southeast milk producers? Is there an option, is there any other option that would ultimately allow them to stay in business?
Mr. BROWN. I will answer by saying FAPRI has been in business to provide you with empirical analysis of alternatives.
Mr. RILEY. And upon your judgment of that empirical evidence, what is your assumption?
Mr. BROWN. That when you look at the particular scenarios that we ran today, if you look at Alabama, in particular, it shows less of a decline under 1–A than it does the final rule.
Mr. RILEY. And if we are losing dairy farmers by the hundreds in Alabama now, and we make them even more uncompetitive, what would you as an economist think the ultimate result would be for those dairy farmers?
Mr. BROWN. You can look at the numbers that are here and draw your own conclusions about what you think is going to happen to Alabama milk producers.
Mr. RILEY. I would like your conclusion.
Mr. BROWN. Our conclusion is to present you with the empirical results of this analysis and let you use it to your best ability. [Laughter.]
Mr. RILEY. Thank you, Mr. Chairman.
Mr. YOUNG. Congressman, if I may, I think supply curves slope up, and I think we know what the prices changes are suggested are there on the page and you can draw your own conclusions. I would also, though, come back and say let's make sure we put it in context and understand how much we think those prices are going to change. Yes, we would expect to see under the final rule a lower price for milk paid in Alabama than under modified 1–A or under current final rule But let's, again, understand how much of a price change we are talking about. We are suggesting that if we do end up with some additional over-order premiums that would come back to producers in Alabama, a price change of only about 7 cents relative to current provisions. Now, yes, every penny counts. Don't get me wrong.
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Mr. RILEY. Well, the only problem I have with that analysis is this is essentially the fourth different number I have heard today. You say 15 cents. You say 7. The people in Alabama say 47. Somewhere in there it is probably true. But if it is totally insignificant to move it to 7 cents, why the devil don't we just leave it alone?
Mr. YOUNG. Well, again, I think there are a lot of other changes as well that go on in this Order reform besides just changing the differentials. But I would come back and say that the analysis that we put together today, we have tried to respond to the chairman's request, did try to bring a number of economists together from around the country in order to end up with this result at the end of the day. It is a change in our original analysis.
Mr. RILEY. Well, I guess if your position was to do away with all milk marketing orders, but that is not what we are saying. We are saying we are going to take one distinct area of this country and give them a competitive advantage over another one. And we are going to do it through congressional mandate. Somehow I can't understand that. I can't understand how you came up with the concept. It seems like this is somewhat of an arbitrary policy that you have put together.
Mr. YOUNG. Understand, Congressman, that this isn't a policy we put together, this is a policy we have analyzed that was proposed by the administration at the requirement of the 1996 farm bill.
Mr. RILEY. OK. Thank you, Mr. Chairman.
Mr. POMBO. I think discretion may be the better part of valor at this point, and I just won't say anything.
Mr. Smith.
Mr. SMITH. Thank you for the opportunity, Mr. Chairman.
Do you gentlemen agree that, number one, I guess that the purpose of Federal milk marketing orders is to level the playing field on bargaining and marketing to come up with a realistic price of milk since the buyers of milk have traditionally had an unfair leverage at the marketplace as opposed to the producer?
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Mr. BROWN. I think the Federal Order system does set minimum classified prices for the different types of products we can produce with milk. In a number of cases, we actually already see today premiums paid above those minimum prices, so I don't think that the Federal orders set prices per se for all of the different classes of milk.
Mr. SMITH. But do you agree that that is the fundamental purpose for Federal milk marketing orders, to try to level out the advantages that the buyers of milk would otherwise have over the sellers of milk?
Mr. BROWN. Yes.
Mr. SMITH. Have you looked at other alternatives that might accomplish some of those same goals so that the producer would not be at a disadvantage other than the Federal Government trying to develop formulas for setting prices?
Mr. BROWN. We have not so far this year looked at any options other than the ones that you see in front of you today.
Mr. SMITH. Someone suggested that any loss or disadvantage to producers that develops would not be there if 1–A were in place, would the consensus have any opinions on that?
Mr. BROWN. I'm sorry, can you repeat that question again?
Mr. SMITH. WELL, FOR ANY RESULTING LOSS OF FINAL DECISION ON HOW THE FEDERAL GOVERNMENT IS GOING TO DEVELOP PRICE, SOME HAVE SUGGESTED THAT IF WE USED 1–A, THAT THAT NEGATIVE EFFECT OF PRODUCER PRICE WOULD BE ACCOMMODATED. IN OTHER WORDS, 1–A HAS AN ADVANTAGE OVER 1–B OF NOT DISADVANTAGING FARMERS, ESPECIALLY COMPARED TO WHAT WE HAVE NOW?
Mr. BROWN. I guess I would come back and say the difference between modified 1–A and the final rule, as we have here is, the level of class I differentials. Under modified 1–A, those class I differentials are closer to status quo. And that is the only part of modified 1–A that is status quo relative to current policy. So when we look at modified 1–A relative to the final rule, one has to remember, again, that this class I mover issue is an important part of the analysis, the fact that we do move milk, more milk to the manufacturing market under modified 1–A than we do under the final rule. That results in States where class I differentials do increase with modified 1–A, that is offset to a certain extent when you look at what happens from the class III mover being used for class I prices.
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Mr. SMITH. The National Milk Producers Federation has suggested in their analysis a dramatically different result in terms of the effect on farmers compared to the consensus. Have you had an opportunity to look at the models they have used to critique that?
Mr. BROWN. When you look at the analysis done by National Milk Producers Federation, I think one of the things that you can focus on is, again, the assumption behind the analysis. They would assume that this new minimum class III price is going to yield a price 50 cents less than the current basic formula price. That is not the assumption that this consensus group used. Again, when we look at different kinds of models, the FAPRI modeling system looks in front of us to try to determine the impacts of a particular policy. I believe the analysis that the National Milk Producers Federation did is more of a historical comparison. And both of those different types of approaches have their merits and demerits whenever you look at a particular policy.
Mr. SMITH. Maybe, Mr. Chairman, I question that I hope you are comfortable in answering. Over in the Science Committee, we have all of our witnesses stand up and take an oath to tell the whole truth and nothing but the truth. In your opinion, has the Department, USDA, taken into consideration and treated fairly all of the various interests of manufactured milk versus whole milk versus the effects on different regions versus other effects that should be considered? Do you see any weakness in there that this committee should be looking at more carefully?
Mr. YOUNG. I guess I would say that there are fundamental reforms in the Order reform proposal that the administration has on the table now. A number of those reforms, sooner or later, were probably going to need to be looked at in any event. The change on BFP, the milk that we are using to price or to set the BFP off of, that pool of milk is growing smaller and the number of manufacturers that are participating in that pool is growing smaller all the time. So sooner or later, some change was going to need to be made in the way that we determined the price mover for class I prices. And the scheme that they have come up with is certainly a scheme. There are other approaches that one could use, but that was one that the administration has put on the table. Some change was going to be needed anyway.
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Mr. SMITH. Mr. Brown, any comment?
Mr. BROWN. I would only agree, Dr. Young, that when you look at the differences, the minimum class III price is a new approach. When you look at how we have come up with minimum class prices under the current system, we are looking at something much different. I remind you this analysis looks at very much the mechanical kinds of things that are going to occur under this final rule, and I do believe that there are going to be things in the final rule, if it is implemented, that we are not going to fully have expected until those market administrators have the job of pooling these new orders. And those issues are not going to be thought of until we get to that point of implementation.
Mr. SMITH. Mr. Chairman, thank you.
Mr. POMBO. Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman.
Many have described option 1–A as representing the status quo option, is this an accurate representation based on your analysis?
Mr. BROWN. It is status quo in terms of class I differentials are fairly the same between what we have today and modified 1–A. But there are a lot of other features, i.e., classified pricing changes that are much different and are not status quo.
Mr. STENHOLM. Doesn't option 1–A enhance the consolidation provisions that were sought by the upper Midwest for a long time? The upper Midwest has also long sought a break in the perceived connection between class I differentials for an Order and its distance from Eau Claire, WI. Doesn't option 1–A make it clear that several basing points would be established under the new Order system?
Mr. BROWN. There are some differences, I will agree, between the modified 1–A differentials and in current law. And in some cases, there is some breaking of the distances from Eau Claire, WI in the modified 1–A differentials.
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Mr. STENHOLM. Mr. Chairman, there has been a little editorializing going on today regarding what 1–A, 1–B does or doesn't do. And I appreciate very much the analytical analysis that has been given by this panel. The truth of the matter is nobody can predict the future. And the unknown is what bothers people.
And I think it is important that we concentrate on this idea that some espouse that the best solution is a total free market and use some historical facts to at least analyze our own opinions. And we all come at them honestly, and I don't challenge any of my colleagues who have a different opinion. But when you suggest that dairy policy over the last several years haven't done much, compared to what? For whom? If you look at the poultry industry, you will see in 1950 that we had, well, about 94 percent independent producers. Today, most of the producers of poultry are contract. The independent is about 1 percent. Now that is what you get when you go for a total market, most efficient driven position. And maybe that is the way that the dairy industry ought to go, too.
Let's like at the swine industry. Let's look at what has happened. In 1970, you had about 98 percent individual what we would call family hog producing entities. Today, it is 40 percent. Let's look at one that has occurred just in the recent years and that is when those who believe that the best answer for agriculture is get government out, the market will take care of it, look at wool and mohair and just take a good, hard look at what is happening to the wool and mohair industry in the United States as we attempt to compete in an international marketplace that is not free.
And we had a little hearing here yesterday on this and I think it is important that we learn from the hearings and we learn and listen to all of the facts because this is not a clear and simple task we have before us. But we were chastised and are chastised by our friends from Australia and New Zealand because we are thinking of having the audacity of stepping in the way of them having the right to sell as much lamb in this country as they wish. Well, you have an advantage of a producer in another country of about 37 percent in the currency, can we really and truly have a free market? Can we really and truly have the kind of philosophical free market that I have heard many espouse here today? That is a legitimate question that this committee is going to have to answer time and time again because with the Freedom to Farm bill, as some still seem to think is the best thing since sliced bread, we have got the Y2K problem coming and do we really and truly go cold turkey?
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And does anybody on this committee really believe that our producers are going to be able to compete with the dairy producers of Europe if they are going to continue to subsidize to the rate they subsidize? And I am one of those that doesn't want to get in the way of European policy, what they do regarding their own consumers. If they wish to charge their consumers what they charge, that is their business. But when they sell it into our market, that is our business. And that is one of the tasks that we have got to separate as we go through this whole discussion and debate.
But I hope that we can concentrate on the facts. And I hope, as we talk about the assumptions that were made—we have a tendency here, we are about to have a tendency of folks that are going to go hog wild crazy, pardon the pun, of having a tax cut of a trillion dollars because we have assumptions that we are going to run a surplus for the next 15 years. Now I hope we don't go down that path. That would be downright frightening, but some would want to go down the path.
The task for this committee, Mr. Chairman, is to recognize that we are making changes. And I think the dairy industry recognizes that there needs to be changes made. And perhaps, as someone said earlier, there is not really a whole lot of difference between 1–A and 1–B and all of this, but some of us think that in the short-term there is sufficient difference that we ought to go a lot slower because if we go as fast as some would want us to go, the results are going to be very predictable based on the facts that we have in other industries where we have gone that way. And I hope that as we continue to go through this that we will keep that in mind.
I don't believe 1–A is the status quo at all. We are making significant changes, but I hope we can count more on our manufacturing friends, whether they be investor owned, privately owned, or cooperatively owned, to recognize that even under the past policy and even under much of what we are arguing about today, that if you are really and truly interested in the dairy farmer, what you are going to need to do is figure out a way to get more of that consumer dollar in the producer's pocket. That is what we better be concentrating on because if we don't do that, you are going to see the dairy industry go the way of the poultry industry, go the way of the hog industry, and we are going to have a very concentrated industry. And maybe that will be best for the consumers of America and maybe not.
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But I hope we will couch our philosophical statements a little bit more and spend a little bit more time looking—and challenging, to those of you who have a different opinion than what I am espousing, take a look at some of these, what I consider to be facts, and get ready next week when we mark up to have a little challenge based on the facts.
Thank you, Mr. Chairman.
Mr. POMBO. Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman. I agree with the ranking member that we ought to get more money into the producer's pockets. The problem is we don't want to do that in such a way that we are going to distort the marketplace. And those of us in the upper Midwest, the problem is that according to these charts that FAPRI has done, and everybody has agreed to apparently except National Milk, if you raise the price of class I differentials beyond the economic cost of moving that milk, what it does is it reduces consumption of fluid milk if you raise the price and that milk goes into manufacturing milk, which impacts us in the Midwest. And so I am all for getting the producers more money, but if we are not careful, we could end up continuing this regional imbalance. And I don't know how we get around that unless we go to quotas and supply management, which you know I have advocated in the past.
But I have questions I wanted to ask. Is not the 1–B proposal that was put together by the Department, have they not determined the differentials based on what the economic cost of moving that milk to deficit areas is? Is that not what 1–B is?
Mr. BROWN. Those differentials were derived from I believe a Cornell model that looks at those kinds of transportation costs, and I will have to say in terms of models that economists have used out there, it is probably one of the few that can address that issue?
Mr. PETERSON. Do you think that it is fairly close to what it costs to move that milk?
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Mr. BROWN. I think that, again, when you look at it from the economists that are there, there is nobody else that has offered results out there that suggest that the results found out of the Cornell model are significantly incorrect.
Mr. PETERSON. Well, how about 1–A, does that model mirror what it costs, the economic costs of moving the milk?
Mr. BROWN. When you look at 1–A differentials, those are essentially very close to the differentials that we have in place today.
Mr. PETERSON. Right and where do they come from?
Mr. BROWN. The differentials that we have in place today were last changed with the 1985 farm bill.
Mr. PETERSON. They were legislated.
Mr. BROWN. Legislated changes, correct.
Mr. PETERSON. I guess that I think is the point that I don't think that we are smart enough around here to figure out what the differentials are. And, as I understand it, the Cornell model and has been followed is about the best that there is out there in terms of trying to figure out what is going on here?
Mr. BROWN. We definitely respect our colleagues from Cornell on that account.
Mr. PETERSON. Now my own view is the most significant thing about this whole rule is the changes that we are making on manufacturing, setting up a new minimum manufacturing price, would you agree with that?
Mr. BROWN. I think that is where we have found the most discussion around assumptions of all economists gathered, yes, is around this new minimum class III price and what it yields relative to what we have with the current basic formula price.
Mr. PETERSON. And if I understand what you have given me here, under this new system, if we adopt 1–A, as I was trying to visit with Mr. Stenholm, if we adopt 1–A, along with the current new minimum price, the effect of that, according to your chart here, is it will raise the price of fluid milk. There will be less fluid milk consumed. That means there will be more manufacturing milk, which means the mover enhancement that is in the model will be reduced, is that correct?
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Mr. BROWN. The minimum class III price under modified 1–A is $11.86, while the minimum class III price under the final rule with no premium is $12.01. So we are talking about a 15-cent difference.
Mr. PETERSON. And the reason is because we are raising the price of class I milk?
Mr. BROWN. And we are pushing more milk towards the manufacturing side, correct.
Mr. PETERSON. And I just want to again reiterate, it looks to me like it is pretty clear that that is happening because are legislating a differential that is not in line with what the marketplace is. And that is what those of us in the upper Midwest have been concerned about. So we can't set up a compact. It is not going to do us any good because only 15 percent of our milk goes into class I.
And we are having just as much trouble, as was mentioned this morning by the Governor and Representative Green and others, losing farmers in Minnesota and Wisconsin as they are in any other place in the country. So it seems to me that if we are going to legislate higher differentials based on politics or based on whoever has got the votes or how things have been, we are going to basically go back to using Tony Coehlo's class I differentials that he forced you guys to legislation back in 1985, then maybe we should have supply management so that if there is additional production put in that it doesn't go into manufacturing milk. And we can have them eat it within those orders. We can have supply management to take the distortions out of the situation. That is the other extreme of where we could go with this whole thing. Right now, I don't think the votes are there for that, but if we keep moving, they might be there some day.
Mr. STENHOLM. Mr. Chairman?
Mr. PETERSON. I yield.
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Mr. STENHOLM. For a point of clarification on this. On table 2, in your presentation here today, what is the baseline?
Mr. BROWN. The baseline in this table is the State-level all milk prices, actual levels over the 2000 and 2006 period. Those baseline set of prices are conditioned upon number of assumptions about the performance of the general economy, as well as feed costs, et cetera. And those are the levels we would anticipate would occur under current legislation.
Mr. STENHOLM. Under current law. All right, this is what has been bothering me for many, many years because I don't quarrel with the general thesis of the gentleman from Minnesota's statement, but we have heard even today the mailbox price doesn't differentiate that much. And if I understand this correctly, Minnesota dairy farmers on the average, baseline, whatever, are receiving $13.36 for their milk. Texas farmers are receiving $13.39. That is 3 cents difference.
Mr. PETERSON. Well, if the gentleman would yield? We have over-ordered premiums in our market.
Mr. STENHOLM. I understand, I don't want to get into the complexities because very few folks understand all of this over-order, under-order. But every dairy farmer, every wheat farmer, every cotton farmer understands the price they get for that which they are selling within a region and within Milk Market Orders. And I want somebody to correct me if I am wrong. But there is not nearly as much advantage to the South, to the actual dairy farmer as is perceived by those differentials when you compare the actual mailbox price, right or wrong?
Mr. BROWN. You are right.
Mr. STENHOLM. Right. Absolutely. So why do we all get worked up so big and work up our farmers to think one region is getting advantage over another if we are not? And that is part of the argument and part of the discussion that is going on because none of us, I have spent 20 years trying to understand market orders and how they are computed, and I don't understand and I have yet to meet the first person that can explain it to me in language I can understand. They do all these manipulations and we probably could do away with a whole lot of that and that is what is happening under 1–A or 1–B. And we probably, the dairy industry, in all honesty, would probably be better if we made it a lot less complicated than what we have got. And I think that is where we are headed. But if that is true and you go right down, if you look on table 2, you will see Alaska has got a pretty good deal. But I venture to say there is not many of us who want to go in the dairy business in Alaska, even at 20 bucks.
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But now here is my question: Can you with your analytical analysis shed any more light on what I have just said as far as these differences between regions, as far as what the dairy farmer is actually receiving?
Mr. BROWN. It is a difficult question. You see all different kinds of prices reported, and we use all milk prices as reported by NASS. And those don't include all the kinds of additional premiums that one can get on that milk. So it isn't an easy question to answer.
Mr. YOUNG. Nor do they include all the deducts as well that occur.
Mr. PETERSON. Well, if I could reclaim my time. I have said time and time again that we are spending too much time on this class I, fighting about this. But the problem is, our region is probably the worst and it has been built up over the years, that they hate the Southeast, the Southeast hates us because of these class I differentials. I have said time and again I don't care basically what the class I in the Southeast is because they are not going to make any manufacturing milk. They can't make enough milk to fill their fluid markets now. So we are not worried about that. We are worried about you guys in the Southwest, maybe not your area, but in the Southwest because when we set the differentials too high, they make more milk than they can sell into the fluid market and they imbalance it and that comes into our manufacturing market.
And the thing that is forgotten about all this is what the utilization in these regions are. Now the Order reform is going to help that because it is going to lower the utilization in the Southwest, so that will help to some extent and that is part of what your problem is. But the reason we are fighting about this and complaining about it is because the government shouldn't go in and give you a higher price on your class I milk if that is going to make more manufacturing milk that is going to reduce our price. Why should we have the government spurring production in another part of the country that is going to be detrimental to us? That is what we are complaining about.
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Now how do you find that right class I price? That is basically what the issue is. And I think the Cornell model is the best that we have got out there in establishing what that is. Why should you make extra milk in the Southwest if we can make it cheaper and ship it to you and beat your price? It is the same thing we are talking about, why should you grow oranges. That is probably not a good example, but you see what I mean. That is where we are coming from.
And so what we would like to do is get to a system where the milk is produced the most efficiently and if it can be shipped and still beat the price in another region, well, then maybe that is what should happen, that the milk should be made where it can be made more efficiently in the long-term. And I would be willing to concede that we ought to maybe make these differentials a little bit different to try to soften the blow but we shouldn't have the Federal Government just keep everything the way it is or even make it worse, if that is not the economics of what is going on within the industry. And so what we are trying to do is to have this thing fit what the economics are.
Mr. SMITH. Would the gentleman yield, even though you don't have any time? [Laughter.]
Mr. PETERSON. Right, I would be happy to.
Mr. SMITH. So what difference is it going to make in over-order pricing, the implementation of either proposal? Is the over-order pricing and the negotiation as we reduce it to 11 orders, have you analyzed that or looked at it?
Mr. BROWN. Well, when you look at the final rule relative to modified 1–A, you are going to hinge much more on negotiating over-order premiums for class I milk under the final rule than you will under modified 1–A. And you are going to have to see if the market is going to extract that additional class I premium. In some areas of the country, it may not.
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Mr. SMITH. Well, yes, it seems like the negotiation is going to be tougher or it is going to be more pressure on organization within that larger geographical area?
Mr. BROWN. The consensus of economists, that was an area we chose not even to delve into because there is no way that if we went from area to area around the country that we could have come to agreement on what premiums—how they would have adjusted in each region of the United States. It is a very difficult question and well beyond the scope of what we felt like we could get covered.
Mr. POMBO. I want to thank you for your testimony and the answers to the questions. I am sure that the members of committee will have additional questions for you. Those will be submitted to you in writing, if you can answer them in writing for the committee as well, it would be appreciated.
And I also want to thank you for making yourself available, not only to Mr. Peterson and myself, but to the entire committee over the past couple of weeks to explain what it was that you came up with. I appreciate the access that we have had to you over the past couple of weeks.
Thank you.
Mr. BROWN. Thank you.
Mr. POMBO. I would like to call up the next panel. Mr. Ray Souza, Mr. Larry Purdom, Mr. Frank Olivas, Mr. P. Joseph Wright, Mr. Elwood Kirkpatrick, Mr. Donald DeJong, and Mr. LeRoy Ornelas.
Would you feel more comfortable if I swore them in, Nick? [Laughter.]
I want to thank the panel and welcome you here to the subcommittee. I am going to start with Mr. Souza, who is a producer in my part of California. I think you are all probably familiar with the lights. If you could limit your oral testimony to 5 minutes, your entire testimony will be included in the record.
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Mr. Souza.
STATEMENT OF RAY SOUZA, PRESIDENT, WESTERN UNITED DAIRYMEN, TURLOCK, CA
Mr. SOUZA. Thank you, Congressman Pombo. I would like to thank you and the members of your committee for giving us this opportunity today to present our testimony here. It is a privilege to be able to participate in this democratic process.
We know that many of you have spent a great deal of time listening to the arguments on both sides of this issue. Our testimony stands for the individual small businessmen and women. Our dairymen and dairy women collectively appeal to you to assist with the legal framework as they deal with large, multi-national corporations and the production and selling of this vital and perishable product.
The vast majority of milk produced is produced on family-owned and operated dairy farms. Generally, one farm employs a family for each 100 cows that it operates. Therefore, the size of the operation is a moot issue in this debate. The small businesses are responsible for a very high number of working families. They need some stability to provide solid economic assistance to their employees and families.
Clearly stated, California does not operate under a Federal Milk Marketing Order. However, there is a direct cause and effect of economic consequences. We attach your economic analysis for your consideration.
In reference to H.R. 1402, we support the legislative modification of the Federal orders by requiring the 1–A formula to be inserted into the class I formula in place of the final rule class I pricing currently proposed, 1–B formula. We believe if it is not changed, class I will have a negative effect on California's class I price of 55 cents per hundredweight. This would mean a decrease to California producers of about 13 cents per hundredweight on all milk shipped. We have seen nothing in recent operations of the Federal or State orders that could be pointed out to be abusive of the system, showing dairymen justifiably deserve this type of action by supporting the final USDA rule, the option 1–B modified rule.
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We ask that this subcommittee send to the full committee for mark up language that contains a 1–A mandate. This proposal will not raise prices above current levels. In our estimation, it should be supported by the members of this committee.
We are aware of another request for modification to the class III final rule. We know of no industry proposal of this type of pricing formula for class III. It has only been discussed within the dairy industry since its publication in The Federal Register. We simply believe a more appropriate and justifiable course of action would be to continue the current class III formula into the final proposed rule. Then USDA could be mandated to hold a formal rulemaking hearing allowing a producer referendum adopting the proposed final rule. We would support this course of action.
Lastly and foremost, we would like to speak to you in support of H.R. 1535 by committee member Collin Peterson. Everyone must remember that before you have milk products, you must have the producer's raw product. This raw product could be transported to several different plants. Its delivery is dependent on the positive economic incentives or the negative economic disincentives of another, depending on price and value of the finished product. With that firmly in mind, we need to consider extending the current support and purchasing program for butter, powder, and cheese through 2002.
Some significant things have happened to the international milk market since the passage of the FAIR Act in 1996. These events have occurred in the last few months.
One, the Secretary has made a decision to roll forward to next year, relative to DIEP, the remaining pounds of product and funds. He also indicated that DIEP product could not be sold into countries of the Pacific Rim areas. These markets are dominated by Australia and New Zealand. This area restriction significantly narrows the field for competitive use of milk powder. A narrowing of markets generally translates into lower producer prices.
In April of 1999, there was a strong reaction by farmers in the European Union about the price support reduction mandated by the General Agreement on Trades and Tariff. The EU farmers finally elicited from their governments a two-barrelled compromise aimed deliberately at the United States dairy industry.
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First, the EU agreed to maintain the support price producers receive at 1996 levels and extend that same support price through 2006. They have chosen this course of action rather than abide by the scheduled GATT agreement reductions.
Second, they increased the production quotas to several countries which means the EU will have even more subsidized product placed on international markets, artificially forcing the world market prices even lower.
Because powder is a major sales product in these international markets, U.S. powder plants will be left with only two options. One, either take a price beating and be forced out of business causing local chaotic conditions, or, secondly, they will be forced by unfair competition to transfer the product into cheese which will result in increases of cheeses in the supply chain and lower raw milk prices to producers used in cheese production. These two stark and disabling economic realities are staring the milk producers in the face if this committee does not extend the price support system through 2002.
We urge passage of Congressman Peterson's language, in spite of the fact it does not contain an appropriation. The producer industry should at least have the vehicle to use as we desperately seek to try to help all of America's dairymen.
Once again, we succinctly support: one, the option 1–A; two, retaining current formative pricing pending a formal hearing and approval on class III, and extending the support price through 2002.
[The prepared statement of Mr. Souza appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
As I am sure you are aware, we have another vote going on on the floor. And in an effort to be fair to the rest of you, I am going to recess temporarily. And I believe there is just one vote, so it should only take a few minutes, and then we will reconvene the hearing.
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[Recess.]
Mr. POMBO. If we could have everybody take their seats, we are going to get going. I apologize for the delay.
Mr. Purdom, if you are ready, you can begin.
STATEMENT OF LARRY PURDOM, DAIRY FARMER, PURDY, MO
Mr. PURDOM. Thank you, Mr. Chairman and panel members. Thank you for allowing me to testify today in strong support of the option 1–A legislation that is being proposed by Missouri Congressman Roy Blunt and supported by the National Milk Producers Federation and my cooperative, Dairy Farmers of America, and the Southeast dairymen that I represent.
I am Larry Purdom; I am a dairy producer from Purdy, MO. My wife, my daughter, and I milk 120 cows and farm 740 acres which is in the southwest part of the State of Missouri. Annually, we produce 2.7 million pounds of milk. We produce enough milk to satisfy the total dairy demand of approximately 4,600 consumers. I think that is fairly efficient.
I am not a politician, but I am a dairy farmer economist. And as a businessman who has operated in the food industry for more than 35 years, I am here to tell you today that the dairy industry in my home State of Missouri and in the Southeast is at a serious crossroads. Unless we find ways to stabilize and increase our income, the producers of milk will disappear; it is that simple.
In just 6 years, from 1992 to 1998, Missouri lost 1,355 dairy farm family operations. That is a 34 percent decline in families making a living from the dairy business. Here is an even more alarming fact. That number continues to go down. In the first 6 months of 1999, another 8 percent have exited the dairy shed. You have seen the statistics; the trend is the same across the whole Southeast. The difference between my numbers and Mr. Green's is, though they do have a decline in the number of farms in the upper Midwest, mine is a decline in farms and production as well.
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The market is being serviced continually by dairy farmers who are located farther and farther away from the population centers. Our input costs are much higher because there aren't as many of us buying those services. And most of us who are still in business have gotten as efficient as we can. And as dairy farmers go out of business, it has a very negative effect on our local economy and tax bases.
According to USDA's numbers in the region in which I reside, the cost of production for May of 1999 was $13.67 per hundredweight. For that same period. Congressman Stenholm, my mailbox price—and I appreciate you recognizing mailbox prices—was $12.16 per hundredweight. Under the final rule, class I differentials in virtually every one of the areas into which I market my milk will drop significantly. My neighbors and I will take income cuts to the tune of 49 cents per hundredweight. I have a chart in my testimony that shows some of the areas around me. For instance, one of the charts shows that in Springfield, MO, it is currently at $2.19 on a class I differential. The final rule would drop that to $1.70, which would result in a 49-cent reduction. Under option A, the class I differential would be $2.20.
The chart will show, further, in other areas surrounding me—the markets of Tulsa, Little Rock, and Fort Smith—that the losses will be similar and, in some cases, larger.
We will be hit hard, and it has nothing to do with the quality of our product or our ability to deliver it on time or to a market or how efficient we are. The great irony is that the spread between retail and farm milk prices is wide and growing.
At the grocery store, retail milk prices on a national basis have trended up, while at the same time, the prices farmers receive for their milk has steadily declined. As is illustrated in my chart B, in 1980 the average dairy farmer received 52 cents of every dollar spent by consumers for dairy products. Last year, we received only 36 cents.
The USDA's decision to lower class I differentials will not only lower income to dairy farmers, it is unlikely that it will have any positive impact on consumer prices. History tells us that when my prices go down, consumers often still pay the same price for milk. Consumers can be supplied by milk from other producers in distant markets. However, since milk is such a bulky commodity, it is very expensive to transport. Ultimately, a local milk supply is the cheapest supply for the consumer.
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I know that you can't solve all of my problems. I am a dairy farmer because I believe that dairy farming can be a solid and profitable business. Option 1–A will not remove the risk from dairy farming, not by any means. But in a quickly changing marketplace, option 1–A will add stability to my farm milk price.
What I can't understand is why did the USDA, after 2 years of testimony and industry input, ignore the fact that option 1–A pricing plan was overwhelmingly supported by the dairy industry? And now as a dairy farmer member of that industry, I have to question; is USDA working for me or against me? And what kind of an economist would lower Federal-ordered differentials in milk deficit areas?
If the Secretary's plan were implemented today on my farm, our operation's income would immediately decline. There are many dairy producers like me who can't afford that. As we move toward the next century, the final rule will only speed up the process of families leaving the dairy farm business.
I would like to thank the majority of the House of Representatives for recognizing that this decision is wrong. Thank you for listening, and as a dairy farmer and a member of DFA's corporate board of directors, I am extremely encouraged by the fact that 225 Representatives understand this issue enough to support my neighbors and me. And I ask you for your support of H.R. 1402, which will implement option 1–A. It is the right thing to do.
I thank you.
[The prepared statement of Mr. Purdom appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Olivas.
STATEMENT OF FRANK OLIVAS, DAIRY FARMER, CANYON, TX
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Mr. OLIVAS. I am glad to be here today, along with my fellow Dairy Farmers of America members, to stand in strong support of H.R. 1402 and option 1–A, a proposal which I am glad to say is now being championed by a majority of the House of Representatives.
My name is Frank Olivas; I came from the Lone Star State, where I operate an 800-cow dairy in the Texas Panhandle near Canyon, a small town located south of Amarillo, TX. I am in partnership with another dairy farmer. My family and I manage all the day-to-day operations of the dairy which produces more than 1 million pounds of milk per month.
I have to tell you that I am a unique testifier. Last month, our dairy farm was the 101st largest dairy farm out of 850 farms in the southwest area of my cooperative. As of this month, we sold our cows so that we could build a brand-new double 16-parallel milking barn. We have got 3 months in which to do it. We will be back in production this September with nearly 900 cows and 30 percent fewer employees.
We are making these changes because we have to. We have too much invested in our farm operation and no where to spread the risk. I am increasing my efficiencies and cutting my labor costs to do all that I can to give my business the best chance for survival. This is my way of adjusting to a dramatically volatile and changing dairy environment. This is my big roll of the dice as a businessman; either we make it right, or my dairy farm won't be there. And that is what I want to talk about today; the impact of not being there.
My fellow DFA members spoke well to the issues of why dairy farmers would benefit from option 1–A. I would like to add to their comments and provide yet one more observation—the economic impact my farm has on my community. If my farm disappears because, in spite of all my management efforts and efficiency, I can't make a profit, my rural community loses. This must be a very important consideration in today's discussion.
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Our math tells us that during the short time we are building our new barn, we will remove from the local business community nearly $80,000 per month in feed sales, about $3,000 per month in utilities, and an estimated $8,000 per month on veterinary and cleaning supplies and services. Think about that. Over the next 3 months, we will have affected our local economy by more than one-fourth of a million dollars in feed sales, alone. That is a single indicator of the impact that one dairy farm has upon the community. When you remove dairy farms from the rural landscape, it directly or indirectly impacts everything from grocery stores to equipment sales. It affects everyone on Main Street.
Dairy farmers in the Southwest, in particular, Texas and New Mexico, will suffer extreme financial losses if the final rule goes into place. The Texas Federal Order Market administrator has calculated a 70-cent drop in fluid milk prices. That is the equivalent of a 5 to 7 percent pay cut, or about $7,000 per month off my gross income. My cash flow would experience a negative impact, not because I am a poor business manager or not because of bad weather. Dollars coming in to meet my production expenses will drop because of government policy. I don't think Secretary Glickman was instructed by Congress to do that.
Each month USDA publishes a report of the cost of milk production. The monthly publication is an extension of their annual study that has been in place for many years. And in that monthly estimate, which was requested to be added by Congress, Texas' cost of production for May 1999 was $12.10 per hundredweight. My milk check for the same period was $12.02 per hundredweight with all premiums included.
I am not pretending to be able to explain to you all of the details of the USDA study, and I am not expecting you to believe that it is exactly representative of my farm in every point. But I do believe that I can convince you that if the final rule differentials go into effect, my price will go down. The gap between production costs and the income returns keep getting wider.
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Here is a story on my side of the world. Look at chart A.
[Chart shown.]
This chart shows the primary Texas milk markets as Dallas, San Antonio, Lubbock, and Amarillo. In Dallas, the current differential is $3.16. Under the final rule, it drops $1.06 to $2.10. The option 1–A plan balances it out at an even $3.00 per hundredweight. There is a big difference between a 16-cent drop in the final rule of a $1.06 loss.
For all four Texas markets, the trend is similar; option 1–A stabilizes the differential prices for class I milk. Even if you don't care about dairy farmers, with the final rule, the differentials between Dallas and Amarillo is 15 cents a hundredweight. Transportation costs is 95 cents to move milk from New Mexico to Dallas to maintain a supply of milk for consumers; they end up paying more.
According to the 1937 act, the Federal Order price is intended to attract efficient milk supplies to consumers; option 1–B does not do this.
Before I sold my cows, I was holding my own because farmers in the feed grain businesses weren't, so feed prices were low. Isn't it a strange business, with our government agriculture policies, we continue to pit farmer against farmer, commodity against commodity. As a dairy farmer and businessman, I should be able to succeed without doing it on the back of another farmer.
H.R. 1402 and its option 1–A plan are not the only solution, but it gives me the potential to pay my feed; the final rule does not. I can afford more expensive input costs if I have a better chance of a stable income. Without that stability, Texas will continue to lose dairy farm families at a rapid rate.
According to the American Farm Bureau, Texas dairy farm numbers in 1988 fell 13.4 percent in a 5-year spread. From 1992 to 1997, family dairy farms left the business in droves, declining 37.7 percent. Since 1994, milk production in the State declined by over 10 percent. To top it off, Texas population is growing, which means there are more dairy product consumers to satisfy. Something is wrong with this picture.
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The point is, we are dramatically losing dairy farmers and the local milk supply in the State of Texas. The Secretary's final rule devastates the price of milk in Texas. And on top of that, no one—and I mean no one—has calculated the impact on our rural economies.
I don't expect the Federal Government to save me, but I sure don't expect it to work against me or my community. To Texas dairy farmers and their rural town communities, this issue is very personal. If we implement the Secretary's final rule, we are on the brink of losing farmers fast. The communities associated with those farm enterprises will degrade from there. And the final irony: consumers will ultimately pay that price.
Thank you for the opportunity to share my story and my comments. Again, I commend those 225 House of Representatives who have listened and believed what they hear. The story is true.
On behalf of U.S. dairy farmers and their communities, I urge you to support H.R. 1402 and the option 1–A plan. Thank you.
[The prepared statement of Mr. Olivas appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Wright.
STATEMENT OF P. JOSEPH WRIGHT, PRESIDENT, SOUTHEAST MILK, INC., PRESIDENT, SOUTHEAST DAIRY FARMERS ASSOCIATION, AVON PARK, FL
Mr. WRIGHT. Yes, sir. Mr. Chairman, and distinguished members of the committee, my name is Joe Wright. I am here representing Southeast Dairy Farmers Association.
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I am a producer assigned to south Florida, presently the highest class I differential in the country, at $4.18. Under option 1–A, that would be increased to $4.30. Under the final decision, it would be even higher at $4.75. And yet, I reject the final decision and ask that you mandate option 1–A. The reason is quite simple; the final decision lowers prices in surrounding areas too low for actual market situations.
The Secretary places a reliance on over-order premiums. We know all about over-order premiums in the Southeast. For this month, we presently have a $2.37-over-order premium in Miami. We have a $1.15-over-order premium in Nashville, Charlotte, and Atlanta. If our existing differentials were too high, you would not see those over-order premiums. Furthermore, if our existing differentials were too high, you would see an ever-growing milk supply in the Southeast, and you do not. From 1992 to 1998, production in the Southeast declined from 15.5 billion pounds a year to 13 billion pounds a year.
I now want to change the focus of my comments to refute the Secretary's statement that the final decision is more market oriented. It is not market driven; it is the Secretary driving the market to where he wants it to go.
Right off the bat, one must contest the Secretary's notion of market orientation, given two unrefutable facts. No. 1, he increases the price in a surplus area, the upper Midwest, and lowers prices in deficit areas, such as Charlotte, Nashville, and Atlanta. Second, he has taken the Federal Order Program, which is a producer program, and on a national level, lowered prices to farmers. At the same time, in the price III cheese pricing, he has inserted a return on investment component—essentially guaranteeing cheese manufacturers a return on investment. So much for market orientation.
What this Secretary has done, he made an a priori decision that he was going to flatten class I differentials to appease the upper Midwest. He then manipulated the Cornell University model, and he was shielded from scrutiny because of the informal rulemaking nature of this proceeding. I want to share with you four major departures from the realities of the marketplace associated with the Cornell model and the manner in which it was used.
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First of all, the Cornell model is incapable of recognizing intra-and inter-market order movements of milk. In the real world, both occur. And this is particularly interesting to note because the Secretary had to reject the market order areas that were defined by this computer model because it couldn't account for this movement of milk. And, yes, he bases differentials on the same model.
No. 2, it is a static model incapable of recognizing seasonal fluctuation in price, production, and consumption. This is extremely prejudicial to the Southeast where our production varies 15 percent in both directions from an annual average. Why?
Quite naturally, it is very favorable to the upper Midwest where production fluctuates 5 or 6 percent. Nationally, it is about a 10-percent fluctuation.
A third point, somewhat related to the second, is the Secretary based it on May data. May is a peak production month. If he would base it on annual data or fall data, it would have been much higher differentials. Basically, he chose this parameter to choke down differentials as low as possible.
And, fourth, another critical area; the computer model changes relative prices. And that is a key, not just changing prices, but relative prices, and yet makes the assumption that milk will continue to be produced and processed in the same locations that it presently is.
As a real milk marketer, I can say that this violates the most fundamental real world marketing principle, and that is the ''M'' rule. And it goes like this. Money moves milk; more money moves more milk; much more money moves much more milk. These relative price changes will change where milk is produced and processed. Hence, my comment that it is the Secretary driving the market with the strong arm of Uncle Sam.
I want to move for a moment to option 1–A. Option 1–A recognizes the Cornell model, but it is based on annual data, spring data, fall data, and actual supply and demand conditions. It is option 1–A that is more market oriented.
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In closing, I can point out one other factor to you. In the Department organizing its rulemaking procedure within the Federal Order Reform, it split into committees. The committee that looked at class I pricing, it was the Price Structure Committee. The Price Structure Committee recommended option 1–A.
Thank you.
[The prepared statement of Mr. Wright appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Kirkpatrick.
STATEMENT OF ELWOOD KIRKPATRICK, FIRST VICE-PRESIDENT, NATIONAL MILK PRODUCERS FEDERATION, NOVI, MI
Mr. KIRKPATRICK. Thank you, Mr. Chairman, and subcommittee members.
I am Elwood Kirkpatrick, a dairy farmer from Michigan. I am president of Michigan Milk Producers Association, a cooperative with over 2,300 dairy farmer members. Today, I am also representing National Milk Producers Federation, where I serve as first vice-president.
I am here today to urge Congress to pass H.R. 1402, a bill that would require the Secretary of Agriculture to implement Option 1–A, Class I Differentials Federal Milk Marketing Order. Enacting H.R. 1402 will eliminate part of the revenue reduction that dairy producers will experience if the final decision to reform and consolidate the Federal Milk Orders issued in March 1999 by USDA is not changed.
In the final decision to Reform Federal Orders, USDA adopted option 1–B differentials despite the fact that an 8 to 1 majority of the comments filed with USDA favored option 1–A. The majority of Congress, and the preceding Congress also, have expressed their preference for option 1–A. The reason why there is such wide support for it is contained in USDA's own analysis.
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USDA stated that option 1–B differentials will reduce the weighted average class I differentials for all Federal orders by 29 cents per 100, compared to the present differentials. In 1998, class I milk marketed under Federal orders totaled almost 45 billion pounds. A 29-cent per 100 reduction on 45 billion pounds amounts to a $130-million annual revenue reduction for dairy producers.
Mr. Chairman, the math in this equation is very simple. Option 1–B differentials reduce revenue for an overwhelming majority of dairy producers. Option 1–A maintains differentials basically at their present level. Enacting 1402, we maintained area producer revenue at its present level without increasing the cost consumers pay for a dairy product.
As a farmer, it is very troubling to me that the Secretary of Agriculture chose to couple Federal Order Reforms mandated by Congress with a price reduction for me and the vast majority of U.S. dairy producers. While a 1996 farm bill directed the Secretary of Agriculture to consolidate and reform Federal orders, the law did not direct USDA to lower dairy producer prices. This decision is contrary to what USDA should be doing at a time when all U.S. agriculture is in dire need.
And let me expand on that point for a moment. Why pass emergency farm assistance appropriations, as the Congress did last year, and then turn around and lower minimum prices for dairy producers? The $200 million that Congress appropriated in dairy market loss assistance payments last year will be wiped out by the $200 million annual loss that NMPF predicts the final rule will have cost farmers across the country. I fail to see the logic in giving with one hand and taking away with the other.
Two hundred million dollars may appear small to some, but it is very significant for U.S. dairy producers. USDA forgot about producers in the final decision. They lowered prices we receive while raising processor margins on the dairy products they manufacturer. That drastically changes the Federal Order Program and is a serious mistake.
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Several organizations—including USDA, FAPRI, and NMPF—analyzed the impact that the final rule would have on dairy producer revenue. Although the estimates vary in amount between organizations, every organization estimated that the final rule would reduce dairy producer revenue.
Mr. Chairman, you asked us to come to a consensus on the final impact of the USDA rule. While we cannot agree on the amount producers lose, you have no disagreement in one important respect—the final rule will reduce dairy producer revenue.
In Michigan where I produce milk, the simple average of class I differentials for all the counties in the State, under the final rule, is $1.65, compared to $1.79 under option 1–A. For every State represented by members of this subcommittee, option 1–A Differential is higher than the differential in the final rule.
The consequences of USDA's final rule will be very negative for our producers. Congress needs to recognize this by passing H.R. 1402. Failure to address the milk pricing problems in the final rule will lead to a dire economic situation for dairy producers. Don't force producers to live with a Federal Order Program that reduces their income. Dairy producers are counting on this Congress and the committee to rectify the problems with the final rule. Let's not compound the many problems facing American agriculture today by undermining the future of U.S. dairy products aid to producers.
H.R. 1402 should be enacted to help ensure that the Federal Order Program continues to serve producers, processor, and consumers. Don't let USDA slash dairy producer revenue and hasten the exodus of our family farmers and, in the process, undermine the economic infrastructure of rural America.
Thank you.
[The prepared statement of Mr. Kirkpatrick appears at the conclusion of the hearing.]
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Mr. STENHOLM. Mr. Chairman, might you permit me to make an observation, as well as an introduction?
Others, perhaps, have thought that there were other VIP's testifying today, but we are now about to hear from the only VIP that will testify before us today, a voter in the 17th district of Texas. [Laughter.]
Mr. Donald DeJong.
STATEMENT OF DONALD DeJONG, REPRESENTING THE TEXAS ASSOCIATION OF DAIRYMEN AND THE WESTERN STATES DAIRY PRODUCERS TRADE ASSOCIATION, DUBLIN, TX
Mr. DEJONG. Thank you, Congressman. Mr. Chairman, committee members, thank you for this opportunity to appear before you today in full support of H.R. 1402, introduced by Congressman Blunt.
Option 1–A is not, alone, sufficient to correct the final rule in Federal Order Reform. The class III pricing formula also undercuts the value of milk. It must be corrected.
My name is Donald DeJong, and I operate a dairy in central Texas, about an hour and a half southwest of Dallas/Fort Worth. I have two other brothers also operating dairies in the same community.
I appear before you today on behalf of Western States Dairy Producers Trade Association and the Texas Association of Dairymen. I also serve as president of Elite Milk Producers, a central Texas cooperative established in 1997. I mention this because Elite is one of four member cooperatives in the Texas/New Mexico Milk Marketing Agency, a marketing agency in common, or MAC. The other members are Dairy Farmers of America, Select Milk Producers, and Zia Milk Producers. This MAC represents virtually all the milk in central and west Texas and New Mexico. I serve as one of five members on this agency's board of directors.
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The Western States is an organization of 10 western dairy producer organizations which represent approximately 35 percent of the U.S. milk production. Its members include all three California dairy producer groups, and producer groups in New Mexico, Idaho, Oregon, Texas, Utah, and Washington. We have also been working closely with the United Dairymen of Arizona.
Western States has actively participated in the Federal Order Reform resulting from the FAIR Act. We actively promoted a competitive, market-driven, price discovery system for pricing class III, but it was never given the light of day by USDA.
The Federal Dairy Program currently has a class I pricing structure similar to proposed option 1–A, and a class III and class I mover that reflects the competitive value of milk. The question now before Congress is this: should this program that is proving fairly successful undergo major changes in theory and approach?
The Secretary has, in the final rule, gone beyond simply merging Federal orders and proposes a radical departure from a market discovery formula to a price-setting regulation, from minimum fluid milk prices that promote equity and stability in the market, to lower class I prices that encourage the kind of destructive competition that created Federal orders in the first place.
The final rule proposes to substantially modify these price discovery formulas and reduce dairy farmer income. Adoption of 1–B is not the only reason for this reduction, but the final rule class III formula also significantly cuts producer income. By USDA's own analysis, the final rule class III is expected to reduce class III prices by 47 cents a hundredweight compared to the baseline. Since we believe class III will be the primary mover for class I, this will result in lowering class I prices an additional 47 cents a hundredweight beyond the reductions in the class I differentials.
In order for marketing agencies in common to restore producer blend prices to current levels, the class I price would have to be increased 47 cents on all class I milk and additional amounts to make up for the losses in class III.
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The Department's own argument is that the Federal Order Program must meet the lower prices of the California system. Why should we engage in a race to see what system can produce the lowest producer prices? California will have no choice, under the rule, but to lower their cheese prices even further to move product east.
Perhaps the only certainly is that, from a given level of commodity prices, the minimum price under the final rule will be less than the current system will provide. Because the final rule proposes to reduce producer prices, not consumer prices, we fully expect to absorb the full impact of this reduction in class III, which will approach $500 million a year. The response has been to say that producers will make up the reduction in over-order charges and premiums. In short, the line is that processors will deliver gold nuggets to every dairy farmer every month. Thus, as argued, there is no real loss.
Based upon our experience in marketing milk and a knowledge of marketing conditions, we cannot accept this basis. This is no doubt that there will be significant losses; the only question is, how much?
In my State of Texas, there has been a 35 percent reduction in the number of dairy farmers over the last 4 years, coupled—which is I think troubling—with a 10 percent reduction in production. We are losing production.
Texas A&M's Agriculture and Food Policy Center now estimates a 35-percent loss in net cash farm income for a 400-cow dairy in Erath County where I am from, as a result of the final rule. This is the biggest hit of any model farm across the Nation analyzed in this study. This promises destruction of our farms.
Reliance on premiums has no basis in fact. If there is a single premise I hope you will remember from my words today, it is that dairy farmers are the ultimate price takers. As I mentioned earlier, I serve on the Texas/New Mexico Milk Marketing Agency. I have also marketed milk for Elite. From these positions, I have personally witnessed the limitations dairy farmers and their cooperatives face in obtaining over-order premiums. The spread between the rate paid by the plant and the price received by producers provides incentives for plants to circumvent the cooperatives and purchase milk directly from producers at lower rates.
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For example, in our agency, we would have to move our class I premium up to $2.03 just to stay level with what we have today. This is an increase of $1.53 a hundredweight from where we are today. If we could extract $2.03, the agency could return 80 cents to producers. This leaves a $1.23-spread, which is more than ample to encourage plants to go directly to producers. The point is that it costs money to service a class I market. We have 40 percent class I in our area, and it is expensive to supply those plants and shut down our processing plants when we don't have milk for them.
To keep this from happening, from plants exploiting that spread, the MAC and each individual cooperative would have no choice but to lower the prices that they are charging. This is a real check on premiums.
The result is that in the Southwest and the West, the Secretary's final rule will reduce class III prices by 47 cents a hundredweight, which we cannot recover. We do not understand the justification of transferring millions of dollars to manufacturing plants.
Changing class I is not enough; we must also correct class III. It would be inappropriate for Congress to mandate specific amounts of rates. We have, thus, requested that new manufacturing prices not be implemented until after formal rulemaking to correct this pricing problem. Formal rulemaking will require proponents to testify, under oath, subject to cross-examination, and the Secretary must base his decision on the record.
We cannot accept implementation of the final rule with the expectation that the Department will later correct the problem through formal rulemaking. If the prices are wrong, there is no need to implement them. Even under optimistic projections, dairy farmers will lose big in the initial years. Correcting the problem after and during this loss does nothing for dairy farmers.
Thank you very much.
[The prepared statement of Mr. DeJong appears at the conclusion of the hearing.]
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Mr. POMBO. Thank you.
And with all due respect to Mr. Stenholm, Mr. Ornelas, our next panelist, is not only a dairy farmer; he happens to be a neighbor and a very close friend. And he votes in my district. [Laughter.]
And so, Leroy.
STATEMENT OF LEROY ORNELAS, REPRESENTING DAIRY FARMERS OF AMERICA, TRACY, CA
Mr. ORNELAS. Thank you. And if I can add, I think the DeJong's were VIP's in California before they were the VIP's in Texas. Am I right?
Mr. DEJONG. A different clan.
Mr. ORNELAS. OK. [Laughter.]
All right.
Before I read my presentation, I just wish I would have had the opportunity to be here during these testimonies and then go home and write my testimony, because there are so many things I would like to modify, not change, but modify. I mean I have heard everything from free market to moving lettuce to compacts to the Governor of Minnesota make some comments—a man who I respect quite a bit, and I admire the fact he came here to support his people in his State, especially the dairy farmers—but I don't think that Governor Ventura has ever milked a cow, and I don't think he has fed a cow. I don't think he has ever got a phone call at 2 o'clock in the morning that one of his special registered heifers was due to calve and was having calving problems, and the weather was so miserable outside that your cow dog wouldn't even go out with you. But I think his heart is in the right place, and at least he has brought attention to this issue. So having said that, I am going to go ahead and read my presentation then. To quote that old country song, ''That is my story, and I am sticking to it.'' So let me go on with this, if I may.
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Thank you for the opportunity to submit my comments today in support of H.R. 1402 which includes the implementation of option 1–A. I am Leroy Ornelas, a third-generation dairy producer from Tracy, CA. With my three sons and wife, we operate a 500-cow and 450-acre dairy farm in the heart of San Joaquin County.
Our objective, like many dairy operations, is to prosper and grow so that we can pass the torch to our children as the fourth generation of Ornelas' make a contribution to the food industry. Daily, we deliver about 33,000 pounds of milk to markets in central California. Annually, that production amounts to about 12 million pounds or 1.4 millions gallons of milk.
I would bet you are wondering why I am here today to speak in support of 1–A. We, in California, have a State order. Recently, our order was modified to align class I or fluid milk prices with surrounding Federal Marketing Orders. So the Secretary of Agriculture's final rule does directly impact me and my fellow California dairy producers.
California is not an island; what happens to the Federal Order prices for producers in neighboring States such as Arizona and Oregon has a direct effect on California farmers and State order prices. If class I prices in neighboring States decline, I am absolutely certain that in order to remain competitive with milk produced and sold in neighboring States, it would not be long before California reduced its prices to the State's class I bottling plants and then, ultimately, to me.
The point is the United States' dairy industry and production agriculture has become a very small place. Truly, what impacts my neighbor, impacts me. For example, consider the neighboring Phoenix, AZ market. If the final rule goes into effect, class I differentials in that market will drop significantly. Currently, the class I differential is at $2.52. The final rule drops that differential to $1.55, resulting in a 97-cent reduction. However, under option 1–A, Phoenix, AZ's class I differential is $2.35. In that market, option 1–A is an 80-cent per hundredweight price improvement over the final rule—and still that is below today's price, which is about 1–Cent per gallon.
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Under the Secretary's decision, Oregon's producers are also at risk. The current class I differential in the Portland, OR market is $1.90. Option 1–A keeps it at $1.90, while the final rule drops the class I differential 45 cents to $1.45. Without question, the negative impact on farm family income will be felt in the States of Oregon and will spread to dairy farm families in California.
I support 1–A because I cannot support Federal rule that establishes milk price disparity for any large group of dairy farmers. Regardless of our geographic location, U.S. dairy farmers share the same issues and concerns: increasing input costs, volatile milk prices, declining margins, difficulty in obtaining supplies and services, financing, labor, and, of course, a growing concern about global markets and their impact on business and our bottom line.
The Secretary's decision creates inequity and will, in the long run, mean financial hardship for many dairy farmers, many who are already struggling financially. It is important to all of us, especially those who live and farm in the Northeast, Southeast, and Southwest parts of the United States. These are areas where demand for fluid milk is strong, but there are a rising number of dairy producers leaving the business.
Tighter financial circumstances, compounded by steep market swings in milk prices, make it increasingly difficult for farmers, in general, to effectively run and capitalize their business plans. Investment in machinery, equipment, and cows is more difficult to plan when faced with such a viable income stream.
Option 1–A won't stop the swings in the marketplace. The ebb and flow of commercial demand for our products and weather effects will continue to cause shifts. But H.R. 1402 and its option 1–A will stabilize our base on class I prices in the United States and in California.
In addition to the income issue, there is a supply issue to consider. Prices recommended by the Secretary of Agriculture's final rule will not generate an adequate supply of local milk in many areas across the United States. Nor will these prices cover the costs associated with the bringing in of supplemental milk supplies during periods of low seasonal production and high demand for fluid milk products. There are thousands of pages of testimony already on record that says just that.
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I urge you to support H.R. 1402 and option 1–A plan. As a member of Dairy Farmers of America, I represent farmers of every size and structure. Some of us are large; some of us are very small. But the majority of us will experience negative cash flow because of the final rule. My point is, we dairy farmers are all in this together.
If DFA members, with all their diversity, can come together on this issue of fairness and equity, it is confusing to me why the Secretary of Agriculture can't understand the issue and its impact on farmers.
Passage of this bill is needed to replace the modified option 1–B milk pricing formula that is part of the revised Federal Marketing Order. USDA's modified 1–B solution is no solution for dairy farmers. It would reduce our income nationwide by nearly $200 million.
I support this legislation as an effort to further improve the basic U.S. milk price structure at the farm gate that increases returns to all dairy farmers, regardless of geographic area.
Ladies and gentlemen, we are in this business for the ultimate goal of maintaining a strong food supply in these United States for this and future generations.
Thank you.
[The prepared statement of Mr. Ornelas appears at the conclusion of the hearing.]
Mr. POMBO. Thank you. I thank all the panel for your testimony.
Obviously, this is an issue that we have all been struggling with for several years in trying to determine what Federal role should be. And once we have determined what the Federal policy should be—and it is increasingly more difficult, given the fact that dairy policy, in and of itself, is so confusing. And it is so hard to follow about an impact on one particular region of the country, let alone, an individual dairyman.
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Mr. Wright, if you could explain to the committee, in as simple of terms as possible, why you believe that if you are currently receiving an over-order premium on your milk, that it is so drastically important that the differentials remain where they are?
Mr. WRIGHT. Yes, sir.
Our price is a market-driven price. Basically, the price of milk in Miami or Orlando is related to the price in Atlanta. What this final decision does, it lowers the price. But I can't look at the exact numbers, but it changes it 45 to 55 cents in Charlotte, and it changes it 55 cents in Nashville. And it is a ripple effect. And what it does to us, it threatens our over-order premium structure. It makes us reliant on those to the north of us for their power to get over-order premiums. So it is relative price changes. And processors will cut your throat for a dime. You know, I have sat here all day, heard, ''Well it is only 15 cents.'' They will cut your throat for a dime.
And I am president of a milk marketing cooperative, marketing 2.6 billion pounds of milk, approximately $450 million a year in sales. And since we are having a processor on the next panel, it probably isn't wise for me to criticize my own customers, but since that is the name of the game, I will. I deal with Dean Foods. I deal with Suiza. I deal with Publix Supermarkets. I deal with Winn-Dixie. And, you know even through the—and so it is a two-tier argument, but one tier has to do with relative bargaining power. And I can make a separate argument leaving that issue aside, but that is why it is the relative price and the changes.
And you first have to assume that we have enough—I mean I will give you an example on Publix Supermarket—a well-run store.
In the June 6 Tampa Tribune—it had a little story on them. And their annual sales is $3.5 billion or something of that nature. That company has zero long-term debt, and they have $700 million sitting in the bank. And for a Congressman to say, ''Well, Mr. Wright, just go and negotiate with those people.''
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I would also point out, on the airplane coming up yesterday, in Feedstuffs magazine, it had the price announcement for Suiza Foods. You know, they are on the New York Stock Exchange—big company. Even in this time we just went through with record-high prices, you know what? Their quarterly earnings were up. And the same thing to be—and Dean Foods was making money; the last announcement I saw, their earnings were down, but they were still earning. So there is not red ink.
So part of the equation is the assumption that we have equal bargaining power in the marketplace. And quite frankly, sir, that is not the way it is, and that is one of the reasons we have a Federal Milk Market Order System. That is why we had it in the 1930's, and that is still why we have it today.
Now the second part of that, drawing on our experience, assuming for a moment—and I am not conceding for a moment—but assume for a moment that we have that relative bargaining position. What we are basically talking to is let's get to a long run equilibrium price, that it will adjust.
And to that, I would just simply refer you to the British economist, John Maynard Keynes, when talking about the Depression, where economists were saying, ''Well, in the long run, this will happen, and in the long run that will happen.'' And what Keynes said was, ''But in the long run, we are all dead.'' And what that means, of course, it is the short-term disturbances to get to the long run.
We have a national dairy economy that is in excellent—on a national basis—excellent supply and demand equilibrium. We are the healthiest sector of the agriculture economy. I would refer you to page 2——
Mr. POMBO. If I can——
[Laughter.]
Mr. WRIGHT. Yes, sir?
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Mr. POMBO. I would like to get you back to my question.
Mr. WRIGHT. OK.
Mr. POMBO. You think that your price is market driven right now?
Mr. WRIGHT. Yes, sir. And I think that in a place like Florida, we will be one of the first—I will be honest; I think we will be one of the first areas of the country to adjust. But given past experience—and I can share exactly what that past experience is. In Florida, you are—I mean we got water on three sides of us. You are probably looking at a 2- to 2 1/2-year timeframe to adjust.
A place like Texas, with the magnitude of the price changes, you are looking at 4 or 5 years. And that is even assuming that, you know, relative negotiating power and so forth.
And in view of an overall national economy that is in supply and demand balance, why are we going through all this? Basically, to pacify the upper Midwest. And I would contend that isn't a good enough reason.
Mr. POMBO. Well, I am not sure if you answered me or confused me even more. [Laughter.]
Mr. WRIGHT. OK; we will try again. [Laughter.]
Mr. POMBO. I am almost out of time. [Laughter.]
It is, to me, one of the outstanding issues in this entire debate, in terms of the difference between differentials. There are regions of the country where I can see where a change in the differential definitely makes a difference in what the producer takes home.
There are other regions of the country that are deficit regions where it is more difficult for me to understand that, in terms of how that makes such a big difference in the price that the individuals take home.
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In terms of California, obviously, our interest in what happens in our neighboring States is dictated by law, both Federal and in our State law. So it is obvious why there is a concern on the part of California.
As my time is running out, I would like to ask the two Californian members of the panel; Mr. Souza, you are currently a dairymen; you are currently milking. And can you share with the committee approximately how many cows you are currently milking?
Mr. SOUZA. We milk about 550 cows.
Mr. POMBO. Which is about the same that Mr. Ornelas is milking?
Mr. SOUZA. That is correct.
Mr. POMBO. Do you consider your operation a family farm?
Mr. SOUZA. Absolutely. I am involved; of course, my wife has always been involved and through all aspects of the operation. And my daughter—we have one child, a daughter—and she has been involved in the operation.
Mr. POMBO. And, Mr. Ornelas, I am a little bit more familiar with your particular operation. Do you consider that a family farm as well?
Mr. ORNELAS. Yes, I do.
Mr. POMBO. A lot of the people that have testified here today, including some of the members that sit in the subcommittee, seem to think that if you have more than 120 cows, you don't qualify as a family farm anymore.
And I have got to tell you, all of you, that I do take offense at that.
Just because the dairies in California happen to be on the average somewhat larger than they happen to be in some of your States, does not necessarily mean that they are not a family farm.
In Mr. Ornelas' case, all of his sons work on the dairy. They have a couple of outside employees, but for the most part, the cows are milked and fed and taken care of by him and his kids. And that is about as close to a family farm as you can get.
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I make no apologies for the fact that he has more than 120 cows, but that is a family farm.
Just because your averages happen to be less doesn't mean that you are any more holier than thou, than any of us.
So, Mr. Peterson.
Mr. PETERSON. I hear you, Mr. Chairman. [Laughter.]
You haven't heard me say that.
I have introduced a bill, H.R. 1535, that would extend the price supports at the current level to 2002. I never could figure out why we were singling out dairy and eliminating the price supports there to 2 years earlier than everybody else.
My question to each of you on the panel; do you support H.R. 1535?
Starting with you, Mr. Souza.
Mr. SOUZA. Mr. Pombo, I don't know what I have done to you, but I am always the first guy to go here. [Laughter.]
Absolutely, we support your H.R. 1535. It was in my testimony earlier today.
It is especially critical for the West. I think it has the potential of disrupting markets in the West. We are a manufacturing area. As someone said earlier, it has its ripple effect.
And we are in very strong support of H.R. 1535. In fact, it very well may be our very——
Mr. PETERSON. I was going to ask you that. What is more important, 1–A or H.R. 1535?
Mr. SOUZA. Well, there are all important to us, Congressman. [Laughter.]
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Mr. PETERSON. You are a good politician.
Mr. SOUZA. But I will just tell you that, in California, we have about 23 percent of our milk is in class I, and we have a very high percentage of our milk in manufactured product.
Mr. PETERSON. Mr. Purdom.
Mr. PURDOM. As a member of DFA, the largest co-op I think in the United States, we do support it.
Mr. OLIVAS. We also support it.
Mr. WRIGHT. We support it, but 1–A is more important. [Laughter.]
Mr. WRIGHT. I agree; 1–A is more important, but we do support it.
Mr. KIRKPATRICK. National Milk Producers Federation is in full support of the price support extension. We have sent Members of Congress a letter indicating our support for it. And we feel that it is a very, very critical issue, because your other alternative, with a little surplus, is the world market. And the world market is not open to pretrade yet until Europe gets its act together.
Mr. DEJONG. Western States and the Texas Association of Dairymen support it.
Mr. ORNELAS. From what I heard about it today, I would support it; yes.
Mr. PETERSON. That is unusual to get everybody on the same page; isn't it?
I appreciate that, and what's that? [Laughter.]
Yes; we should adjourn. [Laughter.]
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Mr. STENHOLM. If the gentleman from Minnesota would yield.
If you were to support 1–A, we probably could. [Laughter.]
[Applause.]
Mr. PETERSON. Well, I don't know if I will go that far.
But I will say to the gentleman from the Southeast—and I have tried to say this time and time again. I will try one more time.
I don't know what you want to call it—''animosity,'' ''distrust,'' ''history,'' between the Midwest and the Southeast. And I just want to tell you, as somebody who has, you know, represents some of the Midwest and been involved in this, you know, we are not—at least I am not and we are not—after your differentials.
I think there is a good case to be made for the Southeast needing higher differentials. You know, and where this all came from originally was when we were trying to make fluid milk close to the population centers. It cost you guys more money to make milk, because of the heat and other kinds of issues. I understand that, and you need it, or you are not going to have anybody in business down there.
In fact, I have talked to USDA and told them I thought it was a mistake for them to reduce your differentials in this final rule, because all it did is create a whole lot of political opposition and a whole lot of impetus for our compacts—which I think in the long term are going to be bad for the industry—that we didn't need, because you guys are not going to make any extra milk that is going to go into manufacturing unless we pay you a whole lot of money that, you know, we are not going to do.
So, you know, I don't know if this—if we can get over this, but, you know, that is now where I am coming from. Most of us in the Midwest are not out to do your differentials in.
As I have said earlier, what our concern is, is a government-legislated class I differential that create more milk than can be consumed in that area. And it creates excess manufacturing milk that is not market driven, which I think the current system is doing, to some extent. But it is not doing it in the Southeast. And so take that message back home.
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Mr. WRIGHT. I was just going to say, Congressman, it is kind of a—I don't hate the guys in the upper Midwest, other than what they are trying to do to me politically. So it is kind of——
Mr. PETERSON. Well now, we are not trying to do that. I mean——
Mr. WRIGHT. Well, I would disagree.
Mr. PURDOM. Congressman Peterson, a good question I think right now would be, with the differentials that we have in the Southeast—and I represent the Southeast area where we are very deficit—would be, where in the U.S. do you think the differentials are larger than the cost of shipping from a surplus area into that area?
Mr. PETERSON. Where do I think they are higher?
I think the Southwest. I think that the differentials in the Southwest are creating more milk than they need in the Southwest.
Mr. PURDOM. But in the Southeast where we were hit hard on——
Mr. PETERSON. No, I am not—you are not a problem.
Mr. PURDOM. OK.
Mr. PETERSON. And I have just—that is what I tried to say.
And if I had my way, and if I had written this rule, I would have not reduced your differentials.
Mr. PURDOM. OK.
Mr. PETERSON. I would have increased them—so you wouldn't be here today complaining. [Laughter.]
But, you know, I didn't write the rule, so that is the point I was trying to make, because you are not the problem.
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Mr. PURDOM. Thank you.
Mr. PETERSON. You know, and I understand that——
Mr. DEJONG. Can I respond to that—because, then, that means that I am the problem.
Mr. PETERSON. No; I know where you are from. You are from New Mexico? [Laughter.]
Mr. DEJONG. We are a marketing agency. And we market our milk cooperatively with New Mexico and Texas because we realize—as these guys in Florida have realized for a long time—we all have to live with each other. And we can't sit there in Dallas and think that we can fight in New Mexico.
We are in the best supply and demand balance situation that we have been in since I have been there, 10 years.
Mr. PETERSON. But you have built some plants that I am not sure you needed.
Mr. DEJONG. Then the milk would still be moving north.
Mr. PETERSON. Well, that is maybe what it should do. I mean one of the problems is I went to New Mexico 3 years ago. Went to a congressional meeting with the Canadians, and went to the motel, and there was a thing on the deal there where the New Mexico Government was going to pay you money to move your dairy herd to New Mexico, you know. And they were saying that the Federal milk system will pay you more money if you come to New Mexico.
They have been up in Minnesota recruiting people. I have farmers from my area that have moved to New Mexico and other areas down there because it is more profitable. And it is only because of the Federal system that it is more profitable.
I have neighbors—a guy that lived 2 miles from me moved his herd to your area because he could make more money down there.
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Mr. DEJONG. I think if you look at the trends right now, there is an exodus of producers.
Mr. PETERSON. I know there is.
Mr. DEJONG. I think in your area, the growth is going to be exponential. You are going to see as many—in the next 10 years, I think you are going to see growth. I know of, personally, people who are building in the upper Midwest, probably around 30,000 to 40,000 cows.
Mr. PETERSON. I know I——
Mr. DEJONG. On 5,000 to 10,000 cow units. Your industry is growing and it will grow——
Mr. PETERSON. No, we are not.
Mr. DEJONG. Our industry is stagnant. We are within balance. The lowest mailbox price is in New Mexico, in the country. That is a fact. And if there wasn't a demand for milk in the Southwest, they wouldn't be there.
Mr. PETERSON. Well, I just say to you, I know there are new dairies coming on board—and thank God there are—but all that is happening—in Minnesota at least, and I think Wisconsin—is what is coming on board is just taking the place of what is exiting.
We are basically holding our own, at the most. And maybe a little bit, we are gaining a little bit. But what is happening, the industry is transitioning. We are going from a 50-cow industry to a 500-cow industry like California is. That is what is happening. And we are basically holding our own.
And we are not out to get you, either. The only thing that I am—where we are trying to come from, is to make sure that we end up with a system that is pricing the economics of milk and not a political decision.
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I still maintain that the 1985 deal that was put together with Coehlo was a political deal that did not follow economics and has got us into a lot of the problem we are in today. And I just don't want that to happen again. That is my bottom line.
Mr. DEJONG. I agree.
Mr. OLIVAS. Congressman Peterson, the only comment that I would like to make is, if the differentials are so great in the Southwest, why has Texas declined in production 10 percent?
Mr. PETERSON. I can't answer that. I think they have got other kinds of problem going on down there, just like we do. We have been losing production, too, until the last year. And so, I am not familiar with what is going on with producers there.
Mr. OLIVAS. I think that is real simple; it is a matter of economics. You know, even with the differentials that are in place, you know, those dairies down there are not—we are not profitable. There is a bigger exodus of dairies in that area than there used to be.
Mr. PETERSON. Well and I guess my point is, is that the way it should be?
I mean what I think a lot of us are trying to say is we are not trying to put you out of business, but we are also not trying to keep you in business just because you have been in business before in——
Mr. OLIVAS. I understand. The reality of it is if the final rule goes in, the differentials between Dallas and Amarillo—which is basically the same price that the New Mexico people get—is only 15 cents. Transportation—you said you can move it. You have got refrigerated trucks, and we can move it. We can move it to Dallas. We can move it to the Southeast. However, the cost of moving that milk from, say, Roswell, NM, or Clovis, NM, to the Dallas is in excess of a $1. So who, in his right mind, is going to want to, you know, produce milk in New Mexico and transport it, you know, 350–400 miles and lose money?
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Right now in New Mexico, in Chaves County, which is ranked as one of the top 50 counties in the United States, there are 10 dairies—and we are talking about large. And some of these are family farms, by the way, that are milking 1,500 to 2,000 cows—that are for sale. So it is not the ''land of milk and honey'' that everybody thinks it is.
There is a mass exodus of dairies in New Mexico.
Mr. PETERSON. I mean those dairies weren't there 20 years ago.
Mr. OLIVAS. I understand. In my county 20 years ago, there was 65 dairies. You know how many are left? Two.
Mr. PETERSON. And you are from New Mexico?
Mr. OLIVAS. No. I am from Texas. I am in the Texas Panhandle. And like I said, there were 65 dairies there, but now we have two left.
Mr. DEJONG. If I could respond?
We are in relative balance, and we are not saying that. We are not asking, legislatively, for more money. We believe that what is happening in the industry is good, but we don't want to see what is happening here make it worse. Because in the last 3 years, we are in balance. We haven't seen the surpluses of product in the warehouse. We have seen some of the highest prices because that surplus problem has been taken care of. And with this balance, we see people going in and out of business, and that is good. But that is the current system.
Mr. POMBO. Mr. Riley.
Mr. RILEY. Thank you, Mr. Chairman.
Mr. Peterson, it is not that anyone in the Southeast doesn't like you or that we resent you, but after that ''War of Northern Aggression,'' we are somewhat paranoid.
Mr. POMBO. We are going to have a great debate here today.
California was neutral in that thing; all right?
[Laughter.]
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Leave us out of it.
Mr. RILEY. So when we hear that people in the northern Midwest want to help the Southeast by passing this, we are somewhat devious.
I think Chairman Pombo is probably onto exactly the same line of thinking that I am, when he said a moment ago that all of this seems predicated on the ability to have over-order premiums increase if this rule goes into effect. He asked Mr. Wright a moment ago, and that represents one area. I think what I would like to do is expand that.
All of you represent a very diverse group across the —almost the breadth of this country. I would like to ask each one of you, individually, if this rule goes into effect, do you think that your over-order premiums will increase to the point that it will make up for the reduction that you will receive in the Federal milk marketing orders?
Mr. SOUZA. You are going to start with me, I guess?
Mr. RILEY. But you are always first.
Mr. SOUZA. Well, California, of course, is a little different system. We are not in the Federal Order System. We do have a MAC in California, in southern California, that is working. Of course, we have had tight milk supplies, and when we have tight milk supplies, the MAC's tend to work better.
But in the North, we haven't been able to put a MAC together at all that we have been able to achieve any type of meaningful over-order premiums at this point.
Mr. RILEY. Mr. Purdom.
Mr. PURDOM. I serve on a board, and it covers about 15 southeastern States, including your State, Congressman. My opinion is that, no, I have no reason to believe that I would be encouraged that we would get those added premiums.
And one of the things that we deal with at our board meetings monthly, is we have to decide how many cents per hundredweight we hold out of our paychecks to transport northern milk into our deficit area, because the current differentials will not do all that.
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And concern in mailbox prices, I believe I quoted mine was $12.16 for May. I believe that that would be very much in line with the upper Midwest. Sometimes we look at prices, and there is some gains there—free hauls and volumes and different things—but bottom line is bottom line, the way I look at it. And I don't think, being in the Southeast, that anyone in Wisconsin or Minnesota would be envious of my $12.16.
Mr. RILEY. Sure.
Mr. OLIVAS. We have a small over-premium price, but I don't expect much change.
Mr. WRIGHT. Congressman, I believe the FAPRI estimate was that we get 75 percent of the drop back in over-order premiums. Long term, we may; but like I started to say, depending on where you are at, that is a 2- to 4-year timeframe.
And part of it is related to Congressman Peterson's—part of the trouble we have in the Southeast being so deficit is, while we are going through this weeding out process, we are already deficit, and yet we are going to lose more and more milk because of the price cut. And it is going to increase the problem.
Mr. RILEY. Let us start here and go across—because I think the answer is probably going to be similar.
Assume for a moment certain regions of this country do not have the over-order price increase. Then what happens to that region? Who is going to pay to bring that milk in?
Mr. DEJONG. If I can respond. I believe within the central-Texas area, what you would see is we need to hold the $1.23 spread, what we have talked about, between the new rule and what we are doing now. And we would get picked apart by the Kroger's, by the Dean's, by the——
Mr. RILEY. Sure.
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Mr. DEJONG. And I believe, ultimately, it would be to their disadvantage to that, but they would do that, because of short-term gains. You talk about their, you know, returns on the board. And I think we would have a destruction of the industry. And maybe in 10 to 15 years, they would realize that we would have to build it back.
But I do believe that we would go out and then realize that, hey, the price in that area has come up; we can maybe build a dairy back in, you know, outside of Dallas/Fort Worth, and it would be economical.
Mr. RILEY. Mr. Kirkpatrick.
Mr. KIRKPATRICK. I would just make a comment. We have had an over-order premium in the Michigan area in the neighborhood of $1 and have had it for a number of years. We have a roll every once in a once; we lose it, and work to build it back. But when the price dropped $6 back here a couple or 3 months ago, we tried to raise that from $1 to $2 for one month and couldn't do it.
Mr. RILEY. That is exactly right. And I think that sums up my argument. I don't think you can. Once you adjust these prices—and Mr. DeJong may be right. Over the next 5 or 10 years, that may level out, and you may have an ability 5 or 10 years from now to come back and try to rebuild an industry that has been destroyed. But why go through that process to begin with?
Mr. KIRKPATRICK. I think that is why we have such broad support for working——
Mr. RILEY. Thank you, gentlemen.
Thank you, Mr. Chairman.
Mr. POMBO. Mr. Dooley.
Mr. DOOLEY. Last year when we had the highest milk prices in record, and nobody would disagree that that was a function of supply and a shortage of supply. What happened to over-order premiums then? Was there any adjustment whatsoever in those?
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Mr. Kirkpatrick.
Mr. KIRKPATRICK. No. Not in my area. Now there may have been in certain parts of the country, but not in my area.
Mr. WRIGHT. Yes, Congressman, in Florida, we do. It is in my written comments. I state that there is one thing about all this the Secretary came out with I do like, and it is the price mover. It is the timing announcement.
We, in Florida, and we get—pardon the term—''clawed'' to death sometimes by the processors, but part of the problem—and it goes back to something Congressman Peterson said—is that our industry in the Southeast is so different. The real problem with the upper Midwest is they don't understand us, and we maybe don't understand them.
We have counter-seasonal pricing; under the price mover, they are trying to shorten it to about a month and a half lag. But under the present system, you know, on June 5, there is an announcement for a minimum July price, based on the May BFP, and it is about a 2 1/2-month lag. And what it does, statistically, is the lowest prices of the year are May and June, setting the lowest Federal Order minimum prices in July and August, exactly the time we need the most milk. But we widen the spread. What I am getting to, is in the fall, in the deficit months. But there are limits. I mean we may be able to widen the price spread 40 or 50 cents a hundredweight in the fall, but if the BFP drops $6, we cannot overcome that kind of drop.
Mr. DOOLEY. Your over-order premiums increased? Did they increase last year?
Mr. WRIGHT. No, sir. We increase seasonally.
Mr. DEJONG. Is that correlated in any way to the supply of milk that is available? Is it not the case?
Mr. WRIGHT. It is increased to help us balance the market in——
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Mr. DOOLEY. Which is to provide a financial incentive that is demand driven to increase the availability of milk?
Mr. WRIGHT. No, sir. It is to defer the cost because we still loss money. I mean in Florida, we bring in 50 million pounds a month in the fall.
Mr. DOOLEY. I mean, you know, I am sorry, though—but why would you see an increase in over-order premium? I mean is this somebody that is just doing it out of the goodness of their heart?
Mr. WRIGHT. Because we have, through years of work, that is the upper limit on what we have been able to get by with.
Mr. DOOLEY. But is that not a function of supply? You talk about all these manufacturers out there that are trying to take you to the cleaners all the time. It doesn't sound like they are a group of people that are interested in paying you over-order premiums unless there is some reason for it.
Mr. WRIGHT. Well, it is not just supply and demand. It is also market share. And we have had them actually force our premium down, even in deficit months. So you asked me for a specific year, I was addressing the fall of 1998. I could go back and explain what happened in 1997.
It is so much different.
Mr. DOOLEY. I mean are you guys telling me that there is no correlation to the amount of over-order premium you are paid to supply? I mean are you guys really saying that?
Mr. WRIGHT. I am not saying there is no correlation——
Mr. DOOLEY. You are saying that, Mr. Kirkpatrick? That would be the position of the National Milk Producers Federation?
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Mr. KIRKPATRICK. I am not——
Mr. DOOLEY. That there is no correlation between over-order payments and supply?
Mr. KIRKPATRICK. I am not speaking on National Milk on that one. I am answering a question, from my own marketplace.
Mr. DOOLEY. What I would like to get to maybe a little bit of a different issue, is some of you folks are talking about the real challenges in the dairy industry is the variability in milk supply and being able to maintain adequate supplies of milk, whether it is fluid consumption or whether it might be manufacturing.
A number of us are interested in maybe giving another tool to the industry in order to deal with that problem, which would be forward pricing of milk, that would allow producers or even co-ops, to enter into voluntary contractual agreements with manufacturers to supply milk.
Is that something that you could support?
Mr. Souza.
Mr. SOUZA. Our policy is not to support outside of the pool of contract pricing——
Mr. DOOLEY. So you would think that—and I am a farmer, although I don't farm dairy—but you think that we ought to have a continuum law that would prohibit me from entering into, voluntarily, a private contract to sell my milk?
Mr. SOUZA. Well, it ultimately has a tremendous potential to destroy the pooling concept. I mean that is actually where we are going to end up going. If you support the pooling concept, I think you can not support outside of the pool forward contracting.
Now what is the purpose of forward contracting? If it is to deliver a supply of milk, you can do that through a contract basis and still keep that milk in the pool.
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Mr. DOOLEY. If I, as a producer, might want to manage some of the volatility in prices that I might even experience under the pool, and use it as form of the risk management tool, I might see some value in that. And, yet, you would say that that would be disruptive to the pool?
Mr. Wright, I would think that this would have even, you know, special applications, when we look to the Southeast, where I think I hear you continue to say that one of the problems you face and one of the concerns you have is maintaining a, you know, a supply of fluid milk?
Mr. WRIGHT. Yes, sir.
Mr. DOOLEY. If you had the opportunity to enter into a contract with producers—it might be outside the region—that could arrange and that it would agree to provide you with a certain amount of fluid milk over a period of time, that you could also divert some of that into a manufacturing and with another agreement, it would seem that forward contracting would have—something would have, you know, a real benefit to some of your region.
Mr. WRIGHT. Well, part of what you said, we are already doing. We fully supply our customers in the Southeast. We presently have up to 49 million pounds a month from sources outside the region contracted for, for this fall. But part of the problem is we actually lose money on that milk.
Mr. DOOLEY. Would you support a piece of legislation that would allow the forward contracting?
Mr. WRIGHT. It would depend on the particular piece of legislation. I am aware of something Kraft Foods advocated, and I am not close enough to a cheese market to know. I know there were some problems with that. I also know, within the industry, there is some interest in the concept, but the actual proposal they have seen, they can't support. And, again, you know, the closest cheese plant to me is a thousand miles away, so how the Kraft proposal would work, I don't know enough about it to comment.
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I will tell you what I would advocate, is more—still with this price mover, there is still a month and a half lag. If there is value in the futures market, I think a July fluid price ought to based on the July manufacturing price not on the first two weeks of June.
Mr. DOOLEY. If you went to an entirely deregulated market, would you think that your July price would be based on July supply?
Mr. WRIGHT. It would, but I also believe it wouldn't be as high as my price is now.
Mr. DOOLEY. And would it—and it wouldn't be as high; why? Because there would be a different in the amount of—there would be an over additional supply that would move into the market that would be driving it?
Mr. WRIGHT. No. I think the relative bargaining positions——
Mr. DOOLEY. What percent of milk in your region is controlled by co-ops?
Mr. WRIGHT. One hundred percent.
Mr. DOOLEY. And that is not a market power position?
Mr. WRIGHT. No, sir. I get beat up monthly. I have got the battle scars to prove it. I have already named the big four customers we have.
You see, the thing is, there is more consolidation in the processing side than there is in the producer's side. And I literally get—like Tuesday morning, I was verbally thrashed. And that is just the fact of the marketplace.
Mr. POMBO. Mr. Schaffer.
Mr. SCHAFFER. Thank you, Mr. Chairman.
I have a question about class III price calculation. We have heard a great deal of concern raised about the calculation under the final decision.
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If the decision, in its current form, were to be implemented, would there be any value to western producers for the Congress to require USDA to continue publishing the BFP under the current formula?
And I would just leave it open to the panelists.
Mr. WRIGHT. I will say something, Congressman. I would apply all we got.
Mr. DEJONG. Using the current formula we have now? Is that what the question is?
Mr. WRIGHT. Using what it is in the final decision? Mr. SCHAFFER. Correct. I want to know what the value to western producers would be if Congress were to require USDA to continue publishing, under the current formula.
Mr. DEJONG. We would be in favor of that—on the class III part of this situation. Publishing it and using it.
Mr. SCHAFFER. Just that simple, huh?
Mr. DEJONG. Yes.
Mr. SCHAFFER. Any other comments from anyone else?
Mr. WRIGHT. Are you talking about what is in the final decision for class III pricing versus our current class III pricing?
Mr. SCHAFFER. Precisely that.
Mr. WRIGHT. OK. I could comment. I think this is another issue that is slanted to the upper Midwest. And this is how it has been explained to me.
In the upper Midwest, there is a disproportionate share of the cheese processing plants that are cooperative, whereas, in other parts of the country, they are more proprietary—and by what you do by increasing those allowances and giving the cheese plant additional profits. If you are in an area like the upper Midwest where it is co-ops, they float back through to the farmers. But in other parts of the country where they are proprietary, you are giving that money to proprietary firms, which they may or may not give it back to the farmer, and you are back into the unequal bargaining system.
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Mr. KIRKPATRICK. I would like to comment, also.
I think there are problems in the class III area. We are seeing some projected decrease, as compared to the baseline, if you will, in income. And we think there needs to be some attention to correcting that.
They changed the make allowance that really took it from the farmers and put it in a manufacturer part of—with a loss of what? 30 cents?
Mr. DEJONG. Forty-seven.
Mr. KIRKPATRICK. Forty-seven. It came out of farmers' pockets and went into a cheese maker's pocket. And we have a concern about that.
Mr. DEJONG. And we don't know why.
Mr. SCHAFFER. Do you have any suggestions on what kinds of modifications Congress could——
Mr. KIRKPATRICK. Well, we could either do it legislatively, or we can try and have a Federal Order hearing, and go through the process of presenting testimony to get it modified.
But it should be modified some way, because there is unnecessary loss of income.
Mr. DEJONG. We are at a loss to understand why we are taking 47 cents out of dairy farmers' pockets and putting it into manufacturing plants. And that is why we think there is a flaw. Possibly, there is a flaw with some of the values in the products and barrels they are using. And that is why we think that it needs to be more consideration on that process. And we have encouraged that it go back to formal rulemaking.
Adopt what we have. We have a lot of reform here. Adopt what we have got, and go back to formal rulemaking to get that class III formula right.
Mr. SOUZA. That is the same position that Western United has, in California. And it is very much along like Donald's, is to go back to—the questions you asked are questions that should be asked in a formal rulemaking process.
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Our main concern with the class III prices is that we hadn't seen the formula until after the publication of the final rule, and it didn't stand up to the same scrutiny that the rest of the modifications were.
So, we would like to see that go back to the producers; maintain it, as it is, status quo. Rather than disturb their markets today, go back to producers and review it. Go through the entire system again, back to formal process, and then have the opportunity to present testimony and review the entire process.
Mr. PETERSON. Will the gentleman yield?
Mr. SCHAFFER. Sure.
Mr. PETERSON. I would like a clarification here.
As I understand the new minimum manufacturing price mover, or price system, it basically moves towards the California system. We go to component pricing. The make allowance is changed, more like your make allowance. It moves us much in the direction of the California system. And you are against that? Does that mean you are against the California system?
Mr. SOUZA. No; we are in favor of the California system. Mr. PETERSON. So why would you be against us moving towards your system?
Mr. SOUZA. We want to look at the entire final rule, because the California system is in transition as well.
But I can tell you that taking money out of producers' pockets in the Midwest, California is going to react. And I think when that happens, everyone loses. Ultimately, there is not a winner in the group.
Mr. PETERSON. Well, one other point.
If the cheese maker is a co-op, I would not agree that you are taking it out of the farmer's pocket, because the farmers own the co-op. And that money eventually is going to flow through and be paid back in patronage dividends if there is a profit. So, I think you could only make that case where the milk is going to an independently-owned modeler.
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And I still have a hard—I mean I think that the true—the answer is that California has got this advantage. And if we move to their system, they are going to lose some of the advantage, and so that is why they are opposing this. That is my own view.
Mr. SOUZA. Well, if I could say one thing, in answer, Congressman, is that it ultimately affects the entire price of cheese, and cheese will drop. And that cost is going to go through the co-op, back to the producer. Ultimately, the producer suffers the consequences.
Mr. PETERSON. Could I make one more comment, Mr. Chairman?
Mr. POMBO. It is his time.
Mr. PETERSON. I don't know if I agree with that argument because just because the price of making cheese goes down, doesn't mean anybody is going to lower the price of cheese, necessarily. Because a lot of that is driven by brand name and what you can get out of the marketplace and so forth. So it may be true somewhere in the manufacturing end, but not through the whole market, so I mean I think it is a complex question.
Mr. SOUZA. Well, Congressman, why don't we take it back to formal rulemaking, and then we can examine the question a little closer?
Mr. POMBO. Mr. Stenholm.
Mr. STENHOLM. Following up on that last point. Just remember, here just a few months ago, we had an article in the Washington Post that stated that the price of Kellogg's Corn Flakes went up 2.7 percent in December, in order to meet the increased marketing cost and increased advertising cost of Kellogg's Corn Flakes—a perfectly legitimate business decision. Nothing wrong with that. It increased the consumer price of Corn Flakes by about 9 percent when it got to retail. Again, a perfect way business works. My frustration with that decision is if half of that increase had gone back to the producer, the producer's price of corn would have doubled. Now that is going to be my recurring theme over the next several weeks and months, as we start looking at what happens in 2002, from all farm programs.
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Because the gentleman's point is correct. Just because the producer's price goes down, does not necessarily mean the consumers' prices goes up and down. But you normally would think that it would, but it just doesn't work that way.
A couple of other comments. I happened to be in Omaha, NE a few months ago, and, lo and behold, there is somebody in Nebraska that is offering Texas dairymen $25,000 cash to move from Texas to Nebraska in order to set up a dairy industry. So it is not just coming Texas way and vice versa. There are chambers of commerce all over the country that are making these kinds of decisions.
And, you know, having experienced some of the negative side of the dairy industry in Erath County and Comanche and large family-owned dairies like Mr. DeJong, and we have worked on that. There is no simple answers or simple solutions to any of this, regarding location of dairies, et cetera.
It was interesting a moment ago when Mr. DeJong was pointing out that milk produced in New Mexico, it cost $1 to get it moved to the Dallas/Fort Worth market. That is where the people are. In Texas, the people are in Dallas/Fort Worth, Houston, San Antonio. And we are finding, because of environmental concerns, it is hard to locate efficient-sized dairies in the those areas. And it is going to get more so as the time goes on. That is why price differentials have always made sense. And either you do it through legislation, or the market does it—preferably the market, but we know that doesn't always work that way.
But getting into the class III question, and I don't have time to go into all of this today, but one of the questions—and it is a legitimate question now—that brings up on the class III, because in the proposed rule, it was the make allowance was proposed at 0.127 cents. The RCBS, the Rural Cooperative Business Services, which also became the national milk recommendation, was 0.1421 cents. The IDFA suggested 0.152. The final rule came in at 0.17.
Now that is a legitimate question that I think somebody—and it has been suggested here by the panel, I think, unanimously, that that should be a subject of rulemaking, other than an arbitrary decision making this, because this will have a very dramatic effect on the mailbox price of a lot of dairymen who do not happen to be in position to benefit through the traditional cooperative theory.
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That is a legitimate question that needs to be looked at, and will be looked at when we eventually get around to marking up this bill, because it is a legitimate question. And there is a lot of question how that happened; what is it that just arbitrarily—where did this number come from? When even the folks, Mr. Wright, that you get upset about that, that Mr. Tipton will be testifying in a moment on behalf of the folks that you don't seem to get along too good with in a moment.
But, you know, I got to say this to you; if I am a cooperative manager, and I have 100 percent of the milk supply, and I don't have a better relationship with my customers than you do apparently do, I believe I would be taking a good, hard look at my own hole card as to what in the world I am doing that is causing that.
But I don't want a response from you today, but I am——
Mr. WRIGHT. But I am president, though; I am not the manager. I am a dairy farmer.
Mr. STENHOLM. Well, all right, then. That is even better.
Mr. WRIGHT. I am not a hired hand.
Mr. STENHOLM. That is even more—then I will want a response from you. [Laughter.]
Mr. WRIGHT. OK.
Mr. STENHOLM. Because I get sick and tired of having dairymen coming into my office complaining about their cooperatives.
I am a great believer in cooperative effort. In fact, if we are going to solve the real problem associated with dairy—and that is price—and do it without the volatility that is now affecting both your customers as well as the producers—volatility is difficult for any industry to survive with, as we are looking at it now.
But I just get real perturbed when we have got the members of cooperatives continuing to complain to me as they do. And if you are here as the president of the cooperative, and you are here legitimately saying you have got real differences with your customers—oh, we have got to work on that.
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And whoever your manager is, if I was president, I would be asking him, ''What is it that is causing this relationship?'' And maybe it is all their fault, but I find that if we are going to solve this particular price problem—we are talking about dairy, today—if we are going to solve this, we have got to get into a more cooperative relationship with our customers. We have got to get into a position in which they recognize they need to do something to get more of the consumer's dollar in our pocket, or we are out of business.
All due respect to the free-market enthusiasts and what have you, it ain't going to work unless we can have a better working relationship. And so I think we have got to work on that.
My time is expired today, but I did want to make very clear, there are some legitimate questions on the class III that need to be answered, and done in the spirit of openness and honesty, and in the same way we are trying to arrive at this gradual transition to a new system of marketing dairy product that will increase consumption and will provide a fair return to the efficient dairy farmers. That is what it is all about.
You had a comment?
Mr. SOUZA. Yes, Congressman, thank you.
In response to—actually Congressman Peterson brought up, too—about the extension—about the class III review and going back to the formal rulemaking.
Congressman Peterson may be absolutely right, you know, but we don't know that this thing has been reviewed properly. There are questions that we need to ask. One example, you are talking about coming to the California system. Where we see a problem in the final rule, is, in California, regarding make allowances, we have audited costs. We know what the costs are. We are not sure that under the final rule right now that we would know what the actual, true cost of manufacturing the product is under this current system. That is just one of the reasons that we are asking to go back to review it under formal——
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Mr. STENHOLM. What is the cost that you know?
Mr. SOUZA. On cheese?
Mr. STENHOLM. Yes.
Mr. SOUZA. Well, I just so happen to have the answer—1.147 cents.
But the problem is with this, we would like to go back and examine it. You know, give it the full authority to have comment, to present evidence, and have a review. And it very well may be—this might very well may be the right formula. But we think we need to go back and reexamine it. Rather than changing off the goal, if we make the change now and wait 2 years, as I understand, it is going to take 2 years to get back to this. In 2 years, we are going to create some tremendous chaos in the industry if the formula is not right. We would know it works; it is in place; we have a good discovery system now. Leave it in place now. Examine it thoroughly; come back and make a rational decision based on the evidence.
Mr. PETERSON. I have met with USDA about this issue. And I think I am right on this, is that the main reason—it wasn't done arbitrarily. They did it to try to harmonize it with California. California has a big impact on the overall price of manufacturing milk in the country. And what they are trying to do is move the class III system closer to California. And that is why they moved it in that direction.
Now you can argue about it, and California doesn't like it because it is going to make us more competitive of them. But I think that is the reason they did it. And I don't think we need to have 2 years of hearings to figure that out.
Mr. STENHOLM. No; but, you know, I have heard the same explanation, and I am prepared to accept that, except, you know, there is a big difference between 1.14, 1.27, and 1.7. I mean that is a big difference.
Mr. PETERSON. Well, there is more to it than I think we know here today. And I will get you that information. It is too bad the Department isn't here, but we should get that mailed on before we have the markup next week.
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Mr. POMBO. We will get that.
I am going to dismiss this panel. I thank all of you for your testimony and your answers to the questions. If there are further questions to this panel, they will be submitted to you in writing.
Thank you very much.
I would like to call up panel No. 3. Mr. Linwood Tipton, Mr. Bill Lenschow, Mr. Mark Furth, Mr. Ed Brooks, Mr. Bill Dropik, Mr. Eric Schlecht, and Mr. Arthur Jaeger.
Thank you all for being here.
Mr. Tipton, we will start with you.
STATEMENT OF E. LINWOOD TIPTON, PRESIDENT AND CHIEF EXECUTIVE OFFICER, INTERNATIONAL DAIRY FOODS ASSOCIATION
Mr. TIPTON. Thank you, Mr. Chairman. I appreciate the opportunity to appear before you today.
I think it is incredible that this committee and the United States Congress is having to spend valuable time on this issue. The distortions of facts and the creation of misinformed emotion is a trademark of the proponents of more dairy regulations and government-set prices at increasingly higher prices.
My plea is that the market will work so it don't intervene and interject more government-forced distortions.
Dairy farm income is at, and has been at, record levels. This wasn't, and isn't, because of the government. It is because government interference has been reduced, both as to setting prices and to setting the market for the largest input cost—feed.
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As a result, prices had been the highest on record for 2 of the last 3 years, and in all probabilities, 1999 will reflect the third-highest prices ever recorded. That is 3 out of 4 years with record-shattering prices.
During this same time period, feed costs have decreased. The milk/feed price ratio for 1998 was at a record high level, 10 percent above the average for the past 10 years. It is above the average—the high average is what I meant to say—10 percent above the high of the average of the last 10 years. And in 1999, is likely to be the second highest.
I am going to not make many comments on the dairy farmer receipts as a result of the final rule because I think that that has been covered very adequately. It is very clear that the impact on dairy farmer income is very minimal as a result of the entire rule, and that whatever changes there are, are within the statistical area, so for all practical purposes, dairy farm income remains the same under the final rule, as it would had they—as it is currently.
I would like to comment on the class I–A proposal briefly. The differentials, clearly, by the evidence submitted by FAPRI in the consensus estimate, are not significantly changed in total. There are some who are changed upward and some which are changed downward.
I have noted in their report that there were 23 States that would have had higher differentials under the class I–A proposal. It is a real split mechanism. It is not that everybody wins and everybody loses; it is really about half of the States have somewhat higher prices as a result of the differentials, and some of the States have lower. But in even in those cases, they are not enormously significant. I think the highest was 20 cents, as I recollect, in any one area.
The thing that is probably more important to saving the income of dairy farmers is the mover, because the mover that is in the final rule is the highest of the class III or the class IV prices. And if you look at the last 3 years, the mover would have been 33 cents higher than—if you averaged it for the last 3 years, it would have been 33 cents higher than the basic formula price that we have used in the past. If you, then, add the class IA option to that new mover, it raises it about 66 cents higher than what it would have been, under the current system.
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I think it is interesting that much of the attention is focused on class I. Class I sales are the weakest sales that we have in the dairy industry. The category is sick, and it has been sick for some period of time. Sales have declined on a per capita basis for a long period of time. And to continue to think that you can add costs to the class I product and not have an impact on sales is just totally erroneous. It has, and it will continue to do so.
I would like to, in closing, to say that there are two things that I think are extremely important to recognize. One is that as I listen to the testimony and have read and made contact with everybody over a long period of time, there seems to be a failure to realize that this is a total package. As I indicated, the class I mover has been increased. I haven't heard anybody object to that. Nobody has talked about class II prices. Class II prices were increased significantly. In fact, in the last year, the formula, had it been in effect, would have been $1.32 per hundredweight for class II prices, higher than what actually existed. That is a significant increase. I haven't heard anybody comment about that, but that is a part of this total package.
The only areas that I hear people talking about—and particularly from the dairy farmer representatives—is that there is a decrease in some areas—not many and not much—in the class I differentials—not in the total class I price—in the class I differentials. And, secondly, as we just had a discussion on class III pricing. And class III pricing is a complicated formula that not only has make allowances as a part of the consideration, but yields and many other factors.
The last comment I will make—and I know my light has come up—but the comment I would make is there seems to be a perception that if you do all of these things, or if we keep the status quo which would be what is being talked about in this panel, for the class I differentials and for class III, that is about 85 percent of all the milk that is priced under Federal Order. So that would no change, for all practical purposes. We have lost, since the Federal Order Program went into effect, about 93 percent of the dairy farms that were in existence, or at least number-wise—about 93 percent of the dairy farms that were in existence in 1937.
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We have also lost about 95 percent of the plants. That means that there is about 7 percent of the number of dairy farmers that are currently producing the milk for the Nation, as compared to when the Federal Order Program went into effect, of 100 percent, and the same thing with the plants.
So this is an issue that everybody is concerned about and is extremely important, but it is one that I don't think anything that this committee can do today or tomorrow or the next month or the next year is going to really turn that tide around.
Thank you very much.
[The prepared statement of Mr. Tipton appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Lenschow.
STATEMENT OF BILL LENSCHOW, DAIRY PRODUCER AND BOARD MEMBER, FOREMOST FARMS USA, SYCAMORE, IL
Mr. LENSCHOW. Thank you. It certainly is my privilege and pleasure to address the committee.
I am a dairy farmer just outside Chicago, in Zone I; there isn't many of those left anymore. And when we talk about Federal orders and how they operate, as we look at the Chicago market in that particular area, there certainly is not very many dairy farmers left in Zone I.
I milk about 60 cows—have been as high as about 180. I have decided, because of my age and help in that particular area, I would reduce that size to something I could manage, and do it as a family operation.
I am a owner and a director on Foremost Farms which produces a wide variety of products and sales of $1.3 billion in fluid and 40 other different manufactured products.
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Certainly our interests are different from that perspective than probably what you have heard from the others.
My involvement in the dairy industry has been rather interesting because I was the youngest person in National Milk for many years and a person who helped form AMPI and being the youngest person and all. All of a sudden, I look around, and I am the oldest. Something happened in those 40 years. And that is how long our farm there has been in—I am the third generation, and my kids are the fourth. So we have been farming in that area for quite some time.
Despite all the talk of the loss of dairy farmers—and I won't come to you and bore you with that, but we have to realize there is one factor in that that you can't do anything about as a committee or I can't or our handlers can't. I can assure you that my profit will increase by building houses than in milking cows. And in being in DeKalb County and the expansion, every single one of us are looking at that, and we have to be realistic. So there are a number of us that could sell out for other interests. As we, in agriculture, and you have had a farm in the family for over 100 years, that weighs heavy on you to do that and build houses, but you sometimes don't have a chance to make any other decision than that.
I will limit my comments because you do have my written testimony. The thing that I am the most concerned about are several items, and we very strongly have decided that we would like you or urge you not to override the USDA's final decision. We think it is important. We realize there are some differences there, but in the fairness issue and addressing the upper Midwest's point of view, certainly has to take that into consideration.
The dairy industry has been changing tremendously. We can see that within the order system, just in the Chicago market. We see almost identical, same things occurring that I saw 30 to 35 to 40 years ago, within the struggle of who is going to supply the Chicago market. We are seeing similar things to that, but the miles have expanded tremendously.
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So I urge you—you know that the Federal Order System is working—has worked in our favor. Certainly needs to be some changes made in it to bring it up to date, but I think the orderly process that has been in effect for many years can change that.
Some of my interest and some of my involvement is—and I find it interesting—the over-order pricing situation has bounced back and forth quite vigorously today. I have been president of CMPC for like 17 and 18 years and been involved for 30 years in the over-order pricing within the Chicago market. That has been a significant part of that. As we get a little further on, I would like to have you look—because you have seen the graphs that we had—and there is some real interesting numbers there.
Second, the class I differentials are upsetting the—by changing only the class I differentials, you are upsetting the comprehensive package of what the Federal Order System and the revised section has done. So I would urge you not to do that.
Skipping a few of these things so that we don't get into—personally, I would better off, in my location as a farmer in Zone I, to be negative towards sharing my class I. Most of my milk for many, many years has went into the fluid sector. It would have generated me more dollars. But there is just such a thing as fairness and market sharing within and establishing a pool to generate those dollars. My milk prices made up of a variety of products, not only the class I sale. And I am rather pleased that I am a part of that market. The northern sector of Illinois really is—works very closely with Wisconsin.
The other decision allows the marketplace to work better, and we think it can work better.
I would like to point out is the graph that we actually have attached to the remaining portion, which addresses the over-order pricing. I would like to see us do some more work, as cooperatives, and working together with each other. And what has been done in the past, I certainly think can be implemented in some.
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But as you look at that graph, you go down there and you look at what people have said. You look at the over-order premiums within there, and you establish where the highest over-order premiums are in some of the areas. Some people I think could cooperate with other co-ops in establishing some of those over-order prices, which would be a significant benefit to them.
But that over-order premium can be adjusted with handlers, depending on the situation and marketing, on a weekly and a monthly basis, and not carry out a legislative price to that point.
I see my time is up. I certainly would be more than glad to answer any questions on over-order premiums that you might have.
Thank you much for—I do have to mention, though, that the introduction—and Congressman Stenholm isn't here—but I would have been pleased to have my Congressman, the Speaker of the House, Denny Hastert, to come by and introduce me but he is busy, I guess, today.
Thank you for the opportunity.
[The prepared statement of Mr. Lenschow appears at the conclusion of the hearing.]
Mr. POMBO. I will let Denny know you were here. [Laughter.]
Mr. LENSCHOW. He already knows.
Mr. POMBO. Mr. Furth.
STATEMENT OF MARK FURTH, GENERAL MANAGER, ASSOCIATED MILK PRODUCERS, INC.
Mr. FURTH. Thank you, Chairman Pombo. I appreciate the invite to testify here today, and I appreciate your taking the time to listen to these reams and reams of testimony on a very complicated subject.
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I am representing Associated Milk Producers; it is a dairy farmer's cooperative headquartered in the upper Midwest. We market milk for 6,500 members. I am also representing the Midwest Dairy Coalition today.
I have worked for those dairy farmers for 30 years. I have for the last 25 years been directly responsible for marketing milk, including all of the Federal Order Marketing and most of the issues discussed here today. For the last 10 years, I have been the CEO of that cooperative.
AMPI and the Midwest Dairy Coalition obviously support USDA's final decision. And it has been made real clear here today that we strongly oppose H.R. 1402.
The 1985 farm bill which was referred to here a couple of times today lowered price supports. It came on the heels of some great changes in the dairy industry. And while we were lowering price supports, we raised class I differentials. Congress raised class I differentials, thereby, insulating a large part of the dairy industry from the full impact of that 1985 farm bill. That decision helped those with high class I utilization and forced milk prices even lower than they otherwise would have been through the late 1980's and early 1990's.
Complaints were addressed to Congress during the early 1990's, and in the 1996 farm bill, Congress asked USDA to develop a ''Fair for All'' program. They have done that. Now in the specter of free-market prices looming, USDA has announced a final decision on Federal Milk Marketing orders that is more equitable and more market oriented, but still benefits areas with higher class I utilization. We see it as a compromise between what USDA believed to be the most economically fair and what has historically existed—at least since 1985.
That final decision may even increase class I values. Allow me to introduce the attached graph which compares current Federal Order class I prices to the class I price resulting from final decision formulas.
[Chart shown.]
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That chart shows that this decision that we have been talking about all day may actually raise class I prices.
Most of the discussion today has been about everybody losing class I differentials. Nobody has been talking about the class I price. When you add differentials to the mover, you may actually have increased class I prices.
This chart explains how that might happen, applying this to the last 3 years of actual markets.
If the final decision actually has the effect of raising total class I prices from where they are today, raising them from where they were raised to in 1985, how could you, in good conscience, support measures that would further increase class I values, as proposed in H.R. 1402.
A lot of discussion today is about the difference between 1–A and 1–B—it seems to me that the question shouldn't be the difference between the final rule and 1–A. The question should be, what is the difference between either of them and no regulation at all?
The fact is that there aren't any areas of the country that are even talking about voting out these orders. People will get a change to vote on these in August. All of these Federal orders still generate higher prices, higher class I prices than you would get in a free market, without any regulation at all. Everybody is a winner; it is just a question of how much.
I am afraid much of this isn't about need, but rather about greed. Proponents of H.R. 1402 are trying to increase class I prices beyond that final decision and beyond 1985 increases, getting an even larger share of the market to those areas. Proponents claim that USDA's final decision will cost dairy farmers $200 million a year. I believe that that is totally bogus, and I am pleased to see FAPRI's analysis agreeing.
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AMPI sells about 85 percent of its producer's milk as manufactured products, and we don't see the final decision as lowering the income of our producers a stitch on class III products. We sell those products at the cheese market, not at the Federal Order price.
Another argument that I have heard a lot about today is mailbox prices, and I have included with my testimony some comments about mailbox prices.
The mailbox prices that are being passed about are from the last 2 years: 1997 and 1998. Both years, when markets where increasing dramatically and, thereby, because of the 2-month lag in class I pricing, creating a skewed comparison of mailbox prices. In fact, the Midwest prices have not been the higher mailbox prices; they have barely been average. And you will see from the submitted testimony that there is several good reasons for that, not the least of which is the most competitive area in the United States.
In closing, Mr. Chairman, let me just ask you to be fair to all concerned. Be fair to USDA, who had the unenviable job of working with the challenge given to them by Congress in 1996. They have made a modest attempt to keep Federal orders from becoming a price support for some, at the expense of others. Be fair to dairy farmers; they work as hard as anyone in the Nation. Don't pit one against the other by giving some a bigger advantage than others through legislating prices higher than the marketplace would give them.
And, lastly, as has been talked about a couple of times today, how can we be fair, as a Nation, when we are talking about all this free trade stuff with other Nations, while we are protecting prices to parts of our own country, to protect the price for some States against others—which is what we are doing—not only with compacts, but even with Federal orders?
Thank you, Mr. Chairman.
[The prepared statement of Mr. Furth appears at the conclusion of the hearing.]
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Mr. POMBO. Thank you.
Mr. Brooks.
STATEMENT OF ED BROOKS, CHAIRMAN OF THE BOARD, FOREMOST FARMS USA, REEDSBURG, WI
Mr. BROOKS. Thank you, Mr. Chairman, and other members of your committee for allowing me to testify before you today.
The previous panel had a gentleman who thought he was unique. I may be an endangered specie because I am a dairy farmer, but I am also left-handed, and, beyond that, I milk Brown Swiss. And so I don't think it is marketable, but we can try it anyway.
My name is Ed Brooks, and I am a dairy farmer from Reedsburg, WI. My wife and I own and operate a 50-cow dairy. We raise our own replacements, as well finishing out our dairy steers. We are member-owners of Foremost Farms USA, a cooperative—the same cooperative that Mr. Lenschow mentioned previously.
I have served as chairman of this cooperative since it was formed in 1995. It is owned by 5,500 members; we operate 25 dairy plants, processing plants, as well as five reload stations. As Bill mentioned, our sales are $1.3 billion per year, and we also export to 25 different countries. Essentially, we export value-added whey products.
My cooperative is both a member of the National Milk Producers Federation and the International Dairy Foods Association. On such matters as Federal Order Reform, we have worked hard to build a good track record of serving the interests of not only our members, but of the dairy industry, as a whole. Within both organizations, our cooperative has tried to work to a consensus on what the reform package should be.
At this time, I think it is fair to say that, on this issue, National Milk does not represent the interest of Foremost Farms.
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Foremost Farms, additionally, is a member of the Upper Midwest Coalition, which you have heard from in the past, representing issues from that area. Our members would ask that you support the final decision advanced by USDA for Federal Milk Market Order Reform, and thank you to not override it.
U.S. Congress has spent 2 years of political maneuvering, if you will, on this very issue before finally giving it to USDA. The reform package advanced by USDA represents 3 years of intensive study, and research, and comments, and industry analysis.
As are well aware, resolving dairy policies is a difficult matter. There are many sides to many issues, many interests to consider, and no solutions that mean gains for everyone. But this reform process was not supposed to be about gains. It was supposed to be equability, leveling of fields, and things like that. It was supposed to, also, be about updating a system so that it can be more efficient and serve the industry and consumers, alike, as we move forward.
What USDA's final decision represents is an opportunity to make some constructive improvements to a program that has been outdated, and now politically gridlocked. What it represents is a series of compromises.
It is true that the process has been divisive for the industry, but the final decision represents at least a small step forward, and it will allow opportunities for new ideas that will help all dairy producers to manage their businesses in a changing marketplace.
Without constructive changes to an outdated Federal Milk Marketing Order Program, or without looking to other new programs that can help our farmers compete in a new global market, we have achieved nothing for our industry. We have simply slid backwards into an environment of continual regional fighting and divisiveness.
And the final decision allows USDA to move forward with only minimal impacts on producers. We have heard the different testimonies this morning. We have heard everything from being a minimal impact to some real severe scare tactics. But I think the fact is, if you have any faith at all in consensus of economists, it is going to have a very slight impact on the dairy industry.
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The full picture shows us that the Federal milk marketing orders are only part of the story. They set the minimum prices. This is where Mr. Lenschow and his common marketing agencies work to get over-order premiums for us, the dairy farmers. If we look at the whole picture, a realistic look at it, we will find the reform package isn't going to spell the end of the world to the dairy industry in one region or another. It is not going to make huge, sweeping changes in the prices dairy farmers receive. And it is not going to mean a windfall for some and a big penalty for others.
Both the USDA analysis and the analysis by FAPRI show only mild impacts to producers nationwide. I think everyone agrees that USDA's decision is not perfect, but it is a step in the right direction. And the process for implementation is one that puts the decision squarely where it belongs—that is with the industry.
Aside from making many long-needed changes in a number of technical areas, USDA's treatment of class I differentials represents a reasonable compromise and puts the system of fluid milk marketing on solid ground for effective coordination of milk movement nationally. The current differentials and option 1–A do not do this.
USDA has done a good job, and certainly a thorough one, of modernizing the Federal Milk Marketing Order System, as called for by you, the Congress. They have gone out of their way to minimize adverse impacts.
I believe your colleague from the other part of Congress, Senator Lugar, said it best in his May 24 letter to his colleagues when he said—and I agree—that Congress cannot improve upon USDA's final decision.
Our recommendation, that of my membership, and Foremost Farms, is for you to allow USDA's final decision to be implemented and to reauthorize the Dairy Price Support Program for 2 more years until the next farm bill. We have a great deal of confidence in the ability of dairy markets to work under the final decision.
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Let the producers decide the outcome in the referendum. Let the marketplace work in setting the pay price.
Thank you.
[The prepared statement of Mr. Brooks appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Dropik.
STATEMENT OF BILL DROPIK, CHAIRMAN OF THE BOARD, FIRST DISTRICT ASSOCIATION, NELSON, MN
Mr. DROPIK. Thank you, Chairman Pombo and members of this subcommittee, for allowing me to testify before you here today on H.R. 1402 and any other dairy issues before your committee.
First of all, I want to have it know that I am opposed to H.R. 1402.
My name is Bill Dropik; I am a dairy farmer from central Minnesota. I have dairy-farmed there for nearly 40 years now. We milk 44 cows. And I have been involved in the dairy industry for a good number of years, basically started out—my milk is marketing through the Nelson Creamery. I have been president of that creamery for 24 years. In turn, that milk goes to the First District Cheese Plant at Litchfield. It is a very modern, barrel plant—a very large facility. We processed 3 million pounds a day. At the end of the year, it is a sum of over 80 million pounds of cheese that we process through that plant. I am currently chairman of the board of that cheese plant which represents a sum of over 1,000 producers in central Minnesota.
I am also the past president and currently the vice president of the Minnesota Milk Producer, the State organization in Minnesota which represents approximately 6,000 dairy producer members in the State.
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Both of these organizations are members of the Upper Midwest Coalition, and I know this coalition has testified before this committee several times. It is a very respectable committee, and that coalition is also opposed to H.R. 1402.
I want it to be also known, I disagree with National Milk Producers' position on H.R. 1402.
I do believe the Federal orders need to be changed. One comment—I will just back up as long as Congressman Stenholm came in here—my brief history on involvement in cooperatives. And as long as I have been with them, I am very proud of our cooperatives, and I have been chairman of the board of them. I support them wholeheartedly. I always feel very strong that I have a lot equities invested in my cooperatives, and I would never hesitate not to support nor back my cooperatives for that.
But in the final decision, I—we support that from the standpoint that there is modest changes. They are very modest, but they are in the right direction.
We have been working on this for somewhere near the last 10 years. And we have participated in the 1990 hearings, followed by—as many of you know, in 1990, we ended up filing a lawsuit because it of the discriminatory pricing that took place in the class I differentials and so on. And we have been involved with that up until recently.
I guess from that point, we felt very strong on regional pricing. We did not support that. We also were involved in the farm bill, followed by about 3 years of informal rulemaking with USDA. And I guess I feel right now that USDA has made some modest changes, and now, basically, this committee is kind of saying, ''Well, we don't like that. We want to do it our way.''
And I guess, again, I would say this bill of 1402, known better as the ''Blunt Bill''—let me just give you a couple examples why I am opposed to it.
I think this congressional action should only involve overseeing what is done administratively. Don't get involved in the decisionmaking of it. The final decision on class I's are reasonable for everyone. I think some give; some take; but they are reasonable. option 1–A leaves me with the same, or worse, disadvantaged position, and I can't accept that.
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A comment earlier today was brought up about even a very large cooperative in the Midwest, Land O' Lakes, that supports the option 1–A, but I don't hesitate to make mention that they have a very large membership on the east coast and the west coast, and I think it is just reasonable that they support their membership, and they support option 1–A.
A major concern with, you know, for me, also, as a milk producer and for a cheese plant, is that option 1–A makes me worse off by lowering prices for the cheese and the milk that I produce for that cheese plant. It would be lowered somewhere between that probably 9 cents to 15 cents per hundredweight. Option 1–A would lower mine about approximately 11 cents. This would cost Minnesota dairy industry about $10 million, and I am very concerned about congressional people tinkering with this when—I guess, when we look back, I would ask right now that Congress do not get involved in that.
And I think that Congressman Peterson touched on that, and I know some of the members of the committee probably don't have that background, but in 1985, it showed what happened when Congress got involved and ''tinkered it up.''
And, very briefly, what happened was the upper Midwest was supposedly to participate more heavy in the Whole-Herd Buyout, and other regions got the increase in the class I differentials. That is what happened. And that, not necessarily, was true, because larger herds across in other regions participated just as heavily in the Whole-Herd Buyout. Furthermore, the Whole-Herd Buyout was a self-funded program. I, myself, as a producer, funded that by 40 cent a 100 check-off. Then it was lowered to 35 cents, then 25 cents, and then it was phased out. So it was a self-funded program.
Again, when Congress, at one point, when Congressman Steve Gunderson was going to introduce legislation for deregulation, again, this committee said, ''No, no. Leave it done at administratively.''
So I think now, in the 1996–97 farm bill, you ordered USDA to reform and reduce the number of orders. And, again, now you are not probably following through on it. But let them do their work. I think they have done it. If it doesn't work out, I guess that is when the congressional people have to get involved.
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I also say I know a little about Federal orders; I am no expert on it. But I think when it comes to tinkering with and making the necessary reforms, USDA is the people. They are the experts. Let them make the changes.
Just a comment that I would like to make. You know, do what is right for the dairy industry; don't do what is politically right. I think we have just got to keep that in mind. And in Minnesota, we have a lot of century farms, a lot of farms that has been around—1 comment I want to make, Chairman Pombo, I brought it along, and I just want to express this concern.
In just the last day or so, I received my check as part of that $200-million distribution for the dairy. Right here it is. I am glad to get it. I want to thank Congressman Obey for that type of legislation. But sometimes I feel if we had a fair price, probably a better price, a better—a more level playing field, dairy producers would not need these kinds of checks. I don't think dairy producers want them nor are looking for them. They just want a chance and have that chance to compete. That is what they want.
So I think dairying is a good way of life, Mr. Chairman, and for a lot of farm families. Let's not take it away from them.
A comment that I wrote down when we—to address Congressman Peterson—I don't think there is a grudge between large versus small. And we always refer to it as the ''family farm.'' I have turned those words around—since farming in the Midwest has gotten larger, it is the ''farming family'' is what it is out there. And I think that that is the term we use as business changes, as the climate changes. It is the farming family. So we don't have to use it, that it is—we are pushing out the family farm.
And another thing I think of many times, the Midwest versus any other region. The Midwest is an ideal place to produce milk. Environmentally, we have ample fresh water; we have a good feed supply. We just want to be competitive, and let us compete and produce milk there. If it ever leaves the region, we will probably never get it back. Other regions of the country aren't that fortunate to have the benefits we have in producing milk. Like I have always said, we don't want to compete and grow coconuts, either, so we are good in producing milk. Let's keep it there in Minnesota.
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Again, thank you, Mr. Chairman and members of the committee, for the opportunity to testify.
[The prepared statement of Mr. Dropik appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Schlecht.
STATEMENT OF ERIC V. SCHLECHT, DIRECTOR OF CONGRESSIONAL RELATIONS, NATIONAL TAXPAYERS UNION, ALEXANDRIA, VA
Mr. SCHLECHT. Thank you, Mr. Chairman.
I am director of congressional relations for the National Taxpayers Union. We are a grassroots organization with 300,000 members across the United States. And as you may know, NTU supports lower taxes, less wasteful spending, accountable government, regulatory restraint, and most of all, an American economy where the free-market principles of competition, free trade, and consumer choice prevail over interventionism and protectionism. In fact, since its founding 30 years ago, NTU has consistently sought the elimination of direct or indirect government price controls on agricultural products.
I would also like to say at the beginning, Mr. Chairman, that NTU receives no Government grants or contracts of any kind.
I would also like to begin with—in the interest of full disclosure—a confession, and that is, I am not an expert on the Federal Milk Marketing Program and its price differentials or the 893-page document that supposedly reforms them. In fact, having looked briefly at many of those documents in the last couple of days, I am amazed that anyone could be an expert on them. And I have a newfound respect for anyone that is. In fact, in a prior life, I worked for a Congressman who was on the Budget Committee, and I handled the Budget Committee for him. And I thought budget process and tax law was pretty convoluted and complicated until I came across dairy price controls. So let me just say that I am not here before you as an expert.
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What I hope to do is represent the average taxpayer. And the average taxpayer doesn't know, much or perhaps anything about dairy price controls. But I do believe they do have some basic tenets that they believe in. One is that they should not pay artificially high prices for products, whether that be milk or cheese or any other product.
Another is, I think if you ask the average taxpayer, that they would be opposed to price controls. They would probably support, I believe, letting the markets determine the price. The market will determine what the fair price for a product is. And, invariably, in my opinion, you will find that the market is more efficient and successful than government in determining what the fair market price for a product is.
With these principles in mind, it is our considered opinion that option 1–B, with its greater reliance on market principles and its phase out over 5 years, is the better of two bad choices, and, therefore, we cannotendorse H.R. 1402. I say that 1–B is the better of two bad choices because it would be our hope that the committee, and in Congress, move toward eliminating price controls altogether.
I would like to quickly close by giving you a couple examples, Mr. Chairman, of why we think price controls are bad for the economy and bad for the American consumer.
During the 1980's, artificially higher milk price supports lead to oversupply problems that cost taxpayers $17 billion. Even the current USDA Market Order will continue to impose $1 billion per year on consumers and add $80 million annually to the cost of school meals.
And I might pause here for a point, to note this costs very regressive effect on the consumer, in that those who will be most affected by higher milk prices or higher school lunch prices are not the wealthy. They are not the middle-class. It is the poor and the lower-middle class that use a higher percentage of their income on daily staples like milk, and to artificially inflate those prices only hurts them. And I find it a little ironic that, when this law was initiated during the Depression, from what I read, the point was to ensure that all American would have access to affordable milk. And yet, we are finding that price controls are ironically doing the exact opposite.
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Finally, according to the International Dairy Foods Association—whom I will quote while they are here, ''There is much evidence to suggest that small dairy farmers, those with 60 cows or less, are not the beneficiaries of price fixing, and that the bulk of the money goes to the larger dairy operations in the States.''
This, I would assume, was not the original intent of the law.
In conclusion, Mr. Chairman, I would just like to say that we believe virtually every deregulated area of commerce—from airlines to freight railroads—have produced better, more innovative products and services in larger quantities and lower prices.
With this in mind, NTU would urge the committee to move dairy price controls in that direction—that is elimination.
Once again, Mr. Chairman, thank you for the opportunity to appear before you. I ask that a written copy of my testimony be submitted for the record.
[The prepared statement of Mr. Schlecht appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Your entire testimony will be included in the record.
Mr. Jaeger.
STATEMENT OF ARTHUR S. JAEGER, ASSISTANT DIRECTOR, CONSUMER FEDERATION OF AMERICA
Mr. JAEGER. Thank you very much, Mr. Chairman.
I am Art Jaeger; I am the assistant director of Consumer Federation of American. Knowing I am the very last witness in a long day, I will be very brief.
From a consumer perspective, CFA does feel that H.R. 1402 is a mistake. It would overrule the modest reform in the administration's Marketing Order Reform Plan and maintain or increase the farm price of milk in many States. That, in turn, would cost consumers more than $50 million a year in higher retail milk prices. That is based on an Agricultural Marketing Service estimate.
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USDA's final rule was, and is, a step in the right direction. It benefits consumers by reducing regional price differentials, and it somewhat reduces the complexity of the Federal milk pricing system. That system now costs consumers more than half a billion dollars a year in inflated milk prices, and that is I think a conservative estimate. As the previous witness noted, this is a system that is particularly burdensome on low-income consumers who use more of their income on food and more of their food budget on dairy products.
The Agriculture Department says its reform plan would save consumers an average of 2 cents on a gallon of milk, or in excess of $100 million over the course of a year. That is only a fraction of the premium consumers now pay under the Federal Milk Marketing Order System, but it is certainly a welcome reform. USDA also says its plan will increase milk consumption by 4 million gallons a year, and it will save Federal nutrition programs and their beneficiaries more than $20 million a year.
This modest reform, unfortunately, is now threatened, not only by H.R. 1402, but by those who would continue the experiment with interstate dairy compacts begun in mid–1997. Compacts do give windfall benefits to the largest, most financially secure producers. Only a small fraction of their benefits go to the struggling small dairy farmers who need the help. And compacts substantially raise milk prices for consumers. In its first 2 years, the Northeast compact cost New England consumers an estimated $65 million in higher milk prices.
Compact fever, of course, now has spread to the Mid-Atlantic and the South. Under pending legislation, 27 States—more than half the Nation—could be covered under compacts later this year. Consumers in these States could see milk prices jump an average of 22 cents per gallon. Under Marketing Order Reform without compacts, all but one of these States—Florida—would see average per-gallon milk prices fall.
A primary rationale for both compacts and for option 1–A is that they slow the steady decline in the number of family dairy farms. The loss of family dairy farms—small family dairy farms—is a particular concern of the Consumer Federation of America, but raising the price of milk for consumers through compacts is not the best solution.
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The Consumer Federation of America stands ready to work with all sides in finding a better solution to this problem, and we would not rule out a means-tested program to support small family farmers.
The administration's Marketing Order Reform package was the product of 2 years of study. It is a compromise between an earlier, more sweeping proposal which would have offered consumers more relief and the status quo. It is not all that is needed, but it is a very good start.
Congress should not negate this modest reform by passing H.R. 1402, nor should it nullify reform for half the Nation by extending and expanding dairy compacts. If compacts must continue, Congress should find a way to target the benefits on the small struggling dairy farmers who most need the help.
Thank you very much.
[The prepared statement of Mr. Jaeger appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
I thank the entire panel for your testimony.
Mr. Dropik, there is one thing you said in your testimony that I would like to correct for the record.
You referred to this dairy policy as being a direction of this committee. This dairy policy was not a direction of this committee. It was different than what this committee passed, and it was changed again in the Conference Committee with the Senate. And in defense of those that were in support of this current policy, I don't think it turned out the way any of them expected it to because a lot of those that voted to put this policy in place are now in favor of H.R. 1402.
So it was not anything in the effort of this committee. And being one of those that was involved with trying to rewrite dairy policy as part of the farm bill, I can tell you that we came up with close to 40 different drafts trying to find a dairy policy that would satisfy the different regions of the country. And when we finally got to a position that we felt we were close with that, there was another policy that was developed on the House floor that ultimately passed. And, again, that was changed in the Conference Committee.
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So, even though we have the responsibility of overseeing this particular dairy policy, it was not a product of this committee.
Mr. DROPIK. Mr. Chairman, I stand corrected. I guess just because we were here and it was before your committee, and I suppose that is the way it came out—or I know that is the way I said it. But I stand corrected on that.
Mr. POMBO. I just have one quick comment to both Mr. Schlecht and Mr. Jaeger.
I think you make somewhat of an assumption that somehow this so-called ''Price Support Program'' that exists in dairy gives us an artificially high price, and in some specific regions of the country, that may be the case. But I think truth be known, that not only in this country but around the world, that the government support programs that exist have, in effect, held down the price of a final product. And that is one of the reasons why I oppose them.
If you—and I know you were here earlier and listened to the testimony. The government-set price on milk is normally at or just above or below the cost of production. Corporate America would not operate in that atmosphere. That is why you see very few corporate dairy farms. If corporate America—or corporate agriculture, in general—were operating these dairy farms, and you did not have the family farmers producing, you would be paying a lot more for milk than you are right now. And you would be paying a lot higher price for your dairy products than you are right now.
I happen to believe that what we have done to American agriculture through this convoluted policy is we have held down prices. And when you try to compare things to the so-called ''world market,'' at least as far as dairy goes, there is no such thing as a world market. What you have is a number of countries trying to compete with what the European communities are dumping on the market, in terms of their over production. The so-called ''world market price'' on dairy would probably naturally be somewhere between $11 and $12. That is not what the world market price is today. But that would be a more natural price on the world market than what we have right now.
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Finally, to the dairymen who are up here, I understand your frustration with the system and your frustration with what seems to be a very convoluted system that doesn't make a lot of sense when it gets out into the real world. This committee has worked extremely hard in trying to develop a less-complicated dairy policy that makes sense. But what my goal would be is to have something that transitions us away from where we are to what, in essence, is a more free-market approach.
I don't want the government involved with your business. I do not want dairymen coming to me because their price is too low, and I don't want processors coming to me because they think their price is too high. I do not believe that that is the business of government, to be directly involved with your business. You know there are things that we can do. I think there is a role that the Federal Government can plan in agriculture. But in setting your prices, I don't think that is our role.
The problem, the challenge, that this committee has is, how do we get from where we are right now to where we should be? And that is a very difficult challenge, as you are all very well aware of, because there are certain regions of the country that a dependence has grown around this system being in operation. And to break that cycle of dependency is very, very difficult to do. And there is also a fear that has built up, that if we didn't have this system in place, what would happen to us? And I think a lot of that is what has driven us to the point where, today, there is a great reluctance, a great resistance, to changing dairy policy because of the fear of what is on the other side.
I think truth be told, there is no one that has testified before this committee today, or in our previous hearings on this topic, who really likes the current system. And we continually have people that come in and talk about the numbers of dairy farmers that have gone bankrupt under the current system, and that is from every region of the country, that are not happy with the current system.
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So I think that, as we look toward the future, we know we are going to have to change. The question becomes, how do we get there, and what kind of a transition period do we go through?
But I would like to thank all of you for your testimony.
Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman. And I will try to be as brief because we probably need to wrap this up.
I would like to ask the same question to this panel that I asked the last.
I have this bill, H.R. 1535, to extend the price support through 2002. I would like to get your response as to whether you would support or oppose that.
Mr. TIPTON. We oppose that on the basis that we would like see the reforms that were enacted. And that being part of the total reform package, we oppose it because we are supporting the implementation of reforms passed in the 1996 farm bill.
Mr. LENSCHOW. Foremost Farms probably would take the position to support that bill. But there is a great deal of concern of the over-production that it might stimulate, because we being in manufacturing, it certainly would affect us.
Mr. FURTH. Members of AMPI are on record supporting that bill, Collin.
Mr. BROOKS. Bill spoke to us, as far as Foremost would support it.
Mr. DROPIK. Yes, and I would say I know the First District Association and also the Minnesota Milk Producers have already went on record supporting H.R. 1535.
Mr. SCHLECHT. I would just say I am not familiar enough with the bill to comment, but I would say that if you wanted to have a staffer send it over to us, we would be happy to look at it.
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Mr. PETERSON. I think I know what your answer would be.
Mr. JAEGER. And I believe we would oppose it, as a step away from a more market orientation and a reform of the dairy program.
Mr. PETERSON. I think could say that all of the producers, and people representing producers, support it—this bill—which is unusual. Right?
And I also forgot to say that the most important person at the whole hearing today is Mr. Dropik, because he is from my district and he can vote for me. And he has been a real leader and worked real hard, you know, for the dairy industry all over the last number of years.
Mr. Tipton, you heard the discussion we had on the make allowance. Do you think the make allowance is too high in this reform proposal?
Mr. TIPTON. Well, I think that the issue is not just the make allowance. The issue is, are the prices resulting from this formula appropriate? And as we looked at it, we thought that the make allowance that we had proposed—and it was in the Final Order—was an appropriate make allowance. But there were other elements of the yield factors and the value of whey and a number of different things that come to bear on what the end price was.
The objective that we had—and I think is the objective that the Department of Agriculture ultimately was supporting as well—was an objective of making sure that the prices were reasonably aligned with California. And that was a major motivation.
Mr. PETERSON. So you would not agree with the characterization that this was arbitrary and it was just kind of picked out of the air without any rational basis?
Mr. TIPTON. No. In fact, I was quite surprised when that was stated, because there was an enormous amount of input into the rulemaking process by a lot of people on this subject. And I think that it had lots of debate and discussion, so it was—that surprised me when I heard that earlier today.
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Mr. PETERSON. This is kind of a parochial, but I just got a news release here from the former chairman of the House Agriculture Committee in Minnesota who is taking me to task for not creating a Midwest compact.
Do you support a Midwest compact, Mr. Furth?
Mr. FURTH. Absolutely not.
Mr. PETERSON. How about you, Mr. Dropik?
Mr. DROPIK. Absolutely not. [Laughter.]
Congressman Peterson, and, Chairman Pombo, I have worked very hard I think to try to eliminate regional pricing over the years. And we have been somewhat successful in the last years by removing some barriers in regional pricing, such as, you know, the down allocations and the compensatory payments and that type of thing.
And as long as we have long, you know, tried to eliminate regional pricing, there is no way I could support a compact.
Mr. PETERSON. Mr. Lenschow, what I want to know from you is, can you get the Speaker to help us keep this bill off the floor?
That is an unfair question.
[Laughter.]
Mr. LENSCHOW. But he is a very likable and I am sure he will cooperate with you. [Laughter.]
Mr. PETERSON. Well, we need his help, so we are glad that you are here today and glad that your people in Illinois see so clearly what the right policy is.
Mr. Chairman, I think that we have been here a long time. I appreciate the testimony of all these folks on the panel.
Mr. PURDOM. Thank you.
Mr. Dooley.
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Mr. DOOLEY. Thank you, Mr. Chairman.
I want to thank all the panelists—and, in particular, Mr. Jaeger and Mr. Schlecht—for taking the time to come over to give some perspectives that have not been heard on the committee which often, obviously, have to be important policy considerations in any legislation that moves through, in terms of the impact, in terms of the Federal taxpayers, as well as to consumers.
You know I would like to ask some of the producers who are here, though, a little bit and follow up on what I asked some of the other producers on these over-order premiums. And I guess, Mr. Furth, you receive over-order premiums?
Mr. FURTH. Yes, sir.
Mr. DOOLEY. Now, do they vary at all at different times of year? Different year to year? Or, are they always the same?
Mr. FURTH. They vary some, but these premiums are on top of prices that are already moved by the market. So the underlying piece to all of these dairy prices is cheese and butter markets, which are very affected by supply and demand.
So, the premiums don't always move around the market as you might think.
Mr. DOOLEY. They are just basically a set margin?
Mr. FURTH. That is correct.
Mr. DOOLEY. And how is that margin arrived at?
Mr. FURTH. Cost, alternatives, options.
Mr. DOOLEY. I have a hard time accepting, as the last panel said, that somebody is going to pay you, as the producer or co-op, an over-order premium if they don't have to. I mean why should they?
Mr. FURTH. Well, frankly, most of these over-order premiums are really just costs. We are simply trying to cover our costs, for the most part. Costs of hauling, costs of handling.
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Mr. DOOLEY. So it is a direct function to a cost? And it is not, then—you know, this is interesting to me, in terms that it is not necessarily a supply-driven issue at all.
Mr. FURTH. Again, in our case, I think they are a little bit supply-and-demand driven, but remember the underlying price is the thing that is very supply-and-demand driven.
Mr. DOOLEY. Right.
Mr. FURTH. And that is butter and cheese everyday on the Chicago market.
Mr. DOOLEY. Yes, Mr. Brooks.
Mr. BROOKS. There is an additional factor here, too, and that is called ''serving the market.'' In other words, we have brick and mortar; we can build cheese or make butter. When the fluid plants that are maybe processor-owned do not want to bottle—there are some days, well, maybe they will have a special in Chicago where they will need maybe 20 extra tanker loads of milk. But the following market period, they don't need any milk.
And so we have to balance the market. We have to have plants in place to either make cheese or make butter, or dry it. And that is part of the cost that I think Mark was referring to.
Mr. DOOLEY. So, in terms of we move forward from whether we went to what the Department advanced or the 1–A proposal, then, should we expect that the over-order premiums would change at all? Or they should be—from what I am gathering, they ought to be the same?
Mr. LENSCHOW. Maybe I could respond to that a little. On the end of my testimony—and whether you have looked at the sheet—the premiums that are in most markets and cities across the United States. Most of these premiums are really negotiated in cooperation to the co-ops supplying the marketplace for the services they render—to a particular handler that needs a unique supply, as Ed said, on a given day—take the responsibility of balancing that market, or taking product from them on holidays such as—what is it?—a 3-day weekend. A lot of that is service, and as everyone has responded to. But those really are set between handlers and the co-ops that supply those markets on a service basis. And they vary between markets—and you can look down that list. Some of the people that were the most concerned have the highest premiums.
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In the Chicago market, we varied in the last 30 years from about 80 cents to $3 a 100. And that does—that price announcement does go out by the 10th of the previous month to any handler within that market.
Mr. DOOLEY. Did I understand you to say that the variation was from $3 to 80 cents?
Mr. LENSCHOW. In the Chicago market, CMPC.
Mr. DOOLEY. And why was there such great variation there?
Mr. LENSCHOW. Part of the need actually was in price, and as price decreases, that particular over-order pricing will adjust its premium so that as it goes down, it is not as severe a drop. And a lot of that has been—and part of it is the service they render. If handlers needed particular milk on certain days, that they would close in that particular market and take 100 percent from the manufacturing plant and distribute it to those handlers as a need basis.
But it has varied—in the last year and a half, I don't think it has varied over about 20 cents, 30 cents. It has been in the $1.40 to $1.60 range up to $1.70 to $1.80.
Mr. DOOLEY. Yes, Mr. Furth.
Mr. FURTH. Your question may be in the context of there has been quite a bit of discussion about if the final decision lowers differentials, won't that just be made up for with higher over-order premiums?
Mr. DOOLEY. Yes.
Mr. FURTH. If that reduction in the differential amount was not made up for with over-order premiums, it is simply because the prices that exist now under the Federal orders are so far above what the open market, would give you, that when you lower those prices, it is not going to be made up.
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Mr. DOOLEY. So, then, you would say that, basically, then, the laws of supply and demand would be being implemented there?
Mr. FURTH. Sure. That is my belief, and I think there is plenty of studies around to show this, that if you didn't have Federal orders at all, you would have lower class I prices. And, in turn, you would have higher class III prices. You would have higher class III values of manufactured products. You would probably end up with the same amount of money and the same amount of milk.
Mr. DOOLEY. Yes, Mr. Dropik?
Mr. DROPIK. Congressman Dooley, another way—the way I look at that, I think I can only speak from the co-ops more in the Midwest. Most of the co-ops in the Midwest are very close to their membership. They represent their membership very, very well, and I would never doubt that they do not negotiate the very highest possible over-order premium to make up the differences. So I think your co-ops work for your membership very, very well that way in negotiating that over-order premium.
Mr. DOOLEY. Mr. Schlecht, do you have a comment?
Mr. SCHLECHT. Yes, just real quickly. I know you have to go vote.
I would just like to point out real quickly that NTU and I would not support price controls if they resulted in artificially low milk prices either, because then you would have the producers subsidizing the consumers. And just as wrong as we think it is the opposite direction, we wouldn't support it if it was artificially low either. So I just wanted to point that out.
Thank you.
Mr. POMBO. Well, I want to thank this panel for your testimony and most of all for your patience. I know this has been a long day, and we appreciate you waiting and sticking it out with us. But thank you very much.
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The hearing is adjourned.
[Whereupon, at 4:24 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Hon. Roy Blunt
I would like to thank the Subcommittee and Chairman Pombo for holding this hearing, and for providing me with this opportunity to testify on behalf of the people of the seventh district of Missouri and dairy farming families in almost every state in support of H.R.1402, legislation to mandate implementation of option 1–A of the Federal Milk Marketing Order system.
In 1996 this committee was responsible for carefully crafting legislation commonly referred to as Freedom to Farm. As a body, this Congress attempted to capture a set of guidelines that not only coincided with advances in technology and recent trends in agriculture, but offered a clear foundation for the future viability of the family farmer. With this in mind, Congress directed the Secretary of Agriculture to do two things with regard to Federal milk marketing orders: (1) consolidate the current Federal milk marketing orders to not less than ten and no more than fourteen orders; and (2) designate the State of California as a Federal milk order if California dairy producers petitioned for and approved such an order. Contrary to some of the statements that have been made about what was required of the Secretary, these are the only two requirements for Federal Milk Market Order reform in the 1996 farm bill.
In response to this directive, the Department of Agriculture ultimately proposed two separate options subject to public evaluation. In examination of the public comment, the Secretary's own Price Structure Committee, among numerous others, recommended differentials similar to option 1–A. Eight out of 10 of more than 4,000 comments to the Proposed Final Rule recommended option 1–A. Most importantly, those groups representing the dairy farmers of America spoke in unified fashion. When the final tally was in, virtually every producer group in the country supported option 1–A. Similarly, 238 members of the House and 62 Senators wrote the Department unequivocally supporting option 1–A.
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Unfortunately, despite the prominent role of the industry, the administration elected to go with a slightly modified version of the proposed option 1–B. This decision has left our dairy farmers in a full-Nelson. It is important to understand that the product dairy farmers provide sets them apart from other agricultural producers. As providers of a very perishable product, dairy farmers lose the ability to ride out or boycott unattractive dairy markets. Dairy producers cannot turn off the faucet on the cow when the price goes down. Unlike most other products we consume, they cannot withhold raw milk from the market in order to bargain for a higher price. This places them at the mercy of the volatile dairy market, which just this spring saw an unprecedented 40 percent drop in the price farmers receive for fluid milk—a drop off the top rope. Imagine what a terrifying experience it is to have forty percent of your income taken away while your bills and expenses remained fixed. After all, no matter how much you receive for your milk, fields still have to be planted, cows fed and mortgages payed. It is no wonder that independent dairy farmers are losing their farms at an alarming rate in southwest Missouri, as well as in many other regions of the country.
Aside from the perishable nature of raw milk, there are other more ominous forces that work against our dairy farmers. Rapid consolidation in the dairy industry is putting market power in the hands of very few. I would only direct you to the problems we now have with market concentration in the poultry, beef and pork industries and contend that dairy is headed down that
same road if we do nothing to prevent it.
Simply put, option 1–A reforms the Federal Order system through a variety of means that include reclassifying milk products, consolidating the current 31 Orders into 11 and including several previously unregulated areas. Further, option 1–A reduces market volatility and continues to assure there will be enough fresh milk in all markets of our Nation. It does so by keeping in place what are called price differentials, a system that has worked for many years, guaranteeing us an adequate supply of fresh, milk. As the government withdraws from the purchase of dairy products to balance the market, we must leave in place those mechanisms that assure us a continued local supply.
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In spite of these concerns, opponents of this legislation, like the good Governor Jesse Ventura and my good friend Congressman Green here next to me, often argue that the final version of 1–B is the most fair and market oriented of the proposed plans. Those opposed argue that the current system, or any reflection thereof, result in pile-driving dairy farmers in the upper Midwest right out of business. There is some surface evidence that this argument is valid. In fact, throughout 1997 and 1998 the total number of dairy farms in existence in Minnesota, Wisconsin, Illinois and Iowa did in fact decline by 8.34 percent. At the same time, the total number of dairy farms in the South, including West Virginia and Texas, declined by a slightly higher 8.39 percent . However, further evaluation of these statistics shows that during this exact same time period, real milk production in the upper Midwest actually increased by 474 million pounds or 2.1 percent. Meanwhile, the loss of farms in the South was reflected by a decrease in production of 762 million pounds or 3.5 percent.
For those of us that are not economists, these numbers show that the farmers who are suffering the most under the status quo are the same farmers that will receive a further decrease in income under the Final Rule. Or, from the other corner, the upper Midwest, which currently receives among the highest class I prices in the country, and have actually experienced an increase in production, will be given a substantial increase in prices with implementation of the administration's proposal.
To continue discussion of arguments in opposition to H.R. 1402, I noticed that we have been joined here today by a few of our friends representing the consumer interest in this legislation. In an attempt to address their concerns without having the benefit of hearing them first, I would start by pointing out the simple fact that this bill will not raise milk prices. In fact economic pressures suggest less income for farmers. Yet if local fresh milk supplies are not maintained, consumers will in fact ultimately see increased costs. Without 1–A, we will see further loss of dairy farmers, decreased local supplies and increased concentration of cows and dairies in a few areas. This leads to increased environmental problems, higher transportation costs, decreases in quality and much greater susceptibility to climate and weather phenomenon . . . such as El Nino, which figured into the highest prices on record. As for government expenditures, this bill does not raise expenditures for feeding programs or other government sponsored food programs. It is not financed by taxpayers, in fact the Order program itself is paid for by farmers and processors. In other words, it is NOT option 1–A hurting consumers, but rather the administration's modified option 1-B that will result in HIGHER consumer prices. In fact, Dr. Scott Brown, who's testimony you will hear shortly, notes in the FAPRI report that under option 1–A ''. . . retail fluid milk prices are unchanged from the baseline, generating no change in fluid milk consumption . . .''
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In summary, the class I differentials in the Final Rule create more losers than winners and they threaten the economic viability of dairy production in the areas of the country where the local milk supply is the tightest. And making sure that milk is either produced near or drawn to where there are consumers to buy it is what Federal dairy policy is supposed to be all about. Unfortunately, there is no getting around the fact that the class I differentials in the Final Rule could do just the opposite. It makes no sense that the Department of Agriculture still maintains that a system that will result in concentration of milk production to one small region of the country is the right system. And when witnesses today argue that we should let the farmers decide by voting in the upcoming referendum, remember that option 1–A is not one of the choices. Instead, all that we offer farmers the choice between completely eliminating Federal Orders, which few people agree with, or electing USDA's revised option 1-B. This is like Congress asking farmers whether they would prefer to be punched in the face or in the stomach.
Finally, when evaluating the testimony that you hear today, I urge you to note the extremely limited region of the country that the opposition's witnesses represent. Also note that Land O' Lakes, dairy processing giant in the Upper Midwest, publicly supports option 1–A. Knowing this, it logically follows that if the processor supports option 1–A, then clearly a large number of farmers in the upper Midwest do as well...though their voice does not appear to be represented on the primarily Minnesota/Wisconsin panel.
Having spent many hours of my growing up years with my father and my grandfather in our dairy barn, I can assure you that the critical facts that we are discussing are life and death issues when considering the future viability of the family-owned dairy farm. The effect of the Final Rule could be paralleled to the Federal Government holding our farmers in a sleeper-hold just waiting for them to completely collapse. Fortunately, so far 225 Members of Congress have agreed to cosponsor H.R. 1402 in an attempt to prevent our nations dairy farmers from going down for the count. I am proud to represent a strong bipartisan majority of Congress with my testimony and support for H.R. 1402. I urge this committee to follow suit.
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Statement of Hon. Mark Green
Mr. Chairman, I appreciate this opportunity to testify before the Subcommittee on an issue of critical importance to consumers and dairy producers across the country.
Here's why: a 1995 Congressional Budget Office report indicated that reform of the Milk Marketing Order program could save taxpayers $149 million annually. In fact, The Milk Marketing program is the third program mentioned in Citizens Against Government Waste's ''Prime Cuts'' Summary of Forty-Four Ways to Leaner Government. The negative impacts of this system are not limited to the taxpayer alone.
In the past two years, Wisconsin has been losing an average of five dairy farms per day. Between 1997 and 1998 Wisconsin lost more dairy operations than Alabama (-70), Arkansas (-100), California (-100), Colorado (0), Idaho (-100), Indiana (-100), Iowa (-200), Ohio (-500), Michigan (-200), North Carolina (-100), Oklahoma (-100), Pennsylvania (-400), and Virginia (0) combined. That covers every state Members of this Subcommittee represent with the exception of Mr.Gutnecht, who because of the unfair milk pricing system, finds his dairy farmers in a similar position to mine.
As you are probably aware, during the debate on the 1996 farm bill, Congress was unable to form a consensus on dairy reform and the impasse threatened to kill this landmark legislation. As a result, dairy interests from across the country and across the spectrum agreed to leave out dairy reforms and they directed the Agriculture Secretary to develop a reform plan with the understanding that all sides would live with the Secretary's final rule. The legislation before you today would directly contradict the Secretary's rule and violate the 1996 understanding. Furthermore, since the Secretary's dairy reforms require approval by two-thirds of dairy farmers within each new proposed order, this legislation would also deny our Nation's dairy farmers the opportunity to vote for dairy reform.
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Agriculture Secretary Dan Glickman's announced reforms to the Federal Milk Marketing Order program are modest—very modest from the perspective of Upper Midwest dairy farmers. However, the Secretary's proposal would for the first time in the 62 years of the Milk Marketing Order system move toward a more market-oriented dairy system that benefits the taxpayer by lowering the price of milk.
Today's milk marketing order system was originally developed in 1937 when the state of Wisconsin was the largest dairy producer in the country and most states were deficit producing dairy states. In 1937, it was difficult to transport drinkable milk across the country. Price incentives were thus created to spur dairy production in deficit states. The system mandated that dairy producers receive more for their milk depending on how far their farming operation was from Eau Claire, Wisconsin.
Today we have refrigerated trucks and an infrastructure that allows us to rapidly and efficiently move milk from one region to another. More importantly we now have 35 states producing dairy surpluses. Many things have changed since 1937, but the milk marketing order program has remained the same.
H.R. 1402 would continue more of the same, more of ''business as usual,'' more of what has driven so many family farmers out of their livelihoods and forced consumers to pay inflated milk prices. It reinforces the fundamental unfairness of the 1937 Milk Marketing Order program by reaffirming the practice of pricing milk based upon its distance from Eau Claire.
The milk pricing system is one of the most difficult issues members of Congress are asked to understand. In fact, I have to rely on a little crutch to illustrate the true unfairness of the Milk Marketing Order Program. Behind me is a cartoon that I believe says it best (refer to figure 1).
I would like to ask members of this subcommittee if they truly believe if it makes sense to price milk based upon its distance from Eau Claire, Wisconsin? If so, should beer producers receive more for the beer they brew based upon their distance from the Anheuser-Busch facility in Saint Louis, MO? Should Congress mandate that poultry producers get paid more for their chickens the farther they are from Arkansas? While Wisconsin's climate is not conducive for orange production, we could produce oranges if the Government subsidized us enough. The real question is whether or not any of this makes economic sense. If you answer yes, then support H.R. 1402. But if you believe it is fundamentally wrong to price a product based upon its distance from a surplus producing area, then oppose H.R. 1402.
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H.R. 1402 requires taxpayers to prop up dairy producers in one area at the expense of more efficient dairy operations in another region. It is important to note that the costs are not solely limited to the taxpayer. In the last nine years, 11,000 dairy farmers have been forced to shut down in Wisconsin. In other words we have lost more dairy farms than most states have ever had!
I believe it is also important to address the issue of costs associated with the Secretary's reform proposal. I have personally been approached by a number of my Colleagues who have indicated that the recent reform proposal could cost dairy farmers across this country anywhere from $200 million to $600 million. These figures are inaccurate and misleading. They only account for the changes in the guaranteed minimum prices—they fail to account for the actual price a dairy producer is paid for their milk.
All dairy producers are guaranteed a minimum price for the milk they produce—this number is referred to as the class I Fluid Price, and it represents a payment ''floor'' for all producers in a given order. The actual price dairy producers receive for their milk is the mailbox price.
The mailbox price is subject to market influences and it is required by law to operate at or above the Minimum Class I Fluid Price. As a result, any economic impact analysis of the Secretary's proposal that fails to account for the actual price or mailbox price a producer is paid for their milk is built upon flawed methodology.
In 1996, Congress moved toward a free market approach for our agriculture industry. The one issue left unresolved was the issue of milk market reforms. After three years of study, the Agriculture Secretary released his final proposal for the first real reform the dairy industry has seen in over six decades. H.R. 1402 is little more than an attempt to interfere with the conclusion of a process Congress agreed to and started 4 years ago.
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Statement of Hon. Jesse Ventura
Mr. Chairman, Ranking Member Peterson, and members of the subcommittee, thank you for the opportunity to speak today on behalf of Minnesota dairy farmers, the people who process and bring their dairy products to market—and every single one of us who drinks and eats dairy products every single day.
I've come to Washington DC with one thing on my mind, and one thing only: It is imperative that Congress reform policies across the board so American farmers—including Minnesota farmers—can compete with each other here at home, and with farmers in nations around the world, on a fair, open and level playing field.
As a new Governor, I've dedicated myself to learning as much as I can about agriculture as urgently as possible because our State is so dependent upon agribusiness for our economic health.
In Minnesota, we are doing everything we can to provide short term relief and long-term competitive advantages to our farmers. I believe that government should only do that which individuals cannot do for themselves, and far too often government intrudes attempting to ''fix'' something only to make matters much, much worse.
To that end, I have asked six departments to work together as a ''Farm Cabinet'' Agriculture; Trade & Economic Development; Revenue; Finance; Pollution Control Agency and Commerce to identify what stands in the way of farmers being successful and self-sufficient.
I want Minnesota farmers to be the most productive, the most innovative and the fastest to adapt to change so that they can compete worldwide.
Whatever we can do at the State level, I am pledged to do over the next three and a half years. Yet, time and again, I hear that what really stands in the way are two things: Federal policy and partisan politics.
I hear despair in the voices of every farmer I talk with—those who are still successfully surviving in this changing economy and those who are giving up.
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I hear exasperation in the voices of leaders of farm associations, multi-national corporations, and cooperatives—who are tired of waiting for leadership.
And I hear anger in the voices of Minnesotans on mainstreets, in rural schools, and everywhere else I go because they, too, want a new direction. With one out of four people in my state depending on agriculture for their living, that's a lot of angry voices.
Minnesotans care deeply about farm issues, including me.
It's time to end two-party partisan deadlocks on farm bills and focus on results for the people. Washington needs to stop using the farmer as a political pawn. Every day, three dairy farms go out of business—nearly one-third of all Minnesota dairy farms have disappeared since 1993. Across the nation, HALF of all the dairy farms lost in the last 7 years were from the upper Midwest.
I don't mean to suggest that this is entirely due to Federal policies, but the outdated Federal Milk Marketing Order System has been a contributing factor. That is unacceptable and warrants action by this subcommittee to begin reform at the earliest possible time.
The issue before this subcommittee today is a significant issue, but, still, a detail of a much bigger picture for American agriculture that will be addressed in the Millenium Round of Trade Negotiations in Seattle.
Soon you will vote on whether to support option 1–A or option 1–B for a pricing structure. It goes without saying that option 1–B, which represents modest reform by the U.S. Department of Agriculture, is the only of the two choices that Minnesota will accept.
The people are best served by getting rid of all of this government intrusion into the free marketplace and channeling the energy now put into controlling prices into opening world markets. Nothing you can do in this room today will permanently improve the lives of farmers or the taste of milk except improving world trade conditions.
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What we need, without question, is to end the nonsense that has the price of milk tied to how far away the cow is from Eau Claire, Wisconsin. Now that there are refrigerated trucks readily available, it makes sense to abandon 50-year-old thinking and find a new way to look at the ''millenium'' dairy industry. One that reflects today's economic realities and is at least fair.
Last week, I began promoting Beaumont, TX as the new center of the dairy universe, and I offer it to you today to consider. It certainly beats Eau Claire for mileage from St. Paul. My staff did some checking and was advised, after a pause on the other end of the phone, that there aren't any dairy cows in Beaumont. A little checking on the Internet showed that Minnesota dairy farmers would receive 1,100 miles worth of benefit from this move. For the record, New Hampshire is 1,800 miles away from Beaumont, and California beats us all with 2,000.
If this sounds borderline ridiculous, it is no more so than the original law that designated proximity to Eau Claire, which is only 83 miles from St. Paul, MN.
Congress is inexcusably inconsistent in pushing for deregulation of other parts of agriculture, but not dairy. If market forces are good enough for corn and wheat, why not cows? I truly believe that the people of this country are waiting for common sense to take hold out here.
Regional political maneuvers like compacts are the worst approach to take. This serves to do nothing more than solidify caucus voting on policies such as the one before you today, and place at a terrible disadvantage the elected representatives of states like Minnesota who will never have the votes to launch genuine reform.
Regional favoritism also erodes public trust in government and makes people cynical about government. If there is one reason why I am sitting before you today, as the first Reform Governor in the United States, it is because the great center of the voting public is weary of politics and business as usual. The public is fatigued with a farm crisis that never ends. The farmers who I talk with are fed up. Every year, it's a tweak here, another tweak there—take what you can get because it's better than nothing—option A or option B.
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Minnesotans, as I've said before, are best served by ''Option C—None of the Above''—and the beginning of a truly free-market new day in agriculture.
What ''reform'' principles will help not just Minnesota, but all farmers in America?
Reform No. 1 starts at home: It is the responsibility of the members of Congress and the President to deliver a new kind of level playing field across America—one that allows the free market to work through the absence of artificial price supports.
Minnesota dairy farmers are losing money, plain and simple. And they will lose more under the status quo pricing system. I'm here today, in person, to appeal to your better judgment.
Three years ago, Congress left dairy policy out of the 1996 farm bill and dumped it on the Secretary of Agriculture.
Secretary Glickman has come up with a plan that tries to correct some of these 50-year-old problems and it deserves your support. I urge you today to support the recommendations of the Administration and decide if you wish to be full participants in this discussion from this point forward.
We need to work as a unified nation to fund land-grant research that is available to any innovative farmer or entrepreneur through a federally-supported Extension system.
We need to work as a unified nation to abandon the cobweb of price subsidies and controls and let American ingenuity work on farms, in processing, and in the grocery stores.
Finally, we need to work as a unified nation to give incentives for farmers to be flexible and adapt to changes. Your efforts to save small farmers aren't working. HALF of all the dairy farmers lost in the last seven years were from the Upper Midwest. Even with the Dairy Compact in the northeast states, most of Vermont's losses are herds with fewer than 100 cows. So it's time for a fresh approach.
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Reform No. 2 is international: It is your responsibility to open the world markets by insisting that the free market work instead of direct and indirect subsidies, and then speak with one voice for the American farmer worldwide. This task is made all the easier and more powerful if you allow farmers to sit at the table at the upcoming Seattle Trade Talks and other places where their future is at stake.
I believe that all people the world over respond best to policies that provide incentives, not punishments. We can no longer afford for the Federal Government to use food as a weapon. Instead of sanctions, our President should jump on a trade mission to SELL, and pack some dairy products in his suitcase before he leaves.
Mutual opening of markets is a win-win for America and the trade partners; mutual protectionism is a lose-lose for everybody. It is the responsibility of each State to make the best of trade opportunities once they are open. That's why I'm going to Japan in November, and have my commissioners of Agriculture and Trade & Economic Development looking for other marketing opportunities. But our efforts—and other states' efforts—will fall short if Federal trade policies with Asia and Europe fail.
American farmers need their American congressional members to be bold reformers in order to pressure an end to unfair subsidies in Europe and elsewhere.
Reform No. 3 is specific to dairy: Vote to let USDA go forward with its reform plan. As with all Federal farm policy, a person needs a graduate degree in at least four subjects to understand the complexities of the issue. And Dairy is the most complicated of the complicated.
As Governor, it's my job to appoint the best people and then let them do their job. Commissioner Gene Hugoson advises that this is the better of the two for a dairy-producing state such as ours that is not protected by a compact.
Our ultimate objective is to ensure a competitive marketplace for our farmers. A strong farm economy serves the public good of this nation. Therefore, I appreciate your support for this testimony today, and I appreciate this time before the subcommittee. Thank you.
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Statement of Mark Furth
On behalf of Associated Milk Producers Inc. and the upper Midwest Dairy Coalition, I want to thank you Chairman Pombo and other members of this subcommittee for allowing me to testify today.
I am Mark Furth, CEO and general manager of AMPI. Today I am representing the 6,500 AMPI members who produce milk in seven Midwest States.
I am also speaking on behalf of the Upper Midwest Dairy Coalition. The Coalition is a group of 18 different dairy farm organizations representing about 34,000 dairy producers in 11 midwestern States. Producers represented by the coalition account for nearly one-third of the United States milk producers.
AMPI and the Upper Midwest Dairy Coalition support the USDA's Final Decision on Federal milk marketing orders and strongly oppose HR 1402.
The 1985 farm bill used Federal milk marketing orders to insulate some areas from effects of the marketplace by raising class I prices. This decision helped those with higher class I usage and forced milk prices even lower in other areas during the late 1980's and early 1990's.
Complaints were addressed to Congress during the early nineties and in the 1996 farm bill, Congress charged USDA with developing a fair-to-all program.
Now, as the specter of free-market prices looms, USDA has announced a final decision on Federal milk marketing orders that is more equitable, but still benefits areas with higher class I usage. It is a compromise between what USDA believed would be most economically fair and what has historically existed—at least since 1985.
The final decision may even increase class I values. Allow me to introduce the attached graph which compares the Current Federal Order Regulated Class I Milk Price and the Final Rule Regulated Class I Milk Price from 1996–98.
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This chart shows the value of regulated class I milk using Federal Order formulas on 1996 through 1998 markets. It says that prices would be 33 cents per hundredweight higher under the final decision than the current Federal order system. If this is the case, how could you in good conscious support measures to increase class I values even further?
The fact that no areas of the country have even threatened to vote out the Federal milk marketing orders is testimony to the fact they remain a price enhancing measure for some at the expense of others. Federal orders still set the class I price higher than an unregulated market would.
Proponents of H.R. 1402 are once again trying to increase class I prices. Through Federal orders they want to set prices higher than the marketplace would otherwise allow, creating winners and losers.
They claim the USDA's final decision will cost farmers $200 million per year, primarily through lower prices on non-class I products. I believe that to be totally false and misleading. The farmers of AMPI sell 85 percent of their milk as manufactured products and don't believe the final decision would lower income even one penny.The only credible and unbiased analysis I've seen is the USDA and FAPRI studies. Both indicate little or no impact nationally. FAPRI's analysis is a consensus of the nation's leading dairy economists.
If farmers were adversely affected by the final decision's manufactured product values, it would not be remedied by HR 1402. This bill only increases class I prices—again helping some at the expense of others—and further lowers manufactured product values for others.
You are the dairy industry's political leadership. I encourage you to speak out against further distortions that divide and frustrate our industry. Most of those signing on to support H.R. 1402 don't understand Federal milk marketing orders or the long-term damage to our industry. Frankly, we might be better off without Federal orders. At least we might work better as an industry.
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The marketplace works. The total price for all production balances supply and demand. If the price for onedairy product is artificially increased, the value of other dairy products will fall. It's simple economics: it's the only way to keep supply and demand in balance.
Be fair to all concerned. Be fair to the USDA. It has worked hard at a challenge given them by Congress. They've made a modest attempt to keep Federal milk marketing orders from becoming a price support fora few.
Be fair to dairy farmers. They work as hard as anyone in this nation. Don't pit one against the other. Don't hold prices up for one at the expense of another.
Be fair to our nation. We cannot talk of free trade with other nations while protecting prices for just some of our country.
You can't blame dairy farmers for trying to help themselves. If you would like to help them, you can do soby extending the Dairy Price Support program.
The Dairy Price Support program helps all dairy farmers, not just areas with higher class I usage.
Mailbox Prices. Some have suggested Federal milk marketing orders cannot be harmful to the upper Midwest since that area often has higher than average mailbox prices.
Actually, Federal milk marketing orders only impact the class I portion of mailbox prices. class I milk accounts for less than 40 percent of national milk consumption. In the upper Midwest, only 15 percent of mailbox values come from class I, with the balance from products like cheese and butter.
The reasons why upper Midwest mailbox prices might exceed areas with higher class I use are many:
(1) Competition. There are far more options for farmers to market milk in the upper Midwest which drives prices higher. Some other areas have little or no competition, allowing cooperatives to ''reblend'' and pay less than the Federal order minimum prices others must pay.
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(2) Hauling. These costs are a big part of regional mailbox price differences. Upper Midwest farmers are more densely populated compared to many areas of the country, thus hauling costs are generally lower.
(3) Manufactured Products. The upper Midwest, with 85 percent of its milk in these products, is the most efficient processor, thereby generating better returns. From a marketing standpoint, the upper Midwest is located centrally for these products that are marketed nationally.
(4) Federal Milk Market Order Pricing. Federal Milk Market Orders price class I milk two months behind manufactured product markets. In increasing markets, areas with higher class I use would ''lag'' and generate lower comparative mailbox prices. In decreasing markets, the opposite is true. Dairy product markets increased sharply in 1995, 1997 and 1998, which tends to exaggerate real price differences.
Statement of Arthur S. Jaeger
My name is Art Jaeger. I am presenting views on behalf of the Consumer Federation of America, a non-profit association of some 260 pro-consumer groups, with a combined membership of more than 50 million people. CFA was founded in 1968 to advance the consumer interest through advocacy and education.
From a consumer perspective, H.R. 1402 is a mistake. It would scrap the modest reform in the administration's marketing order reform plan and either maintain or raise the farm price of milk, depending on the region. That, in turn, would cost consumers more than $50 million a year in higher retail milk prices, based on an Agricultural Marketing Service estimate.
USDA's final rule was and is a step in the right direction. It benefits consumers by reducing regional price differentials and it somewhat reduces the complexity of the Federal milk pricing system. That system now costs consumers more than half a billion dollars a year in inflated milk prices. That's a conservative estimate. The current system is particularly burdensome on low-income consumers, who use more of their limited incomes for food and more of their food budgets for dairy products.
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The Agriculture Department says its reform plan would save consumers an average of 2 cents on a gallon of milk, or in excess of $100 million over the course of a year. That's only a fraction of the unnecessary premium consumers now pay under the Federal milk marketing order system. But it's certainly welcome. USDA also says its plan will increase milk consumption by 4 million gallons per year and save Federal nutrition programs more than $20 million a year.
This modest reform is now threatened, not only by H.R. 1402, but by those who wish to continue the experiment with interstate dairy compacts begun in mid–1997. Compacts give windfall benefits to the largest, most financially secure producers. Only a small fraction of their benefits go to struggling small dairy farmers. And they substantially raise milk prices for consumers. In its first two years, the Northeast compact cost New England consumers an estimated $65 million in higher milk prices. Compact fever has now spread to the Middle Atlantic States and the South. Under pending legislation, some 27 States—more than half the Nation—could be covered under compacts later this year. Consumers in these states could see milk prices jump an average of 22 cents per gallon. Under marketing order reform without compacts, all but one of these States—Florida—would see average per-gallon milk prices fall.
A primary rationale for compacts is halting the steady decline in the number of family dairy farms. The loss of family farms of all types is a particular concern of the Consumer Federation of America. But raising the price of milk for consumers through compacts is not the solution. CFA stands ready to work with all sides in finding a better solution to this problem and would not rule out a means-tested program to support small family farms.
The administration's marketing order reform package was ordered in the 1996 farm bill, which held out the hope of market-oriented reform in Federal dairy policy. It was the product of 2 years of study by USDA. It is a compromise between an earlier, more sweeping proposal—which would have offered consumers more relief—and the status quo.
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Although the administration plan is not what's needed, it is at least a start. The danger now is that even this modest reform will be lost. Congress should not negate this modest reform package by passing H.R. 1402. Nor should it nullify reform for half the Nation by extending and expanding compacts in the Northeast, Mid-Atlantic, or South. If compacts must continue, Congress should find a way to target the benefits on the small, struggling farmers who need the help.
Statement of Leroy Ornelas
Thank you for the opportunity to submit my comments today in support of H.R. 1402, which includes the implementation of option 1–A.
I am Leroy Ornelas, a third generation dairy producer from Tracy, California. With my three sons and wife, we operate a 520-cow and 450-acre dairy farm in the heart of San Jaquin County.
Our objective, like many dairy operations, is to prosper and grow so that we can pass the torch to our children as the fourth generation of Ornelas—making a contribution to the food industry. Daily, we deliver about 33,000 pounds of milk to markets in central California. Annually that production amounts to about 12 million pounds or 1.4 million gallons of milk.
I would bet that you are wondering why I'm here, today, to speak in support of option 1–A. We, in California, have a state order. Recently our order was modified to align class I or fluid milk prices with surrounding Federal milk marketing orders.
So, the Secretary of Agriculture's Final Rule does directly impact me and my fellow California dairy producers.
California is not an island. What happens to Federal order prices for producers in neighboring states such as Arizona and Oregon has a direct affect on California farmers and state order prices.
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If class I prices in neighboring states decline, I am absolutely certain that—in order to remain competitive with milk produced and sold in neighboring states—it would not be long before California reduced its prices to the state's class I bottling plants—and then to me!
The point is, the United States dairy industry and production agriculture has become a very small place. Truly, what impacts my neighbor, impacts me.
For example, consider the neighboring Phoenix, AZ market. If the Final Rule goes into effect, class I differentials in that market will drop significantly. Currently the class I differential is at $2.52. The Final Rule drops that differential to $1.55 resulting in a 97-cent reduction. However, under option 1–A, Phoenix, AZ's class I differential is $2.35. In that market, option 1–A is an 80-cent per hundredweight price improvement over the Final Rule—and still that is below today's price, which is about one cent per gallon!
Under the Secretary's decision, Oregon's dairy producers are also at risk.
The current class I differential in the Portland, Oregon market is $ 1.90. Option 1–A keeps it at $1.90 while the Final Rule drops the class I differential 45 cents to $1.45. Without question, the negative impact on farm family income will be felt in the States of Oregon and will spread to dairy farm families in northeast California.
I support option 1–A because I can not support Federal rule making that establishes milk price disparity—for any large group of dairy farmers.
Regardless of our geographic location, U.S. dairy farmers share the same issues and concerns. Increasing input costs. Volatile milk prices. Declining margins. Difficulty in obtaining supplies and services. Financing. Labor. And, of course, a growing concern about global markets and their impact on business and our bottom-line.
The Secretary's decision creates inequity and will, in the long run, mean financial hardship for dairy farmers—many who are already struggling financially. It is important to all of us—especially those who live and farm in the northeast, southeast and southwest parts of the United States. These are areas where demand for fluid milk is strong but there are a rising number of dairy producers leaving the business.
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Tighter financial circumstances, compounded by steep market swings in milk prices, make it increasingly difficult for farmers, in general, to effectively run and capitalize their business plans. Investment in machinery, equipment and cows is more difficult to plan when faced with such a variable income stream.
Option 1–A won't stop the swings in the market place. The ebb and flow of commercial demand for our products and weather effects will continue to cause shifts. But HR 1402 and its option 1–A will stabilize our base price on class I milk prices in the United States and California.
In addition to the income issue, there is a supply issue to consider. The prices recommended by the Secretary of Agriculture's Final Rule will not generate an adequate supply of local milk in many areas across the United States. Nor will these prices cover the costs associated with bringing in supplemental milk supplies during periods of seasonal low production and high demand for fluid milk products. There are thousands of pages of testimony already on record that says just that.
I urge you to support H.R. 1402 and the option 1–A plan. As a member of Dairy Farmers of America, I represent farmers of every size and structure. Some of us are large. Some are very small. But the majority of us will experience negative cash flow because of the Final Rule. My point is, we dairy farmers are all in this together.
If DFA members—with all of their diversity—can come together on this issue of fairness and equity, it is confusing to me why the Secretary of Agriculture can't understand the issue and its impact on farmers.
Passage of this bill is needed to replace the modified option 1–B milk pricing formula that is part of the revised Federal Milk Marketing Order. USDA's modified 1–B solution is no solution for dairy farmers. It would reduce our income, nationwide, by nearly $200 million annually.
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I support this legislation as an effort to further improve the basic U.S. milk price structure at the farm gate that increases returns to all dairy farmers regardless of geographic location.
Ladies and gentlemen, we're either in this business for the ultimate goal of maintaining a strong food supply in these United States for this and future generations.
Thank you for listening to my thoughts. As a California producer and a member of the U.S. dairy production community, I urge your endorsement of Congressman Roy Blunt's proposal and the implementation of option 1–A.
Thank you.
Statement of Eric V. Schlecht
Mr. Chairman, on behalf of the 300,000 members of National Taxpayers Union (NTU), I greatly appreciate the invitation to testify today on H.R. 1402, and its underlying subject, that of Federal dairy policy in general. I applaud your willingness to hold hearings on an issue of great economic and political importance to consumers, taxpayers, farmers, and producers alike.
As you may know, National Taxpayers Union supports lower taxes, less wasteful spending, accountable government, regulatory restraint, and an American economy where the free-market principles of competition, open trade, and consumer choice prevail over interventionism and protectionism. Since its founding thirty years ago, NTU has consistently sought the elimination of direct and indirect government price controls on agricultural products, as well as the phase-out of loan subsidies that put taxpayer assets at serious risk. I also wish to state at the outset that National Taxpayers Union receives no government grants or contracts of any kind.
Accordingly, we continue to strongly support H.R. 744 as well as other legislation that would help to end Federal involvement in dairy product pricing, especially proposals to terminate the ill-advised Northeast Dairy Compact. We also reluctantly acknowledge that the U.S. Department of Agriculture's (USDA's) final rule on Milk Marketing Order reform was, at best, minor progress. The Order merely removes a few troubled pathways in a regulatory maze that continues to snare consumers and producers. After analyzing H.R. 1402, we conclude that the bill would only reverse these minor steps made toward rational dairy policy, and would represent a grave danger to taxpayers. Our opposition to H.R. 1402 has many facets.
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NOW IS NOT THE TIME FOR MICRO-MANDATES FROM CONGRESS
I do not come before this committee today as an expert on the intricacies of dairy pricing. Nor can I claim to have reviewed every item in the 893-page Reform Rule that USDA subsequently produced. Indeed, given the bureaucratic nature of the dairy price support program, it is difficult to imagine that any one individual can make this claim. Nonetheless, H.R. 1402 is premised on the notion of perfect knowledge—that is, the bill's tinkering with the USDA's four-class, four-formula Milk Marketing Order will produce a predictable and beneficial result. This is by no means certain.
H.R. 1402's short summary states that it would ''require the Secretary of Agriculture to implement the class I milk price structure known as option 1-A as part of the implementation of the final rule'' While the term option 1-A suggests that it is the first and fittest implementation strategy, many dairy-policy reformers would be inclined to label it 4–F.
In fact, the USDA itself, hardly a free-market champion, stated a preference for option 1-B, one which reflected more market behaviors in price differentials and provided a five-year phase-out for these differentials. option 1-A, according to USDA, ''would provide a set of class I prices across the consolidated 11 orders that more closely reflects the current class I price surface, but makes adjustments for recent changes in economic conditions.'' This hardly reads like a strong prescription for reform.
Make no mistake—in an ideal legislative and regulatory climate, the cumbersome 893-page Marketing Order would be jettisoned in favor of a comprehensible blueprint that simply substitutes a free market for the current cartel. In the absence of this approach, taxpayers' interests can best be served by ongoing Congressional oversight of the results of USDA's plan, rather than legislative micro-mandates that only further cloud a murky reform.
FROM MILK TO MICROCHIPS?
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An implicit message behind H.R. 1402 and many other dairy policy bills is that some kind of government regulatory regime, be it temporary or permanent, is necessary to protect this valuable commodity and those who purchase it. While the Members of this Committee are no doubt familiar with the many arguments against continued cartels and subsidies, a few bear repeating:
In the 1980's artificially high milk price supports led to oversupply problems that cost taxpayers some $17 billion—all of which made for great theater at Congress's expense on television programs like ''60 Minutes.'' Even the current USDA Market Order will continue to impose a $1 billion per-year burden on consumers, and add $80 million annually to the cost of school meals.
Other price-setting mechanisms such as the Northeast Dairy Compact can not only cost consumers millions due to overinflated prices, they can also raise ominous Interstate Commerce issues. Unlike other common interstate compacts, the Dairy Compact sets a minimum price that also shuts out products from non-Compact states or regions. Rather than promoting trade and preventing abusive tariffs among states—the clear intent of the Constitution's Commerce Clause—the Dairy Compact concept acts as a cartel system that only a Robber Baron could admire.
According to the International Dairy Foods Association, ''there is much evidence to suggest that small dairy farmers—those with 60 cows or less—are not the beneficiaries of price-fixing. The bulk of the money goes to the largest dairy operations in these states. When even a large sector of the industry that supposedly benefits from Congress's largesse speaks out in opposition, perhaps the time has come for lawmakers to listen more closely.
These results should come as no surprise. Virtually every de-regulated area of commerce—from airlines to freight railroads—have produced better, more innovative products and services in larger quantities at lower prices.
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Imagine, for example, if the same government stranglehold on dairy products extended its grip to another critical national commodity—microchips. Electronics prices and availability would be based on a community's distance from Silicon Valley rather than Eau Claire, Wisconsin. Other high-tech areas of the U.S. would be permitted to form technology price compacts that would keep lower-cost computers for working families out of reach. In areas where prices rose and demand fell, the Federal Government would have to purchase microchips at an agreed price support level, and periodically empty its warehouses in giveaways to the technologically needy.
This Orwellian scenario ought to sound ridiculous and far-fetched. But it certainly didn't to the 105th Congress, which, fearing heavy-handed regulation of e-commerce, passed the Internet Tax Freedom Act. Nor was it quite so silly to the 104th Congress, which passed a farm bill that mapped a way out of agricultural subsidy maze. If the 106th Congress cannot learn from the wisdom of its predecessors, few areas of our economy will ever be totally safe from predatory price control schemes.
CONGRESS MADE A PROMISE TO TAXPAYERS IN 1996—ONE IT SHOULD KEEP
The 1996 Freedom to Farm Act held the promise of finally bringing to an end most of the Federal Government's misguided ventures into agricultural policy. This included a phase-out of the dairy price support system as well as sunsetting the Northeast Dairy Compact. The bill passed the House by a strong, 318–89 bipartisan margin. In the Senate, your colleague Richard Lugar summed up the view of the Bill's supporters when he said that farmers will be producing for the market, rather than [being] restricted by Federal Government price controls, for the first time since the Great Depression.
Today, some Members of Congress believe that this timetable for reform should be altered or discarded entirely. Either action would be a signal to an already wary American public that once again, Congress is prepared to sacrifice the national interest on behalf of special interests. So far the 106th Congress has already voted to raise taxes—on airline tickets—despite promises by the Leadership this year to reduce rates. In addition, Congress's Kosovo Supplemental Bill reneged on reassurances that none of the so-called Social Security surplus would be spent on new programs. Meanwhile, Appropriators continue to chafe under the 1997 Budget Agreement's discretionary spending caps, which many Members criticized at the time of enactment as being too generous.
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Yet, Congress's promise to end dairy subsidies does not involve any of the thorny dilemmas posed by tax cuts, or spending caps, or budget surpluses. Lawmakers can keep their word simply by allowing the 1996 farm bill to take its course. Allow me to make this point as forcefully as I can: by taking no action and doing no harm, Congress fulfills at least the prospect of dairy subsidy reform.
It is true that this year's Supplemental bill included additional aid to farmers. Yet even in this highly controversial move, Congress at least attempted to avoid re-introducing the Depression-era price control system that hampered development of an agricultural free market. The same issue is currently at stake in H.R. 1402, and in several other proposals that would alter or slow the direction of dairy reform.
Three years ago, when our Federal budget was still in deficit and the fiscal outlook was uncertain, Congress had the courage to overhaul Federal agricultural policy, with an eye toward allowing farmers and consumers to work together and develop a market system that better served them both. In 1999, with our Federal budget enjoying a substantial surplus and our consumer-driven economy reaching new records, some lawmakers would erase these gains and plunge a vital sector of American life back into dependency.
During the arms control debate, Ronald Reagan once uttered the phrase, ''If not now, when? If not us, who?'' Those words were never more applicable to the continuation of dairy subsidy reform. Given the current economic and political climate, doing the right thing for taxpayers, consumers, and farmers should be a simple choice—allow dairy reform to move forward, and encourage its pace.
Dairy pricing cartels and subsidies belong in a history book next to the old Soviet five-year plans. Congress can rest assured that Americans will appreciate the gesture.
Once again, Mr. Chairman, I thank you for the opportunity to testify.
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Statement of P. Joseph Wright
Mr. Chairman and distinguished members of the committee, my name is Joe Wright and I appear here today as president of South East Dairy Farmers Association, an organization representing dairy farmers throughout the Southeastern United States in national legislative and regulatory matters of common interest.
I am here to testify in support of H.R. 1402, and ask that you mandate the implementation of option I–A as the class I milk price differentials in the new Federal milk marketing orders.
The focus of my testimony is twofold. First, I am a south Florida producer who would supposedly benefit from the class I differentials specified in the Final Decision. However, I advocate the adoption of option 1–A as I dispute both the policy decision and alleged price enhancement to me resulting from the class I price structure set forth in the Final Decision. Secondly, I shall refute the Secretary's position that the Final Decision's class I differentials are more market oriented than the option 1–A class I differentials. While the Secretary claims that the Final Decision is more market driven, in fact, the Final Decision drives the market and takes a national dairy economy that is in a good supply and demand balance and redefines that market into what the Secretary thinks the market should be.
One Good Feature. At the outset, it should be clearly stated that there is one area in which the class I pricing provisions of the Final Decision are, in fact, more market oriented. However, that provision has absolutely nothing to do with the class I differentials. More specifically, the class I Price Mover whereby minimum class I prices are set based on the NASS survey for the most recent two weeks preceding the 23rd day of the prior month for which the price is being announced is definitely more market oriented than the timing of the existing class I price announcement. Under current Federal Order pricing, fluid milk effectively is priced with a two and one half month time lag behind the manufacturing milk price. This has not
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only resulted in inverse pricing and de-pooling in manufacturing markets, but is often results in counter-seasonal pricing in the Southeast with some of the lowest Federal Order minimum prices occurring during deficit production months. The class I Price Mover in the Final Decision does not eliminate the time lag, it merely shortens it.
OPTION 1–A DIFFERENTIALS ARE NEEDED IN THE SOUTHEAST.
I am a South Florida producer with the highest class I utilization (( 90 percent) and the highest current class I differential ($4.18) in the United States. Dairy farmers in Florida advocate the option 1–A differentials (South Florida $4.30) even though for Florida they are lower than the class I differentials in the Final Decision (South Florida $4.75). The basis for our position is that we are concerned not only with absolute price level, but we are also concerned with relative price level. The Final Decision sets class I differentials in Southeast markets such as Charlotte, NC., Atlanta, GA., and Nashville, TN., too low relative to actual market dynamics.
The Secretary places reliance on the ability of producers in Southeast markets to obtain over order premiums to overcome the lower levels of class I differentials in the Final Decision. We know all about over order premiums in the Southeast. For June 1999, we have a net over order premium of $2.37/cwt in South Florida. There is a net $1.15/cwt over order premium in Atlanta, GA., Charlotte, NC., and Nashville, TN. If the existing class I differentials in those locations were too high, you would not see those over order premiums. What you would see is an ever growing milk supply in the Southeast. That has not occurred. Lowering class I differentials under these circumstances is downright irresponsible. Producers negotiating over order premiums in the Southeast are having to deal with Wall Street giants such as Dean Foods, Suiza Foods and Kroger Company. Even the Secretary recognizes that the processing side of the industry has the upper hand in bargaining power.
Despite the aforementioned level of over order premiums in the Southeast, dairy farms and, more importantly, dairy production continues to leave the Southeast market. From 1992 to 1998, milk production in the Southeast fell from 15.5 billion pounds to 13 billion pounds. During this same time period, the population in the Southeast grew at a rate faster than the national average. What dairy producers in the Southeast really need are either higher over order premiums on the option 1–A class I differentials or the existing over order premiums with class I differentials even higher than those presented in option 1–A. That is why most dairy farmers in the Southeast view option 1–A as the minimum acceptable outcome and seek additional measures outside the scope of this testimony.
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THE FINAL DECISION CLASS I DIFFERENTIALS ARE NOT MORE MARKET ORIENTED THAN THE OPTION 1–A DIFFERENTIALS.
A close examination of the Regulatory Impact Analysis and the Final Decision supports my contention that the Secretary made a decision a priori to flatten class I differentials and then merely looked for some gyration of a computer model (in this case the United States Dairy Sector Simulator model from Cornell University) that would justify that decision. The Secretary carries this facade even further when he uses the politically correct buzzwords that the new set of class I differentials are more market oriented when, in fact, they are not.
Right out of the box, one must question the Secretary's sincerity in finding a market oriented class I pricing model given two unrefutable facts. First, both the Final Decision's class I pricing provisions and the Final Decision's total pricing impact reduce the prices in severely deficit markets such as Atlanta and Charlotte, while raising both class I prices and all milk prices in the upper-Midwest which, by any reasonable definition, is a surplus market. Cut prices in a deficit market and raise them in a surplus market. How is that market oriented? Secondly, if the Secretary is so concerned about supply and demand and market orientation, why does he, in effect, guarantee cheese processors a return on investment of $.0068 per pound in class III pricing. On a national level, the Secretary has taken a producer program, lowered pay prices to producers, while simultaneously guaranteeing cheese processors a return on investment. Where is the market orientation? Query: Is the upper Midwest the big winner in this one too?
Now on to an analysis of the Secretary's use of the United States Dairy Sector Simulator (USDSS) for market orientation. As a starting point, it must be acknowledged that Cornell University is a prestigious institution and that the use of an economic model associated with that University is entitled to consideration. However, one must also acknowledge that the development of the Final Decision was an informal rule-making exercise without an evidentiary record subject to the scrutiny of cross examination as would be the case in formal rulemaking. Many questions remain. Was this spatial equilibrium model appropriate for the purpose for which the Secretary used it? Were the data or the parameters manipulated in a manner in which the computer results reflected a priori policy decision? Are there better economic models available that when properly applied would yield different results, i.e., a recommendation to adopt option 1–A? The analysis set forth below is revealing.
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First, the USDSS does not consider inter or intra order movements of milk. In the real world, milk moves both intra and inter market. For this reason, it is highly significant to note that the Secretary did not use the USDSS to define the market order areas contained in the Final Decision (emphasis added). To summarize, the Secretary rejected the USDSS for purposes of defining market areas because it does not reflect real life market situations yet he bases class I differentials on that very same model.
Second, the USDSS cannot analyze seasonal changes in production, consumption and price. In real milk marketing, the effects of these seasonal changes are overwhelming. In fact, using this static model benefits the upper Midwest where seasonal production varies only 5 percent to 6 percent from an annual average while it is extremely prejudicial to the Southeast where seasonal production varies 15 percent in both directions from the annual average.
Third, the USDSS and the selective data utilized by the Secretary is even more prejudicial with a downward price bias to the Southeast since the Secretary based the class I differential levels on May 1995 data, later updated for May 1997 data. May is a peak production month both in the Southeast and nationally. Had the data utilized in the Final Decision been either annual averages or for deficit time periods, the differential levels would be higher than those set forth in the Final Decision.
Fourth, the USDSS changes prices in markets but assumes that milk presently in a given market will stay in that market. That is not market oriented(emphasis added). In the real dairy world, there is a very true time tested adage. Money moves milk. More money moves more milk. Much more money moves much more milk. Changes in class I prices of the magnitude proposed in the Final Decision will change where milk is produced and processed. Hence, my point that the Final Decision is driving the market.
On the other hand, option 1–A is clearly more market oriented. It is based on annual data, spring and fall data, current market knowledge and the existing price surface. Option 1–A emphasizes current supply and demand conditions (emphasis added). Can you say market oriented? How can the results of a computer model which cannot recognize everyday market phenomenon such as inter and intra movement of milk possibly be more market oriented than option 1–A, which, by the Secretary's own acknowledgment recognizes the USDSS model and relies on specific market conditions and practices?
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Competitive equilibrium geographic price structure methodology does exist which would not have the structural defects of the USDSS cited above. Such analysis would provide information about the location of base points and price-distance relationships that are efficient from an economic standpoint. This superior economic methodology was presumably not used because it would have resulted in a class I pricing surface that looked very similar to option 1–A. Furthermore, the USDSS itself generated option 1–A under assumptions the Secretary chose not to accept because it would not have resulted in the flattened class I price surface desired by the Secretary in order to pacify interests in the upper Midwest.
Additional Reasons to Support option 1–A
Rather than summarize my previous testimony, I instead wish to leave you with four short additional points in support of option 1–A:
Of the 4,015 comments received by U.S.D.A. on the subject of class I differentials, 3,579 were in support of option 1–A.
The 1996 farm bill does not require, but merely authorizes, the Secretary to review the class I price structure.
Option 1–A and the Final Decision differentials are indistinguishable from the standpoint that either will have a minimal impact on the Food Stamp Program, the Women, Infants, and Children Program, and the National School Lunch and Breakfast Programs.
The USDA's own Price Structure Committee recommended the adoption of the option 1–A class I differentials.
Thank you for the opportunity to address this committee.
Testimony of Ed Brooks
Thank you, Chairman Pombo and other members of the subcommittee, for allowing me to speak before you today regarding H.R. 1402 and related dairy issues.
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My name is Ed Brooks and I am a dairy farmer from Reedsburg, WI. My wife and I operate a 50-cow dairy where we also raise our own heifers and grow most of our own feed. We are member-owners of Foremost Farms USA Cooperative, where I have served as chairman of the board since its formation in 1995. Foremost Farms is owned by 5,500 dairy farmer-members and operates 25 dairy plants and five reload stations, serving producers in the states of Ohio, Indiana, Illinois, Iowa, Michigan, Wisconsin and Minnesota. We process and market $1.3 billion worth of fluid milk and manufactured dairy products, and also export to 25 countries around the world.
I have been dairy farming nearly all of my adult life and have served in various leadership roles in the industry for the past 20 years. In addition to serving as chairman of Foremost Farms, I served as chairman of its predecessor, Wisconsin Dairies, and currently serve as chairman of the Board of Directors of Wisconsin Federation of Cooperatives.
My cooperative is a member of both National Milk Producers Federation (NMPF) and the International Dairy Foods Association (IDFA). On matters such as Federal order reform, Foremost has worked hard to build a good track record of serving the interests not only of our members, but the dairy industry as a whole. Within both organizations, my cooperative has tried to come to some consensus on what the reform package should be. Foremost is also a member of the Upper Midwest Dairy Coalition, which you have heard from in the past representing Midwest interests on Federal dairy policy.
I am here today to tell you that the farmer-owners of Foremost strongly and unequivocally support the Final Decision of USDA on Federal Milk Marketing Order Reform and ask that you not over-ride USDA by advancing H.R. 1402.
Congress spent two years of often raucous maneuvering on this very issue before finally tossing the ball to USDA. The reform package advanced by USDA represents three more years of effort, over 4,000 official comments, a wealth of informal industry input and thousands of pages of analysis.
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As you are well aware, resolving dairy policy issues is a difficult matter. There are many sides to the issues, many interests to consider and no real solutions that mean gains for everyone. But this reform process was not supposed to be about gains; it was supposed to be about equitability. It was supposed to be about updating a system so that it can more effectively serve this industry and consumers alike.
What USDA's final decision represents is an opportunity to make some constructive improvements to a program that has been outdated, and now politically gridlocked, for several years. What it also represents is a series of compromises.
It is true that the process has been divisive for the industry. But the Final Decision represents at least a small step forward, and it allows opportunity for new ideas that will help all dairy producers to manage their businesses in a changing marketplace. Without constructive changes to the outdated Federal milk marketing order program or without looking to other new programs that can help our farmers compete in a new global market, we have achieved nothing for our industry. We have simply slid backward into an environment of continual regional fighting and divisiveness.
And the Final Decision allows USDA to move forward with only minimal impacts on producers. Sure, I've heard the scare tactics. We all have. I've heard the predictions of devastation to producers from this region or that. But I'm here to tell you that those who are making such desperate claims are doing so while revealing only a portion of the facts and figures to support their predictions.
The full picture shows us that Federal milk marketing order prices are only a part of the story. They set minimum prices—but there are also private incentives and contracts and over order premiums paid through cooperative agencies that determine the price that I'and other farmers receive. If we look at the whole picture—the realistic one—we find that this reform package isn't going to spell the end to the dairy industry in one region or another, it's not going to make huge sweeping changes in the prices farmers receive, it's not going to mean a windfall for some and a big penalty for others.
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Both the USDA analysis and the analysis by FAPRI show only mild impacts to producers, nationwide. USDA's final decision is not perfect. But it is a step in the right direction. And the process for implementation is one that puts the decision squarely where it belongs—with the industry.
Aside from making many long-needed changes in a number of technical areas, USDA's treatment of class I differentials represents a reasonable compromise and puts the system of fluid milk pricing on solid ground for effective coordination of milk movement nationally. The current differentials—and option 1–A—do not do this.
Class III and IV formulas provide good footing nationally for the pricing of milk used for cheese, butter and non-fat dry milk. These new formulas facilitate alignment of pricing between California and Federal milk marketing orders. USDA's decision on consolidation of Federal order areas establishes boundaries that are more in line with the realities of marketing milk supplies to areas of demand. Each of these areas can be quibbled over, but on balance, USDA has justified its decision based on solid, factual information.
It is unthinkable to me that after all the effort of the industry and of USDA over the past three years, that Congress now wants to take it all back.
USDA has done a good job—and certainly a thorough one as well—of modernizing the Federal milk marketing order system, as called for by Congress. USDA has gone out of its way to minimize adverse impacts.
But now some in Congress—through initiatives such as H.R. 1402 or with Dairy Compact legislation—are saying that they have the better solution. For reasons known only to them, they believe that after careful analysis by USDA, that Congress knows what is best for our industry. Well, I am here to tell you today that these initiatives floating around Congress do not represent a better solution and they do not represent what is best for the industry. Instead, they are keeping our industry divided and they are wasting energy and resources that could be better used for building a stronger future for our dairy industry.
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Congress should not be attempting to do the job of USDA and the industry. Congress should not be micro-managing this program.
I believe Senator Richard Lugar said it best in his May 24, 1999, letter to colleagues when he said—and I agree—that Congress cannot improve upon USDA's Final Decision.
Our recommendation to you is to allow USDA's Final Decision to be implemented and to reauthorize the dairy price support program for two more years until the next farm bill. We have a great deal of confidence in the ability of dairy markets to work under USDA's Final Decision.
Let's let the producers decide the outcome in the referendum. Let's let the market work in setting that final pay price.
Let's quit rolling the dice in the political game and let the system work for the industry.
Thank you.
Testimony of Bill Dropik
Thank you, Chairman Pombo and members of the subcommittee, for allowing me to testify today on H.R. 1402 and other dairy legislative issues before your Committee.
I am Bill Dropik. My family and I operate a 45 cow dairy farm in Nelson, Minnesota. I am chairman of First District Association, vice chairman of the Minnesota Milk Producers Association, and am active in Nelson Creamery and Minnesota Farmers Union.
First District and Minnesota Milk Producers are members of the Upper Midwest Dairy Coalition. The Coalition has testified before your subcommittee at previous hearings related to Federal milk order reform.
First District Association is a 1000-member dairy cooperative which operates a large, modern barrel cheese plant in Litchfield, Minnesota.
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As a dairy farmer and as an owner of a dairy cooperative I believe passionately that Federal milk marketing orders must change. In USDA's Final Decision, many positive and significant changes have been made. Our cooperative believes these changes are the minimum changes needed to keep Federal orders current with market realities and to level out the pricing rules for all dairy farmers. We want Federal milk pricing rules to be less dependent on where a dairy farmer lives.
We've been at this effort to seek reform for over 10 years now. We've participated in the 1990 national hearings, a lawsuit, the farm bill and 3 years of informal rulemaking with USDA. USDA finally gets positioned to make modest, but needed changes, and now you are considering wiping out progress. I am opposed to HR 1402 and other efforts to derail USDA's final decision. You cannot improve upon this product without creating a mess and setting the stage for a continuing regional tug of war over the remaining spoils.
Let me tell you why I oppose your intervention in USDA's Final Decision at this time.
1. It seems reasonable for you to oversee the process to ensure the policy goals are met in the reforms. We believe the goals of moving Federal order pricing to be more market responsive have been met.
You should allow the Final Decision reforms to be implemented and ask USDA to monitor the results of the reforms. If the results have a greater negative impact than USDA's or FAPRI's impact analyses, then ask them to fix the problem. My cooperative and I don't expect that USDA's changes in the Final Decision are going to cause huge or negative adjustments for dairy farmers across the country.
2. My bias from Minnesota is to see that Federal orders don't disadvantage my fellow Midwest dairy farmers as the current system does. The class I differentials under option 1–A leave me in the same or a worse disadvantaged position. I cannot accept that.
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To sell option 1–A as good for dairy farmers is selling me, and a large number of other farmers, a ''pig in a poke.'' The Final Decision represents a true compromise between the more extreme changes that we in the Upper Midwest would like and the hard line ''no change'' position of many others. The Final Decision Class I differentials are a reasonable deal for all- everyone gives a little.
3. Of major concern to me as a milk producer for a cheese manufacturing cooperative is that 1–A differentials make me and fellow dairy farmers worse -off by lowering prices for our cheese and our milk used to produce the cheese. I can't myself measure this impact. FAPRI, the widely respected analytical group, can. FAPRI analysis suggests that the class III/BFP would be between $.09 and $.15/cwt. lower under option 1–A. According to FAPRI, 1–A would lower prices relative to the final decision in my state by about $.11/cwt. That would cost Minnesota $10 million annually on average and Midwest farmers a lot more.
4. Another concern of ours is the possible tinkering with USDA formulas for class III milk. We believe the formulas are workable and help our barrel cheese operation avoid being disadvantaged and maintain its competitiveness.
As a dairy cooperative, we must find a way to compete in a restructuring dairy industry. We need to find ways to align manufacturing milk values around the country—particularly between the West and Midwest—if we are to compete in the longer run. Federal orders can either interfere with adjustment or facilitate it by allowing the market place room to work.
The Final Decision formulas for class III, though not perfect, will facilitate market-oriented adjustments. We will continue to pay premiums for cheese milk in the Upper Midwest, as will other areas. It is likely that USDA will need to adjust these complex pricing formulas in the near future. Therefore, Congress should let the formulas be implemented and allow USDA to make needed adjustments administratively if observation proves the need.
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5. We will find lots of changes will likely be needed in the long term. I don't know if you ever sat through the formal rulemaking hearings, but given the complex, technical nature of milk price regulation, you should be happy you don't have to. USDA has the expertise to referee the process and make the decisions on the numerous, but complex, aspects for Federal orders. Another reason to allow the Final Decision to work!
Finally, I really want dairy policy to work for all dairy farmers. Every need of dairy farmers cannot be addressed with Federal Orders. We all know that the current Federal Orders are not working for all dairy farmers. It is a good bet that the Final Decision will work a whole lot better for all dairy farmers. H.R. 1402 is a bad bet for a good share of the dairy farmers.
Thank you. I look forward to your questions.
"The Official Committee record contains additional material here."