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88–378 PDF







MAY 20, 2003

Serial No. 108–4

Printed for the use of the Committee on Agriculture
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BOB GOODLATTE, Virginia, Chairman
    Vice Chairman
RICHARD W. POMBO, California
NICK SMITH, Michigan
FRANK D. LUCAS, Oklahoma
DOUG OSE, California
ROBIN HAYES, North Carolina
SAM GRAVES, Missouri
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MAX BURNS, Georgia
JO BONNER, Alabama
DEVIN NUNES, California

    Ranking Minority Member

CALVIN M. DOOLEY, California
TIM HOLDEN, Pennsylvania
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
BARON P. HILL, Indiana
JOE BACA, California
RICK LARSEN, Washington
MIKE ROSS, Arkansas
ED CASE, Hawaii
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EARL POMEROY, North Dakota
KEN LUCAS, Kentucky
MARK UDALL, Colorado
RICK LARSEN, Washington

Professional Staff

WILLIAM E. O'CONNER, JR., Staff Director
KEVIN KRAMP, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
ELYSE BAUER, Communications Director

Subcommittee on Department Operations, Oversight, Nutrition, and Forestry

GIL GUTKNECHT, Minnesota, Chairman
RICHARD W. POMBO, California
NICK SMITH, Michigan
DOUG OSE, California
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    Vice Chairman
JO BONNER, Alabama
DEVIN NUNES, California

CALVIN M. DOOLEY, California
    Ranking Minority Member
JOE BACA, California
TIM HOLDEN, Pennsylvania
BARON P. HILL, Indiana


    Baca, Hon. Joe, a Representative in Congress from the State of California, submitted statement
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    Ballance, Hon. Frank W. Jr., a Representative in Congress from the State of North Carolina, prepared statement
    Dooley, Hon.Calvin M., a Representative in Congress from the State of California, opening statement
    Gutknecht, Hon. Gil, a Representative in Congress from the State of Minnesota, opening statement
    Holden, Hon. Tim, a Representative in Congress from the Commonwealth of Pennsylvania, prepared statement
    Kind, Hon. Ron, a Representative in Congress from the State of Wisconsin, submitted statement
    Obey, Hon. David R., a Representative in Congress from the State of Wisconsin, submitted statement
    Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, prepared statement

    Ahlem, Charles, dairy producer, Turlock, CA
Prepared statement
    Boehning, Brian, dairy producer, Earth, TX
Prepared statement
    Brown, D. Scott, research assistant professor, Food and Agricultural Policy Research Institute, University of Missouri-Columbia, Columbia, MO
Prepared statement
    Collins, Keith, Chief Economist, U.S. Department of Agriculture
Prepared statement
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Answers to submitted questions
    Cropp, Robert A., professor, agricultural and applied economics, University of Wisconsin, Madison, WI
Prepared statement
    Grove, Sidney E., dairy producer, Ridgewater, VA
Prepared statement
    Hoover, Gordon B., dairy producer, Gap, PA
Prepared statement
    Kozak, Jerome J., president and chief executive officer, National Milk Producers Association
Prepared statement
Answers to submitted questions
    Rowekamp, Bill, dairy producer, Lewiston, MN
Prepared statement
    Tipton, Constance E., executive vice president, International Dairy Foods Association
Prepared statement
Submitted comments

Submitted Material
    American Dairymen's Federation, statement
    California Dairy Campaign, statement
    National Family Farm Coalition, submitted statement

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TUESDAY, MAY 20, 2003
House of Representatives,  
Subcommittee on Department Operations,
Oversight, Nutrition, and Forestry,
Committee on Agriculture,
Washington, DC.

    The subcommittee met, pursuant to call, at 10:30 a.m., in 1300 Longworth House Office Building, Hon. Gil Gutknecht (chairman of the subcommittee) presiding.
    Present: Representatives Dooley, Smith, Stenholm, Rehberg, Peterson, Janklow, Cardoza, Nunes, Holden, King, and Baca.
    Staff present: John Goldberg, professional staff; Sam Diehl, subcommittee staff director; Craig Jagger, Stephanie Myers, Callista Gingrich, clerk; Kellie Rogers, Elyse Bauer, Tyler Wegmeyer, Andy Johnson, and Howard Conley.


    Mr. GUTKNECHT. Good morning. One of the things they teach you in Austin College is to start on time. And so one of the things we want to start today is at least preferably that we will try to start these subcommittee hearings at the appointed hour.
    Good morning. This Subcommittee on Department Operations, Oversight, Nutrition, and Forestry is called to order to hear the testimony on the state of the U.S. dairy industry this morning. I want to welcome all of you here today for this subcommittee's first hearing of the 108th Congress. Many of you will note that dairy was not previously under the jurisdiction of this subcommittee and I want to thank Chairman Goodlatte for allowing our subcommittee to work on this tremendously important issue.
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    I have a special place in my heart for the dairy producers in my district. There is no harder working group of people than the men and women who get up at 4 in the morning to milk those cows, 7 days a week, 365 days a year.
    When I talk to dairy producers in my district there are three basic questions that I hear. The first is why have prices been so low for so long? The second question is what effect is MPC Milk Protein Concentrate having on prices? And the third question is when are prices going to recover?
    I hope this hearing will help to answer these three questions. As anyone in this room know, America's dairy producers are facing difficult times, and this is almost always the case, there are difficult issues for this subcommittee and the Congress to consider. Our farmers are receiving prices at 25 year lows and are experiencing one of the most severe and prolonged price slumps in our recent history. Dairy consumption has slowed recently and fluid milk consumption in the United States has declined steadily for the last two decades.
    At the same time, U.S. producers continue to achieve new levels of efficiency and productivity. Through improved management and the use of new technology, producers have nearly doubled milk production per cow over the last 30 years. Herd sizes across the country, and particularly in western States, have increased tremendously. Too often though, gains in efficiency and technology have benefited the consumer without increasing producers net returns.
    The dairy industry in my region has had a particularly difficult time for a number of years. Over the last 30 years, Minnesota has lost 38,000 dairy farms, an 84 percent drop. Minnesota's milk production has slumped by almost 20 percent. Despite this, I have great confidence that the upper Midwest can remain America's dairyland, to steal a phrase from our friends in Wisconsin.
    I do not blame all of our problems on Federal policy. I believe States like Minnesota must prioritize our dairy industry, and producers must make business decisions to achieve efficiency and responsibly manage risk. State and local Government and our communities must understand the value that dairy and other animal agriculture adds to rural America.
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    Here in Congress, we altogether too often fall prey to regional and other unnecessary divisions, to the detriment of America's dairy producers. Unfortunately, battles between big producers and small producers; between producers and processors; and/or one region verses another, can keep us from achieving sound policy.
    While I don't believe this subcommittee or this Congress will solve all of these problems, I do believe that we can be a part of the solution, by attempting to focus on the facts.
    As John Adams said ''Facts are stubborn things.'' And the purpose of today's hearing is to provide the subcommittee with just that, an accurate view of the current state of the U.S. dairy industry. It is my goal to gain a clear picture of what is happening across the country from the various witnesses we will hear from today.
    I want to thank our witnesses for coming, particularly those of you who have traveled from across the country, to testify here today. I particularly want to welcome Bill Rowecamp who is an outstanding dairy farmer from southeastern Minnesota and an agricultural leader in our State. I also want to recognize Minnesota's commissioner of agriculture, Gene Hugoson who is here with us today for the hearing.
    With that I'll close and recognize the subcommittee's ranking member, our friend and distinguished gentleman from California, Mr. Dooley.

    Mr. DOOLEY. Well thank you, Mr. Chairman, and I appreciate you calling this hearing in terms of where we can kind of get a better understanding in the state of U.S. dairy industry.
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    You are all most particularly interested in terms of what are the ramifications of our Government's dairy policies having and contributing to the State. And I am very, very concerned that some of the policies we enacted in the farm bill and particularly the MILC Program, which is projected to cost taxpayers about $2.4 billion perhaps this year. It is contributing to, not only costing the taxpayers that amount of money, but it is also contributing to increase production beyond what market signals are dictating, which are contributing to a reduction in all milk prices, which Dr. Brown is going to point out in some of his analysis, are 25 cents a hundredweight, which are in fact costing dairy producers in my district money, been lost returns from the marketplace. It is contributing to increase of purchases by USDA of butter and powder and cheese, and I think it is time for us to have a serious analysis and assessment of whether or not a program of this nature makes any sense whatsoever, when we are putting taxpayers on the line for billions of dollars, we are costing producers in many parts of the country millions of dollars. And there is really no end in sight.
    And so hopefully at the course of this hearing, we can get some ideas in terms of the direction we should be taking our dairy policy that we have in place, so that we can hopefully get to more market based signal that can bring a little more sanity to our existing dairy programs.
    Mr. GUTKNECHT. Thank you, Representative Dooley, and with that we're going to get started. The staff has assembled what I think is just an unbelievably talented group of witnesses today, and we are very privileged to have with them.
    The Chair will accept at this time any other statements for the record.
     Mr. Chairman, thank you for holding this timely hearing. I am very encouraged that you and Mr. Dooley are charging into an examination of dairy policy and I look forward to working with you.
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     I have great concerns about our direction in dairy policy and about the effectiveness of the policies we have in place. Dairy prices are at a low point right now and that is surely cause for concern. But also of concern is the tremendous volatility that afflicts producers. The all-milk price is now about $11. Nineteen months ago it was over $17; 14 months before that it was under $12; 17 months before that it was at $18 and 9 months before that it was $12. This wild ride takes us back to December 1997. While the cycles of markets may soon provide farmers with relief from current prices, I don't see how we can expect long-term, sound investments to be made in this climate. These conditions and other factors have caused me to believe that we need to all come together and make a fresh start in our dairy policy.
     Mr. Chairman, there is a bill pending in this subcommittee—H.R. 1659—which is designed to ensure that a single milk bottling plant in Yuma, AZ is subject to Federal milk market order regulation. I should note that the plant itself is not yet even in business. This bill is regarded as being so urgently needed, that it may soon be brought to the House floor without any committee action at all. As I became familiar with it, I was concerned that the bill would have unanticipated consequences. However, I have been convinced by colleagues on the committee from California—particularly Representatives Nunes and Cardoza—that action is necessary to avoid the risk of severe disruption in the California marketplace. So while I have come to support this bill, I believe that the fact that we need to legislate with regard to a single facility is a symptom of a deeper problem.
     In that context, I note that it is generally accepted that H.R. 1659 would not be needed to ensure the regulatory action sought if California were part of the Federal milk order system. The irony of the situation is that our able colleagues from the California delegation seek the enactment of this change in Federal policy, when the change wouldn't be needed at all if California producers would simply join the Federal milk marketing order system. This is just one way—and there are others—that we find national dairy policy being driven by the vagaries of the California system. As long as California producers choose not to join the Federal order system, I suppose that we will continue to have to make accommodations and adjustments that are driven by features of that State's system—features that we in Washington do not have the ability to affect.
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     Mr. Chairman, another dairy policy situation provides more evidence. A little-discussed provision in the Agriculture Appropriations bill for fiscal year 2000 has made handlers in Clark Co., Nevada (which includes Las Vegas), exempt from milk pricing regulations that apply throughout the rest of the order system. To my knowledge, no person has testified here to explain why processors in Clark County should receive such Congressional favoritism, yet the policy stands.
     And of course, Mr. Chairman, the dairy economy itself and the hardships faced by farmers, despite the farm bill's continuation of price support and the establishment of a new payment program, are also bad signs.
     Mr. Chairman, when we have to legislate to regulate one particular plant, or to deregulate one particular county, or we spend billions of dollars and fail to ensure an adequate living for our dairy farmers, I do not see how we can possibly think that we have gotten our policies right.
     So we are privileged today to have witnesses who can help show the way to a better dairy policy.
     Among them is the University of Missouri's Dr. Brown who has brought with him a FAPRI (Food and Agricultural Policy Research Institute) paper he recently authored which is titled: ''The Effect on the United States Dairy Industry of Removing Current Federal Regulations.'' The title itself is a bold idea and, as far as they go, the study's results suggest that our industry could survive some changes.
     And so, Mr. Chairman, we will receive testimony from all of our witnesses that will point us toward a new beginning. We should start anew on dairy policy—as if we had a blank sheet of paper. And analysis such as that by Dr. Brown will greatly help us to see our way towards a new plan.
     Mr. Chairman, once again thank you for holding this hearing. I thank our witnesses for being here and I ask that they continue to work with us and each other—and help this committee meet its challenge of designing a modern, logical, and coherent dairy policy.
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    Mr. GUTKNECHT. The first panel includes Dr. Keith Collins, who is the Chief Economist for the U.S. Department of Agriculture; Dr. Robert Cropp, professor emeritus of agriculture and applied economics at the University of Wisconsin; and Dr. Scott Brown, research assistant professor at FAPRI at the University of Missouri.
    Dr. Collins, you may begin when you are ready.


    Mr. COLLINS. Thank you very much, Mr. Chairman, and members of the subcommittee. On behalf of USDA, I thank you for the opportunity to be here and begin this hearing to provide information on the economic situation in the U.S. dairy industry. I'm going to provide USDA's current assessment of the market situation for milk and dairy products, and then say a couple of words about how we are providing assistance to the Nation's dairy producers.
    The current dairy situation traces to the 1996–2001 period when returns for dairy producers were generally favorable, and that provided an increased incentive to produce more milk. In 2001, poor weather led to a 1.2 percent drop in milk production, and that was the largest decline since 1984, nearly two decades. That created further incentives to expand milk by driving the all milk price to $15.04 a hundredweight, the second highest level ever in 2001.
    The following year in 2002, milk production rose 2.6 percent, twice the average rate of the previous 10 years. Now that production increase combined with weak demand caused the all milk price to decline last year by $3 a hundredweight down to $12.19. As production has expanded, we have seen the continual shift to larger operations in the United States. Last year, operations of 500 head or more were responsible for 42 percent of U.S. milk production and that compares with only 30 percent just 5 years ago. And we have also seen the continuing geographic shift toward the western States, although we have seen some increases in some midwestern States as larger dairy operations have come in there.
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    At the start of this year, 2003, U.S. milk production was still increasing a high rate. Demand remained weak, and stocks of manufactured dairy products were up sharply. Our most recent data suggests that this down trend may be beginning to turn. Take a look at the year over year milk production increases for the U.S. as a whole in the 20 major States. In January, production was up 1.5 percent from a year earlier; in February, 1.3 percent; in March 1 percent; and in April, the data just released, up .6 of 1 percent. For all of the calendar year of 2003, we forecast production will be up about 1 percent.
    An important factor on how fast dairy markets recover will be the growth in commercial use. While milk production was up 2.6 percent in 2002, commercial use rose only 1 percent. Cheese growth has been below trend. For 2003, growth in dairy product demand is expected to pick up, particularly as the economy strengthens in the second half of the year. And that should help the food service and grocery store sales. However, the demand growth is probably not going to be enough to meet the increase in milk production or pull down product stocks and boost prices appreciably.
    For all of 2003, we forecast that the all milk price will fall another 84 cents a hundredweight, and average $11.35 a hundredweight. Over the past year, USDA's programs have helped support dairy markets, and to stabilize the incomes of producers. For example, we are now purchasing all three products under the price support program, butter, cheese and nonfat dry milk. We have used all of our available quantities for cheese and nonfat dry milk under the Dairy Export Incentive Program. And we announced another 5,000 tons of butter DEIP yesterday afternoon.
    Under the Milk Income Loss Contract Program, we've paid about $1.4 billion to date since payments started last October in that program. And as Mr. Dooley, said we expect to pay out about $2.4 billion this year. For all of 2003, the milk payment rate could average $1.60 a hundredweight, and that would be equivalent to a 14 percent price increase for producers who are producing less than 2.4 million pounds.
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    In summary, milk prices are at 25 year lows. I think markets are showing the beginning signs of returning to balance. And USDA is operating a large portfolio of programs to help producers, during this adjustment process. That completes my comments, Mr. Chairman.
    [The prepared statement of Mr. Collins appears at the conclusion of the hearing.]
    Mr. GUTKNECHT. Thank you, Dr. Collins. We will have questions later. Dr. Cropp.


    Mr. CROPP. Thank you, Mr. Chairman. Also thank you for inviting me to supply some testimony in this important hearing. I will address briefly the issues that was in the invitation letter, and the first one that Dr. Collins has covered is our milk prices.
    It is indicated that the last 3 years prices being depressed, 2000 very low. Recovered nicely in 2001, with some record high prices and up to the second highest milk price in record, and then down again in 2002.
    To continue that way should indicate that what causes this is relatively small changes, either in the production side or consumption side. Previously, it is predominantly the production side prices to recover in 2001, simply because cow numbers went down, production declined about 1 percent. Last year has indicated cow numbers went back up again, production up about 2.6 percent. But the other thing I would point out is that milk prices would be a heck of a lot better if we had the same trend in consumption as we had in the past 10 years, about 2 percent. It is indicated now and it appears that production is continuously slow. Last Friday's production report showed cow numbers finally going down after growing month-to-month through all of last year, down only 11,000 head, but that is the turning side. And production per cow is not doing very well, so up 0.8 of a percent or so, or 6 cents for estimated for the total United States. Well if we had to purchase consumption, 1 to 2 percent, we would have milk prices a couple of bucks higher. So it is ever since September 11 and the slowing for 2001 and the slowing economy, there has been a change in consumption patterns, particularly in cheese.
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    So the turnaround is going to have to come predominantly on a production side. We do not foresee any major change in commercial disappearance in the near future. Hopefully, it does recover.
    So milk prices all of last year most of the time below $10 base class III price, got down as low as $9.11. Some of the time it has been below support level. I think we have bottomed out. It will slowly recover. I could see a little more optimistic than USDA, I could see getting to maybe $11 by July, and I would say $13 is not impossible. I know that is in a minority, but weather has a lot to do with it. The long period of low prices I do see at least by the amount things improving.
    As far as a comment on that production, I have a table there that shows most of the growth has been in the West. Minnesota goes down, Wisconsin is kind of stable, Northeast is kind of stable. And a fair amount of drop in production in the South, Southwest.
    A comment on dairy trade. A little bit is that a lot of emphasis is put on that in terms of impacting prices. I would say our milk prices predominantly responding to domestic supply and demand. Actually on a total-solids basis, we exported more dairy products than we imported last year. Of course the attention has been on milk protein concentrates. Again, that makes good coffee shop talk. That is the primary reason prices are low. I am not saying there is no problems here, but basically, if you look at the imports of that, it is not a total substitute for nonfat dry milk, which is about 36 percent protein. Milk protein concentrates, and we have from 40 to 90, that what product we are talking about, and it doesn't have the lactose that are with nonfat dry milk, so the functionality, the ability of that sometimes is, even though it may be more expensive, preferred over nonfat dry milk. What it does do is increase the cost of the price support program. Maybe being somewhat generous, we could say maybe 300 to 400 million pounds of nonfat dry milk, displacement imports last year, maybe that is an estimate, but we bought over 800 million pounds of powdered milk. So we still would have had a surplus of powder and prices, even without that.
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    As far as industry trends, the trend to fewer and larger dairy farms has been going on for a long time. It will continue, regardless of what dairy policy we adopt, unless it is an extreme change in our policy. We have lost about 50 percent of the farms from 1990 to now. If I said we will lose a third of our farms the next 5 years, that is possible. And if you looked at a table I have in there of farm structure, I think Dr. Collins referred to that, when you look at the structure, that we have 48 percent of our herds, less than 50 cows producing 7.6 percent of our milk. Let's face it, 30, 40 cows it is very difficult to support a family, unless there is a substantial off-farm income, or some other farming enterprise. And frankly, with a lot of young people, there are not a lot of young people that wish to milk in the 30, 40 cow farm that is old and obsolete 7 days a week. There are some. So regardless of what we do, I mean some of this is a way of life, and you could look at the larger farms there that are decreasingly producing a larger share of the production.
    That is not all price the dairies for production is growing. It has got the lowest milk prices in the country. Some of the highest milk prices that experience some of the greatest loss, some of the South, southeastern part of the country. Minnesota, Wisconsin, we pay more for milk togo into cheese than any State; $1 hundredweight higher than the rest. Basically saying that we need to improve our farm level production, and face that, regardless what dairy policy is passed.
    Effects of government programs. You would have to say that Milk Income Loss Contract Program has surely pumped a lot of money into both Minnesota and Wisconsin. But about 80 percent of the farmers in the country receive full benefit, because they have less than 130 cows. If you added $1.20 to the $12 milk price last year, you have got over $13 price of those farmers, you have to say that has prevented a decline in dairy farms. In my own State of Wisconsin, from May to May last year we cut the decline of dairy farmers in half in Wisconsin, to the extent that it has slowed the reduction in milk production, as of course then, milk prices for the larger operations. But it is simply saying, that is preferred policy in our area, and I think in the manufacturing area over say regional dairy compacts.
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    The support price, this comment: the $9.80 support price provides a limited safety net, but we have been below the support price many months this past year, as low as $9.11 this last year. So the program is not working. I ask your help the Producers Federation suggest a change of the make allowance, reflect the cost of selling. That is one alternative. Another one is to look at the Commodity Credit Corp if they buy right off the C.M.E. One way that needs to be addressed is whether a comment there, I think the Secretary of Agriculture should have the discretion to adjust purchase prices, without the political pressure of because of the effects say a class mover should have. Look at the full intent of the program, achieve the program at minimal cost.
    My last two comments on the future policy is if we want a efficient dairy industry, we have got to let markets work. And that means the upper Midwest farmers, where I come from, need to face that reality, and be competitive in production and marketing, because milk production will gravitate to the lowest cost production areas, and I think that could be the West, it could be upper Midwest, it could be the Northeast. And I think milk prices will flatten across the country as cost production becomes more uniform.
    If you want to preserve a farm structure, it would take a drastic change, a real strict mandatory and quota system. That doesn't work, even in Canada, because it can capitalize and change. So maybe somewhere in between, but this structural change is going to continue. And an average all milk price and that $13 range will probably give us all the milk we need in this country to satisfy the demand. That is the reality. Thank you.
    [The prepared statement of Mr. Cropp appears at the conclusion of the hearing.]

    Mr. GUTKNECHT. Thank you, Dr. Cropp. Dr. Brown.

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    Mr. BROWN. Mr. Chairman, and members of the subommittee. Thank you for the opportunity to be here today, to discuss the current state of the dairy industry. My remarks will focus on how policy, trade, and supply and demand factors have been important in determining today's market situation. In my remarks today, I will not condone or condemn any of the current policies in place in the dairy industry. The institute that I am a part of, the Food and Agricultural Policy Research Institute, strives to remain an unbiased objective unit that stands ready to provide Congress with a quantitative assessment of any agricultural policy alternative.
    The dairy industry is experiencing some of the lowest milk prices since the late 1970's. USDA's preliminary April all milk price is $10.90 per hundredweight. This is a decline of over $2 per hundredweight relative to the previous 5 or 10 year average for April. Many factors are responsible for the current market price situation. Demand for dairy products has been soft since late 2001 due in part to a weaker, general economy than many experts had expected. Commercial disappearance on a milkfat basis grew only 0.5 percent in 2002. Although there may be some signs that demand for dairy products is starting to turn around, commercial stocks of dairy products will need to be drawn down before prices can rise.
    The supply side of the picture has also contributed to low milk prices. Milk production expanded by 2.6 percent in 2002, in response to the $15 all milk prices that we saw for the annual average in 2001. Thus far in 2003, milk cows remain near 9.15 million head, the latest milk production report did show April cows down 15,000 head in the United States, the first decline we have seen in several months.
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    Although dairy product trade has caught the attention of many in the dairy industry, changes in the trade picture are not a major factor in the current outlook situation. The current FAPRI projections would suggest that milk prices will rebound in the second half of 2003, but will remain low by historical standards. Recent increases in dairy cow slaughter should begin to impact milk supplies in the coming months, and allow for some strength in milk prices.
    With respect to some of the long-term market and policy issues, FAPRI has recently completed a broad examination of current Federal dairy policy in a report attached to my testimony. The research examines the Milk Income Loss Contract Program, the Dairy Price Support Program, the Dairy Export Incentive Program, and the Federal Milk Marketing Order System.
    The MILC Program has received considerable attention in the wake of recent low milk prices. Some have argued that the MILC Program is responsible for the current milk price declines. It is clear that the MILC Program does lower milk prices as producers respond to the additional payments made under the program. However, the current FAPRI estimate suggests the all milk price would only be 25 cents higher in 2003, in the absence of the MILC Program, suggesting that much of the current decline in milk prices is due to the fact there is other than the MILC Program. In terms of the current outlook, the MILC Program likely prolongs adjustments in milk supplies to the current low milk prices.
    To date, over $1.3 billion has been sent to milk producers under the MILC Program. Current FAPRI estimates suggests that during the life of the MILC Program outlays will reach $4.8 billion. With the 2.4 million pound marketing's cap on benefits, the MILC Program benefits small dairy producers. This benefit can be seen in the state-by-state milk outlays, as nearly 20 percent of total milk outlays have gone to Wisconsin producers, whose production represents 13 percent of our Nation's milk supply. Alternatively, California producers have received 8 percent of the milk outlays while producing 21 percent of the Nation's milk supply.
    The MILC Program has offsetting effects on producer income. On the one hand, producers benefit from the direct Government payments they receive on up to 2.4 million pounds of milk marketed when the Boston class I price falls below $16.94. On the other hand, producers are hurt as increased milk supplies caused by the MILC Program reduce milk prices. Using the FAPRI aggregate analysis of the MILC Program, Agriculture Food and Policy Center researchers at Texas A&M University suggest that until a dairy operation reaches about 600 cows, the benefits of the MILC Program exceed the loss from lower milk prices that result from the MILC Program.
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    The FAPRI analysis of an expanded MILC Program that covers every pound of milk produced shows that the market effects of such a program could be quite large. Milk prices could decline by over $1 per hundredweight under such a program and Government outlays could top $2.5 billion annually. The analysis of this program alternative suggest that parameters under which the MILC Program operates are critical. Perhaps even more important is the compatibility of different aspects of Federal dairy policy. The MILC Program and Price Support Program can create a chronic problem for the dairy industry if parameters of these programs are set at levels that encourage long-term surplus production of milk.
    The Dairy Price Support Program has been a key component of dairy policy for many years. If the Price Support Program is eliminated, FAPRI analysis suggests that in the short run milk prices would decline by nearly 40 cents per hundredweight.
    Although FAPRI analysis shows only small effects of eliminating the Price Support Program after the first two years, it is important to note that the current Price Support Program does provide a safety net in circumstances where milk supplies exceed demand needs. This can be critical in a market where demand for the product is rather inelastic.
    Thank you for the opportunity address these critical issues for the dairy industry. I'll look forward to answering your questions.
    [The prepared statement of Mr. Brown appears at the conclusion of the hearing.]

    Mr. GUTKNECHT. Thank you, Dr. Brown. Let me also say not only does the chairman intend to begin the committee meetings on time. We will do the best we can to abide by the 5-minute rule, and I will hold myself to that. We will also call on members for questioning in the order in which they arrived. And so, we will do the best we can with that.
    First of all, let me turn to the issue of market volatility. From 1995 to the present, dairy farmers have seen significant volatility. Part of the difficulty producers have faced during his period is risk management, particularly when prices have fallen below the support price in 14 of the last 39 months.
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    Dr. Collins, in your opinion what is causing this, and I guess more importantly, what remedies to the Price Support Program is the USDA considering at this point in time?
    Mr. COLLINS. Are you asking me about volatility generally, or the fact that class III prices have been below support?
    Mr. GUTKNECHT. Well actually I am asking you about both. And the question is what can we do about it?
    Mr. COLLINS. Well I guess this question about the class III price being below $9.90, or the cheese price in Chicago being below our purchase price of cheese, has come up repeatedly, for many, many months. Because there have been a number of months where that has occurred. And Mr. Cropp in his comments just said that is evidence that the Price Support Program is not working. I guess I could take a different view of that. I think what the law tells us to do is to set purchase prices for products, such as cheese, in such a way that a plant of average efficiency can pay on average $9.90. The word average is in there twice. And it doesn't say anything about class III milk. It says $9.90 for milk going in to those three products, butter, powder, and nonfat dry milk. Somehow we have associated the goal of the Price Support Program to keep the class III price above $9.90. The class III price is a minimum price under Federal orders. It is not even mentioned in the Price Support statutory language.
    So one thing I would look at is what are farmers receiving for milk going into manufactured products. And one way to look at that is the National Agricultural Statistics Service price of manufacturing milk, which they report. And that price every year, has been above $9.90. I think in 2000, it got down about $10.50. It is true, periodically it has fallen below $9.90. For example, 2 months ago it fell to $9.80 in the United States. But the most recent price for April is $9.90.
    So I guess the first general point I would want to make is that I think we ought to be clearer about what the goal of the Price Support Program is. Is it to achieve a minimum price under Federal orders for milk going into cheese at $9.90, or is it on average to achieve a price for producers, for milk going into all manufactured products. Because class 3 is a minimum price, and we know in certain areas of the country, processors pay more than that minimum under Federal orders.
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    Now having defended the program vigorously here, you asked me what can we do about the price going below our support price for cheese, or below $9.90. And I think that does get into this question of if we did want to ensure cheese prices don't go below $1.13, then there are probably some things that can be done.
    One of the things people have taken a hard look at is what it costs to deliver cheese to USDA, as opposed to delivering it to commercial buyers. And we impose some requirements and other things that cause the cost. There is a difference in cost by some estimates; I think National Milk did an estimate of about 5 1/2 cents a pound. So one thing we could do is pay producers, or pay processors for those additional costs, if we wanted to do that. Or we could change our specifications. We could change the way we pay, and we could change what we demand of the products that we buy, so that they are more similar to products in the commercial market, or the process is similar to a commercial transaction. So those are two choices right there, and I will tell you that we have been looking at that, since we received National Milk Producers Federation's cost estimates for delivering product to USDA. We are reviewing those, we are doing some of our own survey work.
    I can't tell you that any action will come of that, because quite frankly, I think it is a very hard sell to go to the Office of Management and Budget and tell them we are not supporting the price of milk at $9.90, when the manufacturing price of milk is consistently there.
    Mr. GUTKNECHT. My time has about expired, but let me throw out one quick question for the other group.
    What risk management tools might help producers manage this volatility, and such as revenue insurance, Dairy Options Pilot Program, or forward pricing of milk? Can you comment very quickly on, Dr. Cropp?
    Mr. CROPP. Sure. My report of risk management, as we all know. I can give many examples of dairy farmers in my part of the country, that had some of the best years in the dairy business the last 2 years with this volatility by using risk management tools.
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    There has been a combination of many of them have resorted to contracts with their milk buyers, setting in a base milk price. Others have directly used the futures, or options. And simply saying there has been an opportunity—there is a great opportunity to avoid low milk prices in 2000. A great opportunity to avoid them in 2002. In fact, the opportunity was there to set some of the best milk prices up until early of that year, if you took advantage of that.
    So I think it is a tool farmers need to look at and use, it is there. I am just supplying it with the National Milk Federation, I am not supporting continuation of contracting the Pilot Program. Because I think producers ought to have the right to contract with a co-op or individual firm. I do not buy the logic, it destroys the Federal order system when plants still are obligated to the pool.
    We have had contracting for 100 and some years in the grain business. I realize a small percent of farmers use that directly. But we are going to have this volatility with the support price we have that is not all bad. If we want part of this to work, we are going to have volatility. Small changes in supply and demand, these tools are very readily usable and the smaller farmers have to either rely on contracting, because they don't have the volume of milk, or futures contract. And so I think we ought to provide for milk plants to offer that. In our area there is a strong interest in doing so, and there are more and more farmers that are doing it. I can give testimony to those farmers that have done it, have done quite well by managing their own risk.
    Mr. GUTKNECHT. Thank you, Dr. Cropp. My time has expired.
    I'm sorry, Dr. Brown, because I will turn to the ranking member, Mr. Dooley.
    Mr. DOOLEY. Thank you. Mr. Collins, I just want to run back through the numbers again. We are projected to spend $2.4 billion on the MILC Program this year. And in terms of the Purchase Program, does the USDA have the figures in terms of our outlays for the purchase of the butter, cheese and powder for this year, and what the projections will be there?
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    Mr. COLLINS. I don't have them in front of me. I have our baseline estimates for 2002–06, which is about $1.6 billion. I am going to guess it is somewhere in the range of $400 million or $500 million, something like that.
    Mr. DOOLEY. For the purchases themselves?
    Mr. COLLINS. For the purchases, correct.
    Mr. DOOLEY. And then we also have, with the purchases that were powder this year, we are going to have ending inventories this year of powder of 1.3 billion projecting?
    Mr. COLLINS. That is correct.
    Mr. DOOLEY. And how, as I understand it, that is what 100 and almost not quite 2 years utilization in the private market?
    Mr. COLLINS. That is correct, too.
    Mr. DOOLEY. And how much is it costing us to store these products? Is that included in the $400 million?
    Mr. COLLINS. Yes, it costs us—it cost us last year about $22 million to store what was roughly 1.2 or 1.3 billion pounds of nonfat dry milk.
    Mr. DOOLEY. OK. The National Milk Producers Federation is going to testify a little later that they are not very happy about the way that you folks are running the program. And which I find a little bit remarkable, when we are spending $2.4 billion through the MILC Program. We are purchasing 10 million pounds of butter, 33 million pounds of cheese, and 600 million pounds of powder, all of which is being funded by the taxpayers, which seems that we are asking them to do a lot here. And I guess in some of our questions here where are directed on whether or not you are implementing the program in terms of the support price of $9.90, which you made, I thought a pretty compelling argument that you were.
    Dr. Cropp, you said there might need to be some adjustments there, but I would be interested in terms if we did see an effective increase in the price that we are paying for these commodities. What would be the signal that we would see in the marketplace, and what would be the producer response that we would think that we would result if we were effectively paying more through the Government purchase programs for powder?
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    Mr. CROPP. Well like I said, your question with one comment here, I commend the Secretary for doing 2 butter powder tills. I think administering this program the Secretary is supposed to administer the program to achieve the $9.90, but have the flexibility at least twice a year to adjust, and there was a lot of resistance to that because of a different purpose, trying to hold up class I prices, rather than achieving the Price Support Program.
    And to answer that question, I agree pretty much with Dr. Collins here, is that a cheese however is an increasing part of the pie. And if you are going to support the industry, you have got to look at that. Butter, powder is a shrinking part of the pie. Under Federal orders in all, you got 40-some percent as cheese, and powder is 10 percent for example. So the majority of the dairy farmers depend upon, as for the growth in the cheese industry. So if you are going to have a support program, I simply say you need to look at, because that is where the cheese prices drops substantially below support and class III got down below $9 for awhile in 2000.
    But I am not advocating a higher support price, I am advocating let markets function and work. I think the difficulty we have is we have a Price Support Program, and a Milk Income Loss Contract Program on top of it. I am not so sure that is maybe one or the other, rather than both.
    Mr. DOOLEY. There have been a lot of questions about and concerns about the impacts that milk protein concentrates have on the domestic market, and the price of milk in the United States. I am struggling to understand why we don't have a domestic industry in terms of production of milk protein concentrates. There are some individuals, and that make the contention that one of the reasons is, is that we have a purchase program for powder that is at a level that does not result in a financial incentive for the investment in the capital to develop this market for milk protein concentrates. Dr. Brown, what is your assessment of that line of thinking?
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    Mr. BROWN. I do think that when you look at what we have in place in terms of the nonfat dry support price at 80 cents, in many cases we have retarded growth in any kind of domestic MPC industry in the U.S. It may be more cost effective to produce that product and sell it to the Government, than try to produce MPC's. Now we are seeing a new plan to come on board, the DFA has in southwest U.S. that may start to move that around, so that we are going to see some domestic MPC production occurring here in the U.S. But I think again, we are going to have to see how that plays in terms of what we have occurring with the price of our program. It may be tough to grow our domestic industry for MPC production to a large extent, given what we do have going on with the Price Support Program.
    Mr. GUTKNECHT. The gentleman's time has expired.
    The gentleman from Michigan, Mr. Smith.
    Mr. SMITH. Mr. Chairman, thank you. As an old cow milker, that used to sell based on butter fat. What is your analysis of the component pricing now, does component pricing and the reimbursement to farmers based on the component prices represent what you get from the utilization of that milk in terms of final product? That is not a very clear question?
    Mr. CROPP. No.
    Mr. SMITH. Is component pricing a fair way to price milk to farmers, based on how much money the seller gets when they sell the different products that might be developed from that milk?
    Mr. CROPP. I'll have at it. Yes, I think component pricing is the proper formula; we argue over the formulas. We just had a change in Federal order formulas right now. But basically, increasing share of the milk is manufacturing use, and the components in there determine the yields of those products and the value of that milk, and so it is a fair way. We want farmers to get the proper signal to produce the composition of milk that we need. So we have been in component pricing in the upper Midwest for quite a while, and in California for a long time so.
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    Mr. SMITH. I guess the two most important components would be protein and butter fat, I am assuming?
    Mr. CROPP. Right.
    Mr. SMITH. And so you are saying that however we manufacture, if it is a manufactured product, or the sale of cream or half and half, represents the kind of return that makes component pricing fair to the farmer?
    Mr. CROPP. I would say absolutely, we take milk apart, put it back together.
    Mr. SMITH. I have got some curiosity questions here, what is the average national production for a cow, now?
    Mr. CROPP. A cow, 18,000 pounds of milk.
    Mr. SMITH. 18,000 would be a national average?
    Mr. CROPP. Yes, a cow.
    Mr. SMITH. All right. Now let us see, our milk production went up 0.7 percent last month with these low prices, why is that?
    Mr. CROPP. It wasn't because production per cow was up, I think only——
    Mr. SMITH. No, no, not per cow, total milk production in the United States went up, it shot up higher than a year ago?
    Mr. CROPP. Cow numbers are still higher than a year ago.
    Mr. SMITH. Pardon?
    Mr. CROPP. Cow numbers are higher than a year ago, more milk cows than a year ago.
    Mr. SMITH. Well, why is that?
    Mr. CROPP. Well for one thing, it takes a while——
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    Mr. SMITH. I mean with the low prices, all of my farmers complaining about low prices, and they are expanded milk production, just typical farmer reaction, if you are not making milk money, milk more cows, I think so?
    Mr. CROPP. I think there is a combination of reasons, and it does vary by State. It is going down drastically, Minnesota is down greatly a 4 percent in production. Part of it is I think the different structure of dairy industry. A lot of these dairies are farmers in the prolonged haul, if milk prices recover, they are in for a long haul. So you have got to keep your bottom full once you start expanding and a bulldozer comes it takes awhile for adjustments. You have got to fill up with cows, and I think the milking loss contract we indicated has stopped the decline in the smaller part of it. For every evidence you look at, cow numbers and the decline of farm numbers, so——
    Mr. SMITH. Visiting with your counterparts in New Zealand, they told me that they now control 50 percent of dairy products that are exported in the world. Would you say that is true?
    Mr. CROPP. Not that high, it seems high to me.
    Mr. SMITH. I see some yes, and some no's.
    Mr. CROPP. Yes.
    Mr. SMITH. But some place around there.
    Mr. CROPP. It is high, it is high.
    Mr. SMITH. But some place around there, New Zealand is building the NBC plant down in Oklahoma now, and then in New Mexico and there is the Texas Dairy Producers are building another one in Texas. What is that going to do in terms of the overall effects on milk prices, and will they survive with the price that we are paying for nonfat dry milk?
    Mr. CROPP. I don't think it is going to do much on the overall effect on milk prices. Certainly not in the near term, you are talking about one or two plants that are going to produce presumably MPC's, that is a protein product, it could result in some diversion of milk away from butter powder plants. But since we have so much milk going to butter powder plants now, that we are right at support, I don't think it is going to make a big difference.
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    Mr. SMITH. What would be roughly over 40 percent, at least the figures I saw, it says over 40 percent of the milk comes from herds under 200 cows right now. Are we supporting those smaller herds with our Price Support Program, where every pound of milk they sell is supported with the Contract Low Price Program?
    Mr. CROPP. Yes, we support the price of milk directly through the purchase of our products, and then we write a income support check to the small producers.
    Mr. SMITH. And so without that program, would some of those farmers stopping production?
    Mr. CROPP. I think so, even with that program, some of the farmers are stopping production.
    Mr. SMITH. Thank you, Mr. Chairman.
    Mr. GUTKNECHT. The gentleman's time has expired. The chair recognizes the ranking member of the full committee, the gentleman from Texas, Mr. Stenholm.
    Mr. STENHOLM. Thank you, Mr. Chairman. I have an opening statement that I would like included at the appropriate place in the record for today.
    Mr. GUTKNECHT. Without objection.
    Mr. STENHOLM. I would like to first commend you, Mr. Chairman, for this hearing and hope that this will be the first of many hearings in which this subcommittee takes an in-depth look at the whole question of the Federal market order system and whether or not it has served its time. When you have a situation of volatility that we have seen in milk pricing, when you see all of the criticisms that are now coming from the Dairy Program and the costs, and you still see the unprofitability of milking cows in an efficient way, we have got a problem. And I think it is time for us, all of us, and I say myself included, and as ranking member I look forward to working with you as you do so. A couple of questions. Are you familiar with the Nunes bill, Dr. Collins?
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    Mr. COLLINS. I have read it, yes.
    Mr. STENHOLM. One of the problems we have now, and when the bill first came up, I had some problems with it because of unintended consequences, that might occur. And so often when we try to fix a specific problem, instead of a rifle shot, we get a shotgun, and it hits a lot of unintended consequences. However, I have been convinced by my colleagues on this committee, principally Mr. Nunes, and Mr. Cardoza, that action is necessary in order to avoid the risk of severe disruption in the California marketplace. Rather interesting that we need to legislate in regard to a single facility, that to me is a symptom of a deeper problem. Even more so, when we find that there is another handler in Clark County, Nevada exempt from milk pricing regulations that apply throughout the rest of the order system. Again, one rifle shot, again obviously for a specific purpose. My question is when we talk about this nonfat dry milk, and all the costs of storage, and all of this and your answer regarding whether or not the Department has done everything it should have done under the law, which we will hear later. Where is the powder coming from? Does it come from all over the United States? And all of the orders in an equal manner, or is more of it concentrated in certain areas?
    Mr. COLLINS. The powder we are buying mostly comes from the West, California.
    Mr. STENHOLM. Most of the powder comes from the West. Not interestingly, that is the one State that has chosen not to participate in the Federal market order system. And we have debated this for the 24 1/2 years I have been in this Congress. I think it is fascinating, that at the same time that we have criticism of the costs, we find that somehow, someway, either in the administration of, or in the fault of the legislation that, that is creating a problem.
    This whole area too, I remember when we used to have butter out the gazoo, and the industry absolutely didn't want to make any changes in the price of butter et cetera. And then we lowered the price of butter, and lo and behold, consumers began to buy more butter, and we had a problem, we allowed the market to warden. And it worked.
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    Now I don't think we are ever going to get there, Mr. Chairman. I don't think we are ever going to get there, as long as we keep trying to defend something, that is not working. And I would hope that the industry is well represented, as you are and one of the things that has bugged me, in an industry that is 85 percent cooperatively owned, which means its owned by, as we used to say in the electric co-op, it is owned by those we serve. That we continue to allow a 2 percent surplus, i.e. inventory blessing, to be as destructive of pricing as we see it today.
    Dr. Collins, when you testified that we are at a 25 year low in milk prices, that's not demonstrated in the excellent products that we have. Something is wrong with the whole system. And Mr. Chairman, I hope and I look forward to working with you, and Mr. Dooley, as we look at kind of thinking outside of the box, and seeing if there is not a better solution for our dairymen, than what we are operating under today.
    But on the Nunes bill, you do not have a position on that?
    Mr. COLLINS. No, the Department has not taken a position yet. We are reviewing it.
    Mr. STENHOLM. You will review it, you will allow this committee the benefit of your views, before we bring it to the floor?
    Mr. COLLINS. We have been asked to review it, and we will have a position on it.
    Mr. STENHOLM. Thank you, sir.
    Mr. GUTKNECHT. The gentleman from Montana, Mr. Rehberg.
    Mr. REHBERG. Thank you, Mr. Chairman. And let me add my accolades to you as chairman for calling this meeting.
    I am struck by the comments of Mr. Stenholm that are similar that I have, he has been here 24 1/2 years, I have been here 24-plus months, and we have come to the same conclusion, this is one of those industries that a lot of experiments have been tried over the years, and it is time to look at some of the things that have worked and not worked.
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    I was relaying a story to the chairman about my background of how I got into politics. My great grandfather helped create the Milk Control Board in Montana, my grandfather served on it and my dad sued them. And the end of the story was as Lieutenant Governor, Governor Mark Roscoe and I, eliminated them. It took four generations to realize that it was a mistake to begin with. I hope I am a quicker study than you, Mr. Stenholm, and it doesn't take me 24 1/2 years.
    I would like to review a couple of policies within the milk industry that have occurred over the years that are still under my saddle a bit. Let me use the dairy buyout as an example. I just happened to be in the cattle business at the time, and a lot of my friends went out of business. We are in the cattle business as a result. Dr. Collins, I would like to know, in your opinion, did the dairy buyout work? Did it accomplish the goals that it was intended, and the disadvantage that you are at, is there is going to be a presentation I understand from the testimony later on, to once again suggest perhaps another buyout. Let us forget for a minute who is going to pay for it. And going back to Mr. Stenholm's comments about unintended consequences. That was one of them, did it work, and does the administration support doing this again?
    Mr. COLLINS. Well some aspects of it worked, and some didn't. What worked is that it did reduce milk production for a number of years, below what it probably otherwise would have been. Where it was problematic was that it didn't deal very effectively, with all of the beef that was produced from all of the slaughtered dairy cows, so it had a consequence for cattle markets, which you are referring to. Nor, was it a permanent way to balance supply and demand in milk markets. It was an attempt to avoid further reductions in the support price. The support price reductions would have been a more permanent approach to balancing supply and demand. But by doing a whole herd buyout, or termination program, ultimately over time, with prices being boosted by the reduction in production, you get more capital coming in to milk production. Either the producers that return 5 years later, or those still in the industry, expand. So it was a temporary fix, not a permanent fix, and it did have market repercussions for beef.
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    Mr. REHBERG. So then the follow-up question is, is this the time for another temporary fix, or is that one of those ideas that has come and gone, and ought to be left on the table?
    Mr. COLLINS. Well I am speaking from an economic point of view, I am not a fan of temporary fixes. We have had on the crop side, 70 years of those things with supply control and diversion programs, and we finally shut those down with the 1996 farm bill. Now I think those things were mandates. They were attempts to maintain a certain Government support structure with temporary fixes, to relieve temporary imbalances.
    Mr. REHBERG. One of the reasons why dad sued the Milk Control Board is he said he could produce a better quality product, at a cheaper price than they were allowing him to charge, and he didn't have the capital necessary to put together to compete with the big guys and couldn't stay small, so he was stuck in the middle of it, pretty well put him out of business.
    One of the things we do in agriculture is continually try and find ways to create cooperatives, and have those cooperatives work together. Do you think the Federation's Cooperative working together can work, and in the long-term is it any more legal than any other opportunity to create strength in the marketplace?
    Mr. COLLINS. Oh you would really like me to answer that. I think that you know, if they get a high enough participation, they could have a voluntary program that producers could pay into, and they could undertake some of the export and domestic supply control programs that they have envisioned. Again, I think those things are temporary, and if there is a fundamental imbalance because productivity in dairying is increasing faster than the growth in use, then over time, milk prices adjusted for inflation are going to continue to decline, and this is not going to solve the long-term problem. On the other hand, if people think that markets are going to be different in the future and there is no need to wash people out of dairying now who might otherwise be able to prosper in years to come, then you undertake these short-term temporary measures. I think the history in all of our agriculture commodity markets has been pretty generally that the long-term trend has been declining real prices, high productivity growth and adjustment over time in our support structure to bring the industry more in line with the market.
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    Mr. REHBERG. Thank you, Mr. Chairman.
    Mr. GUTKNECHT. The gentleman's time has expired. The gentleman from Minnesota, Mr. Peterson.
    Mr. PETERSON. Thank you, Mr. Chairman, and thanks for your leadership. I hope that you and the ranking member, Mr. Dooley, and this committee can fix this problem. I served as ranking member for 8 years, and I don't know if we did much good, it probably got worse, it seems like. But we wish you well, and I think it is a good thing to have this hearing.
    My first question is, well I think you all kind of testified that the MPC is a problem, but it is not a significant impact on the price. They are working on this Free Trade Agreement with Australia, and it sounds like if they get it done, it will go to New Zealand as well. What impact would be on the industry if we ended up with a Free Trade Agreement with Australia and New Zealand with no duties, and no restrictions on imports of any kind of milk products? Have you thought about that? Anyone of you.
    Mr. BROWN. Well I think looking at Free Trade with Australia, and potentially New Zealand, we definitely run into a situation where we will talk about additional dairy products that are going to come into the U.S., and in some cases some of those products we are going to have to worry about the Price Support Program, and what levels we have set at because we may see product that will displace some commercial production that we have occurring here. So that is one thing that we will have to worry about. I do think that by and large, as we look at where world dairy prices are today, relative to U.S. prices, in many cases we are going to talk about additional products that will come in. The Australians, New Zealand would rather sell into some higher priced U.S. markets, than some of the world alternatives that they normally have. So I think in that case as well, we will see other markets that potentially will lower U.S. domestic products, product pricing that we see occurring.
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    Mr. PETERSON. Has anybody done any studies as to how much impact this might have, has there been any kind of economic?
    Mr. COLLINS. I have not done one, but I would agree with Dr. Brown, the degree of disruption, can be measured by the price gap between our domestic prices and the world price. And if you look at the last few years, our butter prices have been twice the world price, and our powder and cheese prices have been 40 to 50 percent higher than the world price. And so that would be like a magnet to bring in other products.
    Mr. PETERSON. Are any of you going to study this and give us an analysis of what might happen, because this might actually happen, and we may not be confronted with?
    Mr. COLLINS. The Department of Agriculture is doing a study of a potential Australian-U.S. Free Trade Agreement, yes.
    Mr. PETERSON. OK. The other thing I have been looking at these production. And Minnesota has been going down more than just about any other place, and Michigan has been going up, and so I asked Representative Smith why that was, and one of the anecdotal things he said was that they had Dutch farmers, and Canadian farmers selling their quota and moving into Michigan. Now in Minnesota, that is illegal. I think it is illegal, am I right Commissioner? They tried to change it in the legislature, but I don't think they did. But my question is has anybody looked at this, how many people are actually doing this, selling quota in the Netherlands, and in Canada and moving into the United States? Is it just a few producers, or is this kind of a big deal that is going on? Does anybody know?
    Mr. COLLINS. I have no data on that, I haven't a clue.
    Mr. CROPP. I don't either, I would say though, it is a relatively small number, there has been some of that, there has also been people from Holland. Some of them were coming here. In Minnesota you don't allow that, and I realize kind of change the law, because maybe you need some of that.
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    Mr. PETERSON. Right.
    Mr. CROPP. And steal your dairy industry, but that would be a small part of it. I think the difference is, is basically Michigan, even eastern Wisconsin, has been more progressive and modernized in their dairy industry, lower their cost production, other areas a lot of smaller farms, old facilities and haven't made that change. And we have got a lot of exiting, and not the new investment coming in and there is a number of reasons for that. But we need to look at that as a new investment.
    Mr. PETERSON. Is there anyway to find out how much of this is going on? Mr. Collins, is there anyway that you can track this to let us know how many people are coming in from the European Union or from Canada that is selling their quota and using that? As I understand it a 50 cow dairy in Canada is worth about 2 million bucks.
    Mr. COLLINS. We have immense data bases at USDA, but I can't get an answer to the question of how many dairy operations participate in the MILC Program, let alone find out how many people are coming in from foreign countries.
    Mr. REHBERG. Well maybe the Homeland Security can help us with that. That is if the gentleman would yield, Green Peace in Michigan keeps track of them very well.
    Mr. PETERSON. Well maybe you can give me a report then. Thank you, Mr. Chairman, I appreciate again your leadership.
    Mr. GUTKNECHT. The gentleman yields back the balance of his time. The gentleman from South Dakota, Mr. Janklow.
    Mr. JANKLOW. Thank you very much. I believe in Europe and some of the countries like Holland, some will carry a $25,000 certificate don't they? I mean the value of the certificate is worth about $25,000, isn't it, Mr. Collins?
    Mr. COLLINS. I don't know what it is valued, but normally in countries that have quota production program, the quota takes on a value, and in Europe they do have a quota program.
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    Mr. JANKLOW. I think they are worth about $25,000, and you can sell them for that and come over to this country and start a large scale operation for $4,000 to $5,000 per cow. And so they are worth about 5 to 1 in terms of cows, for the Europeans to sell those certificates, at least that is the familiarity I have with those programs. I am a little bit struck by some of the statistics, in the testimony. It appears that the larger operations, have had a substantial increase, and the herds above 500 have increased substantially over the last several years. But it also indicates that the amount of productivity that they have, has increased far greater than the smaller herds in the country. I am trying to grab the testimony from one of you gentleman that has that laid out. But what I was wondering was, what is it about the smaller herds that makes them less productive per cow? It is on page 3 of Mr. Collins' testimony.
    Mr. COLLINS. As a general reaction to that, I would only say that that probably focuses on the knowledge, skills and abilities of the farm manager. And sometimes those who have high skill, high knowledge, high abilities and are aggressive, want to get larger. Those that are smaller sometimes have less ability to manage their animals.
    Mr. JANKLOW. Well looking at the testimony and listening to the testimony of all three of you gentlemen, and reading your testimony and being aware just generally, of what is going on in the marketplace. It appears that the output per cow has gone up about 2 percent over the last few years. The number of cows have increased, the amount we are paying out in total amount for support of our programs has increased substantially. The price of milk has gone down substantially. Can any of you tell me what is it about this that isn't a typical marketplace problem, where over supply is driving down the price, especially in the face of the international markets?
    Mr. COLLINS. It is a typical supply and demand problem.
    Mr. JANKLOW. Is there anything we can do to fix it other than write bigger checks, which would raise the number of livestock? I do believe when they had the Dairy Buyout Program years ago, in addition to dumping meat into the beef market, which created a distortion, it also made some people very wealthy, buying cows and leasing them to dairy farmers.
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    Mr. COLLINS. All right, if your question is, is there anything we can do to fix it, what we described was a normal supply and demand problem. And you are asking, how do we fix a normal supply and demand problem?
    Mr. JANKLOW. You get rid of the supply or increase the demand.
    Mr. COLLINS. Well you intervene and you prevent a normal market adjustment from taking place. And I mean, that is what we typically do. Whether that is a prudent thing to do or not is what we have a continual debate about.
    Mr. JANKLOW. Well let me ask you a question out of ignorance, if I can, sir.
    Mr. COLLINS. Sure.
    Mr. JANKLOW. If we have a 2 percent surplus that we are just banking away, putting away. Why don't we just give it away to hungry people in Africa, just give it to them, and pay for the shipping, and let them worry about distributing it and give them 3 percent, not 2. Wouldn't that raise our price substantially, and save our Government a couple of billion bucks?
    Mr. COLLINS. We do try and give away all that we can give away. As we noted earlier, we are now sitting on 1.3 billion pounds of nonfat dry milk. We would love to give that away. However, there are limitations on what is considered bona fide humanitarian assistance. And so in a good year, we can legitimately give away maybe 80, 90, 100, 120,000 tons of nonfat dry milk, which only makes a small dent in our inventory. So there are limitations without creating disruption for the market.
    Mr. JANKLOW. What are the limitations?
    Mr. COLLINS. We have international obligations to make our humanitarian assistance legitimate. If it is not legitimate, then it is an export subsidy, and it contravenes our WTO export subsidy obligations.
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    Mr. JANKLOW. Are we going to have another round, Mr. Chairman?
    Mr. GUTKNECHT. I don't think we are going to have time. We have three panels. There are three or four questions that I want to ask this panel myself. And so I would ask if you would be willing to respond to some written questions, not only from the Chair, but from other members of the committee. And they are all nodding affirmatively, for the record. So next we will go to the gentleman from California, Mr. Cardoza.
    Mr. CARDOZA. Thank you, Mr. Chairman. Mr. Collins, I am interested in what percentage of U.S. consumption do imports constitute?
    Mr. COLLINS. A tiny amount, 1 to 2 percent.
    Mr. CARDOZA. I have heard numbers as close as 10 percent.
    Mr. COLLINS. I don't—that seems awfully high to me. I guess it depends on how you're measuring it, whether it is milk fat or solids.
    Mr. CROPP. I think cheese is 6, 7 percent or something like that on the cheese part, but——
    Mr. COLLINS. Well then I stand corrected, it is higher than I recollected.
    Mr. CARDOZA. Because I have been told and I need to find out this information, it is important to me. I have been told that if there were no imports coming into this country, that domestic supply would be less than the domestic demand.
    Mr. COLLINS. I think they would be in pretty close balance, because we also export as well. Now if we are not having any imports, would we continue with our exports, we might not.
    Mr. CARDOZA. I am not the expert, sir.
    Mr. COLLINS. I don't know.
    Mr. CROPP. Gentlemen, if you put out numbers on milk equivalent basis, it shows that we have a shortage of milk. Well that is an accounting type of thing. If you eat a pound of butter weighing 2 pounds of milk, but really didn't because we are buying a lot of powder. I guess the point I make with the support program we have, that markets are going to clear. And right now, productions look greater than consumption, so prices are depressed. In 2001 we had reversed, prices were record high, it is very sensitive to small changes. Cows are milked everyday, and that milk has got to move through the system, so markets will clear, and so it is going to balance out. So if we reduced imports, yes prices improve, production will respond, then we are back to the same place we are right now, so——
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    Mr. CARDOZA. Well there is contention from my part of the world, where I come from, that milk protein concentrates and other imbalances have been caused by getting around trade tariff issues and some other things, and so when you talk about small shifts causing big problems, I am concerned about that.
    Mr. COLLINS. But let me go back and just make sure I have the record correct. I said imports were small and said I stood corrected. I go back to where I stood in the first place. For 2002 to 2003, imports were 5.1 billion pounds, our total production is 170 billion pounds. Imports are small. But it is true, as Mr. Cropp said, that small changes on the margin, when you have very inelastic demand, very inelastic supply, that is they don't respond much to price changes, can cause very big shocks. And that is the allegation, that imports, particularly the protein concentrate imports, have created on the margin, a reduction in price. But we have addressed that earlier in this testimony, and I think it is Mr. Cropp's conclusion, and I share that, that the effect of those milk protein concentrates and caseinates has had a fairly minimal effect on price, in the current environment we are in.
    Mr. CARDOZA. Sir, have you looked at the effect of retail market consolidation on the pricing mechanisms? Recently surveys show that even though we have historically low prices to producers, if you go to the grocery stores, oftentimes you find that we have fairly high prices, in fact, one recent survey showed that costs go in my area, it was $2.09 a gallon, but yet, many of the retail grocery chains, were in the $3.50 range. And so we don't see the prices at the store level following the wholesale prices.
    Mr. COLLINS. I think that is true in many instances. It is symptomatic of most agricultural commodity markets, there are substantial lags sometimes between the farm level prices and the retail prices for lots, and lots of reasons. Contractual arrangements, desires by retailers to hold their prices steady, also we have measurement problems and whether we can actually measure the amount of product that is moving at the various prices, susch as a loss leader.
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    Mr. CARDOZA. Thank you, sir. I have one further question, I would like to get in before my time is up. And that is, with regard to Iraq, would that be a legitimate place for us to send our powder supply, countries like Iraq, Afghanistan, where we have people who are starving?
    Mr. COLLINS. I think that is a legitimate place, and we have said that we would make available all of the nonfat dry milk that Iraq would be willing to take.
    Mr. CARDOZA. Thank you, sir.
    Mr. GUTKNECHT. With apologies to the gentleman from California, the staff does a wonderful job, and I just got out of order. The author of the Nunes Act, to Mr. Nunes.
    Mr. NUNES. Thank you, Mr. Chairman. I will keep my question real simple for the entire panel, because we only have 5 minutes. So I would like for you all to comment on this new proposed herd buyout that the producers are talking about enacting themselves, without Federal Government support, and what that might possibly do to milk prices short-term, long-term. Basically, I would just like to get your comments and reactions to the program. Maybe we will start with on my left, Dr. Collins.
    Mr. COLLINS. Well I don't exactly know what they are going to do when they get this program up and running. But I do think that if they are successful, and they can subsidize some exports, and they can divert some production, and maybe kill a few herds, they can raise the price of milk. And it would be a short to medium term effect. How much—National Milk has done some estimates, and I have no particular reason at this point, to quibble with their estimates, not really understanding how this program is going to operate.
    Mr. CROPP. Well say, commend the co-op is trying to do something voluntarily, I think they want to get 80 percent of the production by the co-ops participate. That of course, depends upon the producers participation of those co-ops. But anything that reduces the milk supply, will have an impact. And the more the participation, the greater the impact. So take cows out of production, it has got export subsidy, it would have an impact. Concern of a free writer problem, those type of things, in the long run it is not a permanent fix, but short run we have go to reduce this production somewhat, and it would have an impact. The greater the participation, the greater the impact.
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    Mr. BROWN. We will need to know the exact parameters of whatever program they put in place to really do a very good job of estimating the impacts on the industry. But as the other witnesses have suggested, I think if they are successful in getting rid of cows and exporting some product, there is no question that prices will rise in the short-term. I think we need to recognize that longer term, markets will adjust to now, what has been this temporary policy that we have in place. And once we get the increase in prices, we will have other producers that will respond with additional supplies of milk. On the longer term, impact of a program like this probably sends us back to where we would have been in absence of it. So there is very different short and long run impacts of these kinds of programs.
    Mr. NUNES. Are you all familiar with the California solids standards, in the State order? I would like to get your opinion on what would happen if those standards were made Federal standards? We will start on my right this time, how is that?
    Mr. BROWN. Good, I get to be the first one this time. I do think if we were to adopt California's standards across the country, we are talking about being able to use some additional solids that might probably be ending up in powder support right now. Whether or not we can talk about moving prices up significantly, again, when we talk about the fact that we have 1.3 billion pounds of nonfat dry in CCC inventory right now. That is a lot of product that we have to worry about getting rid of before we see prices probably moving up significantly. Perhaps the Secretary wouldn't release powder immediately, once we started climbing significantly above support, but at some point in time, that product has to be dealt with in some fashion. And so that may put some limit at least on the short-term of what kind of price increase we could get.
    Mr. CROPP. A quick comment. Surely you would use up more nonfat dry milk. There is no clear evidence that it would improve the consumption of fluid milk. If you look at trends in California, I don't think it is any better than the National average, so there are concerns there. I would also raise the issue if you raise that price of that milk protein, what does that do to attract the imports MPC, and I mean, is that an area we should concentrate on? So I think there are some real questions of long-term depth benefit to the whole industry by doing so.
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    Mr. COLLINS. I would simply agree with my two predecessors. I don't think I have much more to add to that. We have done a study on this, which I can make available to you, and the farm bill does mandate that we do another study on milk standards, which we are doing right now. But I would generally agree with the statements made.
    Mr. NUNES. I am not familiar with the science on, and I know there is some, the USDA has been conducting some studies or funding some studies in regard to turning milk powder into milk protein concentrate. Do any of you have a background on that process that you could comment on?
    Mr. COLLINS. I do not, not scientifically. From talking with people in the industry, it doesn't seem like a prudent way to go. You would think you would go from fluid milk to milk protein concentrates, not from nonfat dry milk, to milk protein concentrates. We did look at one point, about the prospect of making some of our nonfat dry milk available for those such things. We do have a program where we sell nonfat dry milk for casein production. And I believe that has been a mandate since 1985, that we are supposed to sell a million and a half pounds a year. And most years we have sold none, because nobody wanted any to make casein. We actually sold, I think a million and a half, or 2 million pounds this past year for that purpose. So there is a tiny amount of that going on, but it doesn't seem like the economic way to make protein concentrates. It seems like the most economically efficient way, would be to go from the milk, to the protein concentrates.
    Mr. NUNES. Thank you. Thank you, Mr. Chairman.
    Mr. GUTKNECHT. The gentleman's time has expired. The gentleman from Pennsylvania, Mr. Holden.
    Mr. HOLDEN. Thank you, Mr. Chairman. I have no questions for this panel, but I have an opening statement I would like to submit for the record. Thank you.
    [The prepared statement follows:]
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    I would like to thank Mr. Gutneckt for holding this hearing today. As a representative from a leading dairy State, I have heard from many in the industry about the current crisis. Hopefully, after today, we will better understand the situation and can work to prevent a further decline in prices.
    The structure of dairy farms has taken a dramatic shift over the past decade. We are witnessing fewer, larger dairy operations in the West, a decline in the South, and stagnation in the Northeast. My biggest concern and hurdle has been how to stabilize and keep small dairy operations in business.
    Prices took a dive at the end of 2001 and have never recovered. During consideration of the farm bill conference we came to an agreement to include a counter—cyclical milk program targeted to small operations—the intent and objective was to come to the aid of small producers and help them continue. I think many producers are still in business today because of this safety net.
    The nature of MILC helps farmers during times of low prices—unfortunately that's all we have witnessed. As stated before, the program has been working for a number of small dairy farmers; however, some producers are frustrated by limitations and misinterpretations of the program. I am deeply concerned about some of the guidelines established by USDA regarding the definitions and also concerned that the distribution of payments are not equitable across the Nation. Hopefully, the economists can help us understand how the program is progressing, especially due to the unexpected cost.
    Since implementation, payments have gone out every month. In April the payment was $1.82 a hundredweight, March was $1.74 a hundredweight—at these levels USDA is spending about $100 million per month! This is a lot more then we ever expected and the program is supposed to be $2 billion for 3 years!
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    The questions of when will prices turn around and what or should we do for the industry are important now more than ever, but in order to answer those questions we all need to keep an open mind and explore all possibilities.
    I understand National Milk has been working on a voluntary proposal and hopefully we can hear a little more about what they are doing as well as others.
    Overall and as a nation, we are experiencing economic difficulties and financial hardships across the board. Consumer confidence is down and growth has been extremely slow. We need to help increase a demand that's just not there and it's going to take all of us working together to develop an effective solution.
    I look forward to hearing from both panels and hope we can shed some light on the current situation.

    Mr. GUTKNECHT. The gentleman from Iowa, Mr. King.
    Mr. KING. Thank you, Mr. Chairman. I think in lieu of my questions, I would ask unanimous consent to yield to Mr. Janklow, so he could complete his line of questioning.
    Mr. GUTKNECHT. Without objection. The gentleman from South Dakota is recognized for 5 minutes.
    Mr. JANKLOW. Thank you. And I will just use a couple of seconds and yield the time back. Let me ask you if I can again, Mr. Collins. I will ask in a different way. I don't understand the limitations on charity in the foreign markets. I realize that is not an answer on anything, but I am puzzled when you say we are limited. Is it by the amount, by transportation facilities, distribution facilities? It clearly can't be the hunger of human beings in places like Africa?
    Mr. COLLINS. It is not. And maybe I didn't give the best answer possible on that. There is no limitation on legitimate humanitarian assistance. The only area we get into, and it is not a problem that we have, is a subsidy problem that some exporting countries have, and we watch other exporting countries as well. The problem you get into is are exporters going beyond legitimate humanitarian assistance, using the name humanitarian assistance, as an outlet for their surplus products to essentially benefit their domestic producers. And in so doing, they can displace legitimate commercial sales of competing export countries. So that is the only constraint we have got.
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    Mr. JANKLOW. I understand, but when you look in places like Somalia or like Saab or like Botswana, I mean the list is endless.
    Mr. COLLINS. Right. For some of these, I think there are opportunities there. We try to avail ourselves to those opportunities. We will probably do so as we acquire butter and cheese now this year. We certainly have been doing it through our nonfat dry milk distribution programs over the last couple of years. We have found some countries have preferred not to take nonfat dry milk, they have preferred whole milk powder which they can get from other sources. But our Foreign Agricultural Service has had a lot of pressure on them, put on by the Secretary, to try and use every avenue to dispose of our surplus nonfat dry milk.
    Mr. JANKLOW. Thank you very much. I yield back the time. Thank you, Mr. King.
    Mr. GUTKNECHT. Mr. King.
    Mr. KING. Thank you, Mr. Chairman. I just have once conceptual question here that is rolling around in my mind as I listen to this testimony. And maybe this isn't the panel that has the expertise, but it has come to me that there has been through embryonic transplant or transfer, a significant improvement in the amount of butter fat that has been able to yield on a per cow basis. And it has been a—it is an opportunity for the ice cream industry certainly, and if that is taken to its logical extension to where we would improve that percentage, and I think it is incrementally by 1 or 2 percent. How might that echo across the industry, how could that effect our markets in the entirety of the milk production?
    Mr. CROPP. Well if you are talking about the composition of milk, actually the composition hasn't changed that drastically over the years. It stayed pretty constant, butterfat 3.6, 3.7, or crew protein about 3.1. The increase has been in pounds, simply because cows are producing more hundredweights of milk. And there is some geographical difference there, there is more in for certain areas going to the colored pries, like Jersey. Increased composition because the milk goes in a manufactured products. That is where the growth has been, manufacturing. And the higher the composition, the greater yield, per hundredweight of milk. But percentage wise, it hasn't changed a great deal.
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    Mr. KING. But if we are able to increase that percentage, say by 1 percent or 2 percent, go up to say 5 for example, how might that change the—if the composition changes, and it is available on a broader scale, how might that change the industry in its entirety?
    Mr. CROPP. Well it would change the efficiency of making certain products, because the yield would be higher. You just come back to the same thing again, we need so many pounds of butter, cheese, to clear the market. And if you got more per hundredweight, it would take fewer hundredweight, which means we would have to have an adjustment down through the market. But clear, it would make the industry more efficient, because that is the intent of component pricing is to have producers feed, breed, for the composition of milk that serves the market needs.
    Mr. COLLINS. The support price for butter is $1.05 a pound. The market price is roughly $1.09. It suggests to me that the market price would be $1.05 a pound. And we would be buying a lot more butter.
    Mr. KING. But then also it would boil down to is those producers who first had access to the technology then, would be like they are in any other industry on the cutting edge, they will take advantage of that, until such time as the market were to make those adjustments.
    Mr. COLLINS. Sure.
    Mr. KING. Thank you very much. Thank you, Mr. Chairman.
    Mr. GUTKNECHT. The gentleman from California.
    Mr. BACA. Thank you very much, Mr. Chairman. Dr. Brown and Dr. Cropp, you testified that milk production concentration imports have some impact on domestic milk prices. That impact is small. What do you estimate the increase in milk prices would be if order control such as those included in H.R. 1160 were adopted?
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    Mr. CROPP. Basically to stop imports, is that what you are saying then?
    Mr. BACA. Yes.
    Mr. CROPP. Well again, very little I guess. I think the price response has been predominantly domestic supply and demand. We actually on a total solids basis, exported more products than we imported. If we stop imports, it doesn't mean that we entirely would increase the consumption correspondingly domestically, because some of those products we are not necessarily producing ourselves. But I can't give you an exact dollar figure, it is about 4 percent of our production imported or something like that, but again in the short run, yeah you would get an increase, long run we will end up in the same place, as production responds, things adjust domestically. So it would be a short-term thing, and I don't think that would be realistic to even think about closing off imports, because we also want to expand exports.
    Mr. BACA. Dr. Brown, do you want to?
    Mr. BROWN. Yes, I would agree with Dr. Cropp as well, I think if we looked at closing off imports again, we do have market effects, we know that an erection of those to give you an exact change, I don't think we have done that work at this point. But it is a short run effect, and as you look at allowing markets to adjust, we will head back to a some worse place than we would have been otherwise.
    Mr. BACA. Thank you. Then as a follow-up, what do we estimate is the Federal cost for higher CCC purchase of nonfat dry milk, that was displaced from the market due to the MPCs?
    Mr. CROPP. The point I might make is that I cited in my paper, my colleague justly did some pretty extensive balances of last year, of what percent of nonfat dry milk possibly could have been displaced. And being somewhat generous an estimate, somewhere between 300 to 400 million pounds. I think if that cause is semi-right, we bought about 800 million, or a little more than 800 million pounds of nonfat dry milk. So we still would have a surplus, nonfat dry milk would still have been a substantial purchase and growing. So the Support Program isolated the impact on our milk prices what we are saying, but it did add to the cost.
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    Mr. COLLINS. I agree with that, but I would not agree with that displacement estimate. That is, I don't have my own estimate, but that study shows the displacement greater in the year 2002 than it was in 2000, when we had the all time record high imports. It is an artifact of the way the displacement estimate was made, and I think it is an over estimate. I think the effect is smaller, but surely there is some displacement, considerable displacement, by MPCs and nonfat dry milk. Because in many uses, there are substitutes. But in many users they are not substitutes. And if you didn't have the MPCs, then something else would happen. You might find those end uses looking for something to make their product out of. It might not be milk, it might be soy protein, or it might be any number of other things. So if there is not perfect substitution for every end product between nonfat dry milk and MPCs. But I do agree that the displacement is probably a couple hundred million pounds anyway.
    Mr. BACA. Well that is why we are very much concerned with the economic conditions or the damage it could have on us, as well as we look at the imports, so it could have some there.
    The next question that I have is pending the Agriculture Committee at this time, is a bill on, of course, Nunes has an H.R. 1659, which is designed to ensure that fluid milk bottlers situated in Arizona are not able to avoid—or are able to avoid price regulation by selling across State borders to California. For USDA is the Department aware of this situation that has led to the introduction of this bill? That is question No. 1, and has the Department either considered, or been asked to consider taking regulatory actions regard to this situation?
    Mr. COLLINS. The Department is aware of that bill. We have also been asked to take regulatory action, with respect to at least part of that bill, that is, limiting producer handlers, who have essentially been exempt, who are exempt, from Federal Marketing Order Regulation. We have an issue now, I think it is the Arizona, Las Vegas order to look at that question of regulating producer handlers above a certain size. Regarding regulating handlers in an order, where they don't sell into that order, that is not something we have ever done. And that is what that bill would have us do. It may be a prudent thing to do, the Department will opine on that at some point. But it would be precedential, it would be having us deviate from our long standing regulation, where we regulate a handler in an order where they have the majority of the sales of their product. Now we would be regulating someone under one order, who is competing in a different order, where the competitive conditions would be very different, than in the order in which we would be regulating them. So I think it is just something, that we have to think carefully about.
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    Mr. BACA. OK. Thank you very much, Mr. Chairman. I know that my time has expired, but I also have a opening statement that I would like to submit for the record today, as well.
    Mr. GUTKNECHT. Without objection. As I mentioned, some of us have additional questions and we would certainly like to send them to you. And we would hope that you could respond as quickly as possible. Especially, as it relates to this whole issue of milk protein concentrate, and the displacement issue, as they are really incredibly different views out there in the dairy industry, of exactly what the impact and what is happening with milk protein concentrate. We have got a third panel, where we may learn a little more about that issue. But I will dismiss you and thank you for coming for the subcommittee today, all of you. And call up the next panel of witnesses.
    We expect a series of three votes around 12:30. Which will mean if we don't finish with the second and third panels, we will have to recess the subcommittee and come back to finish that up. And we hope that most of you will be able to come back. We understand that there are an awful lot of things going on today.
    This second panel, Mr. Jerry Kozak is the president and CEO of the National Milk Producers Federation. And Mrs. Connie Tipton, is the executive vice president of the International Dairy Foods Association. And I do want to thank the IDFA, because they have provided members with a variety of the world's finest beverage in various flavors, and we are enjoying the milk today. And one of the things that I hope to do for the benefit of the members is, it has been brought to my attention, and I am keenly aware of the fact that, we here in the Capitol complex do not have enough vending machines that sell milk. And so I will be sending a letter in the next several days to the Committee on Administration, suggesting that we have more milk vending machines here in the Capitol. And I would appreciate it, if any of you would be willing to co-sign that letter. With that, Mr. Kozak, welcome to the committee and we invite your testimony.
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    Mr. KOZAK. Good morning, Chairman Gutknecht, Ranking Member Dooley, and the other members of this subcommittee. I am Jerry Kozak, the president and chief executive officer of the National Milk Producers Federation.
    Mr. Chairman, I won't sugarcoat the point that I am going to make today. The state of the U.S. dairy producer community is deplorable. A few weeks ago, the USDA announced that the April all milk price is $10.90 per hundredweight, that is the lowest level it has been since 1978.
    In the brief time you have allotted me this morning, I can't possibly go into every factor behind depression in dairy farming. My contribution here is not to take issue with USDA's explanations, but it is to take issue with the Department itself, and how it has mishandled the management of many dairy policies that are intended to help producers. The programs we have in place, many of them created by Congress are fine. But the way they have been administered lately, is anything but fine. The USDA has had many chances to be part of the solution, but for whatever reason, they remain part of the problem. These programs are tools, that if used properly, could do a great deal of good. But these tools are being used inadequately at best. Let me list five examples.
    First, the outcome of the 2002 farm bill. Our No. 1 objective was the extension of the Dairy Price Support Program. It is dairy's best safety net; no other program gives producers more bang for their buck. But USDA is not operating the Price Support Program in a way that is supportive of dairy farmers.
    The law that Congress passed stipulates that the USDA should provide a modest price floor level of $9.90 per hundredweight for producer milk prices by offering to purchase cheese, butter and skim milk powders at levels that will return $9.90 to producers. Chart No. 1 illustrates the prices for class III and IV, during the past 12 months. Clearly, the program is not living up to its obligations, particularly in class III.
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    We believe that the Department is failing in its statutory obligation to maintain purchase levels for butter powder, and especially cheese, that allow the average plant to return $9.90 milk support price to farmers. NMPF did an extensive survey within its membership, of the additional cost of selling product to the CCC. Based on that survey data, we offered the Department specific recommendations to address this problem, and have received no response.
    Compounding the problem has been the way the USDA has devastated dairy producer income, by adjusting the price support purchase ''tilt'' between butter and powder. The USDA has reduced its offering price for nonfat dry milk by 20 percent since May 2001. Rather than saving money through these reductions, the agency has created a ''lose-lose'' situation. As chart No. 2–A describes, the tilts have cost dairy farmers nearly $1.5 billion in lower prices. What's worse, we project that the tilts have a continued detrimental impact on prices in the range of $2.4 billion through the end of the year.
    But as chart No. 2–B shows, the tilts have also cost USDA an additional $56 million, in higher net expenditures. Sure, while the CCC purchases have been reduced only slightly, because the tilt raises butter's support level as it drops the powder price, USDA is now buying butter, more than 10 million pounds to date. The cost of these butter purchases, plus the higher cost of the milk payments, quickly overwhelmed the savings on nonfat dry milk purchases. And because both tilts have reduced farmer prices, the cost of the Government's MILC Program has also jumped.
    So let me be clear: USDA's mismanagement of the Price Support Program has cost taxpayers and farmers more money, than if they would have left the butter/powder purchase prices alone. Mr. Gutknecht, as a senior member of the Budget Committee, I think you should be very upset at the poor fiscal decisions that are being made at USDA.
    Second, the USDA has failed to make use of the Dairy Export Incentive Program. To date, despite low milk prices; despite other countries' free use of WTO-allowed export subsidies; despite a clear overseas demand for the U.S. butter; and despite growing inventories of Government-purchased butter; the Department has issued invitations for a mere 5,000 metric tons of this program, less than one-quarter of what is allocated. That is inexcusable.
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    Although I did hear that they did allocate 5,000 new metric tons yesterday, right before this hearing. I hope we can have hearings every week. As the Chart illustrates, we estimate that the 5,000 tons of butterfat awarded under the DEIP in March, increased wholesale butter prices by only 6 cents a pound. But to farmers, that translated into a revenue boost of $20 to $30 million because the all milk price rose about 18 cents a hundredweight.
    Third, in its administration of the Milk Income Loss Contract Program, the Department disenfranchised a large swath of medium sized producers, in the way it implemented the program. Chart No. 4 illustrates how this middle group of producers was disadvantaged by the lower overall payment rate that either small or large farmers, who received much higher payment rates.
    Fourth, the USDA responded last year to the drought affecting much of the country, in providing compensation to affected livestock producers. That is all well and good. However, the drought disproportionately affected regions with especially large farmers, who were often disqualified from assistance by the Department's decision to limit eligibility on farm size, and those hit hardest by the drought.
    The Farm Service Agency did administer a Drought Assistance Program last year that was effective. This year however, the Department chose to bypass experienced FSA staff and allow the target States, who do not have experience in such programs to write their own rules. Only after a united outcry by manufacturers of whey products, did the Department tighten the provisions.
    Fifth, the 2002 farm bill also included a provision that requires dairy exporters to sell their products in the U.S. as well as producers who pay their fare share to promote dairy consumption.
    But the USDA has failed to implement the promotion assessment, even though by my calendar, the farm bill passed 53 weeks ago today. And we understand that, that is in violation of the law, and it is also clear that the U.S. Trade Representative's office is also part of holding this up. I urge this committee to work with USTR, and USDA and other administration officials to see that the intent of what this Congress passed is not thwarted.
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    Finally, let me speak to the one legislative measure that is a top priority for NMPF. We overlooked MPC's in our last trade negotiations, but our trading partners did not. They recognized the potential and they protected their markets; but we left a loophole through which 804 million pounds of nonfat milk equivalent, of casein and MPC came last year. This compares to 556 million pounds in 1993, as chart No. 5 illustrates. Together, the economic impact of these dairy imported proteins has had an enormous impact on dairy farm revenue. We estimate $3.5 billion since 1993.
    In conclusion, I hope that your oversight of this Department, can effect some changes in the current administration of USDA's programs. Dairy farmers today are desperate. They need a friend in USDA; instead, they are losing faith in an agency that has an economic tin ear. My last chart, shows that the all milk price beginning 2001, when the current USDA team came into office. We have noted the two tilt adjustments. While I appreciate the time you have given me to speak on behalf of the dairy producer community, I think this chart speaks for itself.     Thank you.
    [The prepared statement of Jerry Kozak appears at the conclusion of the hearing.]
    Mr. GUTKNECHT. Well Mr. Kozak, we asked you not to sugarcoat it and you have not. Thank you very much.
    Mrs. Tipton.


    Ms. TIPTON. Thank you, Mr. Chairman and members of the subcommittee. I certainly appreciate the opportunity to appear today on behalf of milk, ice cream and cheese processors, manufacturers, and distributors across our Nation.
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    We certainly recognize the problems of low farm milk prices and the threat that these pose to many dairy producers. But because of this we think it is really important to focus on the dairy policies and programs, and what some of the fundamental problems are that exist as a result of those programs. And we believe it is especially important to look, not only at supply and demand, and to Government for solutions; but also, not only supply and price and Government for solutions, but also to demand and to markets.
    I think it is really stunning that is becoming apparent and widely accepted across the entire industry that the basic programs that are intended to provide orderly marketing, and to provide a safety net for our dairy producers are not working. And I would like to highlight just a few points.
    First, on Federal Milk Marketing Orders, these are not working as originally intended. And today, are at the root of many of the industry's problems. They have created regional differences, that are detrimental to producers, where fluid milk is lower than the national average, and I know you know that well, Mr. Chairman, that is the case in your district.
    They lock milk into class uses. This classified pricing structure often keeps milk going into class uses, regardless or demand would otherwise drive it. We think that deprives producers of the best prices they might otherwise get. And the Dairy Price Support Program has made these regional distortions worse. When nonfat dry milk prices were kept high, along with high market butterfat prices, that drove the base prices for Federal order pricing much higher than otherwise would have been. And if we are going to continue a Price Support Program, that purchases products in surplus of the market, then we have that managed to keep the product prices in alignment with the markets.
    The product prices in the Dairy Price Support Program had not been adjusted in a decade. And at the same time, market demand shifted greatly. The use of butterfat was much in demand through increased cheese consumption, at the same time nonfat dry milk demand had declined. And that is what really started our major buildup of nonfat dry milk.
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    We, unlike Mr. Kozak's group, applaud the Department of Agriculture for making long needed adjustments in that program to bring it into better alignment with the markets. The purchases of nonfat dry milk have also encouraged continued production of a product, that is not in market demand in lieu of other milk protein ingredients, for which demand has been growing.
    It is essential to realize that these very complex programs are interrelated, and sometimes counterproductive. For instance, the Dairy Price Support Program assures a market for nonfat dry milk. At the same time, the Federal Order Program ensures that the manufacturing costs are covered for that product. As a result, there is only incentive to keep producing this product, even though demand has decreased.
    The answer is to revamp the underlying programs, not start another new subsidy program. A critical component for healthy dairy industry is product demand, selling our products to consumers. Cheese has been the leader for over the past 20 years, with consumption growing today, to over 30 pounds on a per capita basis. Milk is doing its part to try and compete in an increasingly crowded market, and teams have been identified as the sort of battleground in the beverage market.
    Milk producers and processors on the one hand, are trying to keep that market. Other beverage manufacturers who are often much better funded, and don't have to deal with these regulatory systems, are trying to steal them away.
    Today as you mentioned, we brought some of the newer, single serve milk products in for the committee to sample and to see. Many of these are targeted at this teen market, and you can see, there are a wide variety of flavors and packaging that will appeal to kids and teens.
    But the point I want you to clearly understand is that the price regulations we are talking about here today are a burden and an impediment to milk's ability to compete as effectively with other beverages as they might. None of milk's competitors have similar price regulations on their ingredients.
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    One other issue I'd like to touch on is risk management. If you look at milk prices over the last 15 years, you can see the dramatic increase in price volatility. As a result, there is a need to provide basic market tools that allow milk buyers and sellers to manage these price swings. And a simple tool that is used by most other commodities, is forward contracting, which permits buyers and sellers to smooth out those seasonal price swings.
    We believe that the Pilot Program now in place, giving milk buyers and sellers the ability to have voluntary contracts, should be turned into permanent authority for all milk buyers and sellers.
    And in conclusion, we believe that there should be one's national safety net for dairy, that is fair across regions, and has the least market distorting effect, while providing critical assistance to producers when it is needed. We recommend that the Federal Order Classified Pricing System be revised to allow market demand to play a greater role in moving milk to its highest value use. And above all, we recommend rejecting short sighted programs, such as regional dairy compacts, that will only exacerbate regional distortions in an industry that has increasingly national markets. We must have policies that don't lose sight of demand, by only focusing on price and production. And we must have policies that allow us to grow markets, both domestically and internationally.
    We are certainly committed to working with you, Mr. Chairman, towards a policy environment that allows our industry to prosper at all levels. Thank you.
    [The prepared statement of Ms. Tipton appears at the conclusion of the hearing.]

    Mr. GUTKNECHT. Thank you, Mrs. Tipton, and thank you, Mr. Kozak. Let me go first of all, to talk about National Milk's program, because we have had some discussion here at the committee today already, about the Cooperatives Working Together Program. And I am wondering, Mr. Kozak, can you tell us a little more about the program? And then I think one of the questions we are concerned about is, how do you deal with the free riders, the folks who don't really participate, and can you tell us what level of support you have already and when you expect to roll it out? And then finally, if it is not too much to ask, just for the benefit of the rest of the committee members and others who may be paying attention to this hearing. Talk a little bit about the 18 cent per hundredweight assessment, and the response you have had to that.
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    Mr. KOZAK. Well thank you, Mr. Chairman. I'll give you a thumbnail sketch about the hundredweight program. I would be happy to do that. One of the things that I must indicate that we are in the process of finalizing the details. We are going through an extensive legal analysis and review to structure the program, in a way that minimizes any potential problems down the road. So I will be reticent on certain—answering certain questions.
    But overall, the Hundredweight Program is a multi-faceted or multi-dimensional program. It contains three basic elements, under a self-help concept. It doesn't require any Government intervention, and nor, do we want any. It is a——
    Mr. GUTKNECHT. And Mr. Kozak, on that point, can you share with the subcommittee some of the things you told me earlier about why you don't want the Federal Government involved?
    Mr. KOZAK. Well there are a couple of issues. For instance, as I mentioned, as a multi-dimensional program, we have an Export Assistance Program that we intend to manage through the Hundredweight Program. It is our contention after looking at WTO and other legality issues, that if this program is fully funded and operated only by dairy producers, we would minimize to the greatest extent any challenges down the road in terms of WTO obligations. If the Government were involved, we would have some serious difficulties. So there is a specific area of which, by a self-help program, funded by producers, we intend to manage some export assistance levels.
    Second, I am afraid that the term buyout has been used misappropriately. We are looking at a Herd Retirement Program, you will recall that in the Herd Retirement Program administered by the Government, I think there 1.6 million cows removed. We are talking about 125,000 cows, as part of a multi-dimensional program, so I don't consider it to be a major buyout.
    And the third area, is to provide some incentives to producers who wish to reduce their production. And all three of these programs are designed to work in concert. I heard some of the responses from the first panel, and I would take exception to some of the answers, because although some of these programs are not necessarily new in their concept. I think they are new in the concept, of working all combined in a program that will be administered by dairy producers. And so, at this stage, the National Milk membership has voted to endorse the program, the Board voted overwhelmingly, to ask the staff to put in place the structure, which we are doing now, to provide the proper legal structure as well.
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    They have targeted 80 percent participation in the program. And right now, I feel very confident that we will get that 80 percent participation, because within National Milk itself, we have 70 percent of the national supply. Sixty-nine percent of that has now voted on it, and we have pledges of participation from non-NMP of co-ops, as well as other producer groups, limiting it only to producer groups. And I feel very confident that by June 30, we will have signed up that 80 percent. Obviously the free rider situation, has always been one of the mitigating factors in any self-help program.
    But, Mr. Chairman, as you spend a lot of time on a lot committees, not necessarily just related to dairy, we have free riders in our society, in many of our programs. Our plea to our producers is if we are going to worry about the free riders, we are not going to put this program in effect. Our membership has stepped up to the plate, and I am really anxious to complete the participation level. And I think it will be a step in the right direction. And I hope that answers most of your questions about it.
    Mr. GUTKNECHT. We look forward to hearing more from you about this, because I used to work for the former captain of the Green Bay Packers, so we heard a lot from Vince Lombardi, or Lombardisms. And he said there are three kinds of people in this world: There are people who make it happen, there are people who watch it happen, and then there are people who ask what happened. And we are really very interested in seeing you guys make it happen.
    Mr. Dooley.
    Mr. DOOLEY. Thank you. Mr. Kozak, if I understand you correctly, you are highly critical of the administration, because they did adjust the butter/powder price tilt, in at least two separate occasions here. What would be the, if they had not adjusted those, what would be your expectation, what would have happened in terms of Government purchases?
    Mr. KOZAK. Well I think in terms of Government purchases, our information shows, that we would probably be selling about what we are selling now, because if you look at the numbers for instance, from December 2, which is right after the tilt, you would see that we were selling 21 million pounds of powder during that period. After the tilt, for a few weeks from December 9 to the 27, it did drop down. However, if you look at the rest of the numbers, including now May to May 9, we sold 23 million pounds of powder. So we don't think that we would have been selling a far more powder than we would have, and the disturbing issue here is that although the Department saved $36 million in reduced powder purchases, because of the two tilts, they spent $10 million for additional butter, and $82 million more in terms of additional milk payments.
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    So part of our concern, Mr. Dooley, is the rationale. Because if we were to run our businesses the way that was run, we would be net $56 million in the whole. So we are struggling to understand the Department's mentality. In one case they want to save money in purchases here, but at the same time now, they are spending more money here, and the amount of powder is still the same.
    Mr. DOOLEY. Just intuitively though, when you have the Government that is making massive purchases of powder to where we have 1.3 billion in storage now, and that we are in fact, seeing that sending a false signal to marketplaces, to some extent is that by doing that adjustment, it would seem to just make sense that we would be sending a more appropriate signal to the producers.
    I guess you talked a little bit about on the MILC Program, about disenfranchising a group of producers on the transition. And I think there might be some merit in your comments in terms of that transition. But when you talk about disenfranchising a group of producers, I think your National Milk Producers Federation supported the MILC Program or policy. It is disenfranchising, the vast majority of producers in my district. Because if you do the analysis, in terms of what is the net impact of a 1,000 cow dairy in my district, is that this program is actually costing them money, if you accept Dr. Cropp's figures that this is resulting in a 25 cent a hundredweight reduction. And if I do the figures as information that is provided at $1.45 in terms of the payment that is going out, on a dairy in my district of 1,000 cows, with a 21,000 pound a year production, it is costing them over $17,000 a year. And if we go to a 2,000 cow dairy herd in my district, where there is a whole lot of them, is it is costing them $70,000 a year. How are you representing the interest of the most productive dairy sector in the country, in the production side? And we are going to have Chuck Ahlem who is going to speak here afterwards, who is one of those guys. When you are advocating a policy that is resulting in my producers losing over $70,000 a year.
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    Mr. KOZAK. Well first of all, let me remind you that when National Milk testified both before the House Agriculture Committee and on the Senate Agriculture Committee, we did not offer the Milk Payment Program as one of our policies. In fact, we had advocated a class III Enforced Supplemental Program, which we think would have been far greater impact on helping the producers in your area, and some of the other areas. Unfortunately, the Congress both in this House and in the Senate didn't accept our class III Enforced Supplemental Program. Instead, there were bills introduced in the Congress, as you fully are aware, that were in relation to trying to deal with the loss of the Northeast Dairy compact. The first set of bills National Milk was against, because that was even a more terrible program. That would have disenfranchised 33 States versus 12 States. And we came out in full support against that program at National Milk. Whether we were in favor of the program or not, I contend that we would have been given the Milk Payment Program.
    Connie can also respond to it, because I don't think that I did effete in any statements were against the Milk Payment Program as well. And so it isn't just the industry that we represent.
    Mr. DOOLEY. Are you an advocate then for making major modifications in this program?
    Mr. KOZAK. Yes.
    Mr. DOOLEY. And what would those be?
    Mr. KOZAK. I think that we, first of all, we testified on that Milk Payment Program, and we said that there should be no caps on that program, that all producers should be treated equally. Obviously, that is one issue that we still maintain if we are going to have that kind of program.
    Mr. DOOLEY. Excuse me just a second. If you are advocating for no caps on the program, then Dr. Cropp's analysis, where with this limited approach would have a 25 cent a hundredweight drop in prices, is that we would see a continuing escalation in terms of the cost to taxpayers, and even a far greater price on the drop on the market price if you didn't have a cap on it. I mean his analysis that FAPRI has done on this, has indicated that if you didn't have a cap on the program, you would have a dramatic reduction in milk prices from the marketplace.
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    Mr. KOZAK. Well now we are mixing apples and oranges in a sense, because I don't think we are in agreement with Dr. Cropp's assessment. We did look at the FAPRI analysis, certainly Dr. Cattelliani just got it so I don't think we are in a position to give you a specific verbal answer today. We would be happy to supply a more detailed response.
    But when you asked about modifications, one of the modifications is still that we should be treating producers, whether regardless of the size of the farm, equally and equitably. That is the beauty of the program that we are putting together under the Hundredweight Program. If you were to take away the Milk Payment Program, which is not what I am advocating. But if you were to take it away, you would see that the returns under the Hundredweight Program a producer funded program treats all producers equally. That is one of the modifications that I do think I agree with you, has to be done. There has to be some modification to the program, so that we don't disenfranchise producers, and we don't pit small versus large.
    Mr. GUTKNECHT. The gentleman's time has expired, and I really appreciate that last comment because that is one of the problems we have had. The gentleman from Michigan, Mr. Smith.
    Mr. SMITH. Thank you, Mr. Chairman. Would you in terms of the herd buyout, would you have some kind of balance, so that the herd buyout would be somehow distributed across the country? How would you do that or would you just do it by economics, where can you get the biggest milk production?
    Mr. KOZAK. Again I would say that I would ask us to use the Herd Retirement Program, because buyout I think causes some apoplectic response from our colleagues in the Cattlemen's Association. One of the things that we are attempting to do, is to put together a program that is sensitive to the needs, not only of our producers, but other agricultural commodities such as in the beef area. We are planning to do it in a way that will be done over a 4 month period of time. As I mentioned, it limits the amount of cows that we are talking about. We have put in place some regional——
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    Mr. SMITH. I was just wondering about geographical reduction in the West, or the East, or the North or the South?
    Mr. KOZAK. OK. We put in place regional safeguards, one of the beauties of designing a program ourselves, is that we can take into account those issues that our membership is concerned about. We put in five—we have set it up in five regions, and we have made sure that no region disproportionately loses a major part of their milk supply; because there are regions who are still in milk deficit areas. So our regional safeguards ensure that no one region, will have either a reduction in milk, either through the Milk Reduction Program, or in the Herd Retirement Program, that will cause a marketplace disruption. So we have planned for that in the program.
    Mr. SMITH. It is interesting, some of the similarities over the old NFO Program. So NFO was trying to get a greater signup or dumping milk and reducing some dumping milk, and actually having a called core cow sale to remove some of those call cows into the beef industry. I don't even know if they, I mean I guess they have given up that program, right?
    Mr. KOZAK. I think they still have a purchase program for call cows, but I am happy to report that NFO was one of those organizations whose Board voted to fully support and participate in the Hundredweight Program.
    Congressman, one of the things I think that is critical for you to understand is that we are, all we are attempting to do is to balance a supply at this point with demand. And as we proceed on that particular fashion, I think it is also important to note, Mr. Collins' comments. We intend to have this as a long-term program. And so, we expect that for the long-term, we will put in place some other modified programs that will help us do that.
    Mr. SMITH. Well I am a co-sponsor of Mr. Obey's bill on limiting imports of protein solids, and because I just couldn't think of any other way that we are going to accommodate it. But I want to ask you a question, Ms. Tipton, because it has always been sort of my presumption, when I was very young, we started the marketing orders, because what we found out was that the buyers of milk, would sign a contract with the farmer, for whatever, $5 a hundred. And if more milk started coming in than they wanted, they said well we can't afford to pay you $5 a hundred anymore, because we are getting too much milk. The farmer says but I got a contract, and the processor says well tough luck, sue us. Either go along with $4.80, or we are not going to pick up your milk tomorrow. So I see, I still see the potential of a little conflict of the processors and the retailers, trying to buy dairy products at the lowest possible price, and sell them at the highest possible price, as long as the lowest possible price still accommodates their need of supply.
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    Ms. TIPTON. Congressman Smith, you started out by mentioning the Federal Order System and that was put in place back in the Depression. I don't think you were born yet.
    Mr. SMITH. Oh yes, I was. You tried to help.
    Ms. TIPTON. But it was put in place for orderly marketing, I would submit that the conditions at that time however, were dramatically different and at that time as you rightfully note, the producers were a lot on their own.
    Mr. SMITH. 1932 I thought, so I was very young at 1932.
    Ms. TIPTON. But producers were very much sort of free agents at that time, and there weren't as many cooperatives, and the producers did not have the advantage of the members of Mr. Kozak's group, to bargain on their behalf as their own groups. Today that is quite different. Most producers are members of the co-ops, that Mr. Kozak represents. And they have quite a bit of bargaining power. I think there was a statement earlier, that the top three co-ops represent over 40 percent of the milk supply in the United States. In fact, one of those co-ops represents 25 percent. So today, is a very different dynamic, I would submit that the farmers do have considerable bargaining power through their co-ops. Milk processors on the other hand, I don't represent retailers, so I won't speak to what their position is in the market, but there obviously has been a lot of consolidation throughout the industry, at all of those levels. The retail level, the processing level, the farm level. And this is to create efficiencies, this is to do a better job of marketing our products at all of those levels. And I think we are seeing that. I think everybody is concerned about doing the best job of marketing the products, and in the end, selling the best we can.
    Mr. GUTKNECHT. The gentleman's time has expired. The gentleman from California, Mr. Cardoza.
    Mr. CARDOZA. Thank you, Mr. Chairman. I have two quick questions, Mr. Kozak. Sir, what do you believe will happen when FDA approves milk protein concentrate for block cheese? Currently it is my understanding that the approval has moved from the B list, to the A list on their priority. And couldn't this possibly devastate the domestic cheese production, if something is not done to limit either MPC imports, or increase in domestic production?
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    Mr. KOZAK. Well one of the, I think one of the issues that is often overlooked Congressman, is that we are producing milk protein concentrate in this country.
     I have heard a number of statements today, that sort of indicates that we are not. We have a fairly active and aggressive farm level program in many farms, to produce liquid concentrated ultra-filtered milk protein concentrate. And as Connie would probably tell you, I was partly responsible for helping to move that along when I represented the processing sector. So we are in full agreement, that using liquid ultra-filtered milk protein concentrate in cheese products, under the petition that was filed by the American Dairy Products Institute, we find would be acceptable.
     Where we have a great deal of concern, obviously is the use of milk protein concentrates in dry form, for a number of reasons. So we are concerned how the Department will publish the regulations. Having worked at FDA a part of my career, I would caution you, that when something moves from the B list to the A list, that doesn't necessarily mean the A list moves at anything other than turtle speed at times. So we are somewhat waiting to see what they are doing in that respect.
    Mr. CARDOZA. Do you support Mr. Obey's bill on milk protein concentrate, limitation of imports?
    Mr. KOZAK. Oh absolutely, we are in full agreement with both the Congressman Obey's bill and Congressman Sherwood's bill both the cosponsors, and also in the Senate side. I think as to date, we have 122 sponsors for that bill in the House, and 25 sponsors on the Senate side. I think that obviously, that Congress is interested in that, in passing that legislation.
    Mr. CARDOZA. Do you share Ms. Tipton's request for expansion of forward contracting?
    Mr. KOZAK. No, and one of the things that we are disappointed about is the lack of review of this pilot program. We did our review from the USDA, and here is a couple of issues that we are concerned about. When you look at the simple average, that was contracted for milk, it was $14.02 per hundredweight. The same milk would have been paid $14.51, without contracting. Calculating the data, we showed an average weighted loss over that study period, was $1.23. So we have serious concerns as to whether or not this program benefited producers.
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    But here is the more serious issue, that we are concerned about, and that is this. USDA in their own reports said, that 7 percent of the contracting producers, felt obliged to sign a forward contract, or lose their outlet for milk. I think that is a serious issue, that requires this committee to take a much more full extensive review. Because if producers feel coerced to sign a contract, or list they would lose their ability to outlet milk, I think that will be the death of forward contracting, and I think it needs much more further review.
    Mr. CARDOZA. Thank you.
    Mr. GUTKNECHT. The gentleman from California, Mr. Nunes.
    Mr. NUNES. Thank you, Mr. Chairman. Ms. Tipton, you have expressed your frustration with the Federal Milk Marketing System and the orders, and I think that all of us share that frustration; because it is very difficult at times to make changes to the system. And as the last farm bill was quite contentious, where now we have a program that is supporting smaller dairy farms, which Mr. Dooley has quite appropriately pointed out; and thus, costing our farmers in California money.
    I am a little though confused as to why, your groups oppose the system, when you are now buying milk at 25 year lows, and then in the grocery store, I would have to say that we are at all time highs. And I just wonder how the relationship works there between the dairy farmer, your processors, and then the retailers?
    Ms. TIPTON. I would be happy to answer that. Certainly our members are benefited by low milk prices in the short-term, Mr. Nunes. But they recognize that the long-term interest is to have a very adequate and reliable milk supply, and you can only have that, if you have a system that helps dairy producers stay in business and be efficient and make a decent living. So we want programs that work. If we are going to have Federal Programs and regulations, then they need to work, and they need to work for the farm sector, and they need to work for producers of products, so that we can build demand for those products. What we have now, I think you have heard both Mr. Kozak, and me agree, that what we have now is not working. We however, would not propose to put more programs in place, we would like to fix these underlying programs. We think there are things that can be done to move in the right direction, so that we let markets adjust.
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    Now with respect to the retailers, as I mentioned a minute ago, we do not represent retailers. But there has been a dramatic change, in the market with respect to the retail food industry, and with respect to virtually every other industry in the United States. There are fewer retailers, and they are larger. They have different strategies, many of them are publicly owned. I could not tell you what their strategies are, but I do know, that there are a lot of variety of outlets that consumers have the opportunity to go to. They can go to a Cosco, if they want a low priced product, or they can go somewhere nearer to their house, that may have a higher price, but it is more convenient. So product choices, are something that are positive for consumers. I don't want to defend anybody's particular retail prices, because we don't have anything to do with that. But I would just say, that the dynamics of the marketplace are important, and it is important that they can work, and it is important that we do not have programs that stand in the way of that.
    Mr. NUNES. Right, I mean I understand what you are saying, but as you know, milk is relatively an elastic product. What changes, would you want to make to the Federal order, or the Federal orders?
    Ms. TIPTON. Well for one thing, we think that the multiple classes that are in the Federal Order System. There are four classes of milk. We think that this is locking milk into those class uses. Each of those classes is set with a manufacturing allowance for production of whatever that product is. As you know, there are higher differentials, for class I, for milk going into class I products. The whole system is so structured now, and so detailed, that you have got most of the milk, except for California's milk, moving through these classes, and getting locked into those classes. It no longer has the ability to be bid up to its higher value use, because you have got these manufacturing allowances built in. It is a very complex system, but it is not working to let milk move to where it would be for its highest value use. That I think, is leaving money on the table for producers. And it is also distorting markets. You have got a lot of regional distortions. The chairman's district happens to be in an area where the class I utilization is relatively low, it is about 20 percent. That means that they are getting fewer dollars for their farmers, because of the structure of this system. This system is very discriminatory, and I think it needs to be looked at and the class prices are really the root of that.
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    Mr. NUNES. I am glad to see that you want dairy farmers to get more money.
    Ms. TIPTON. I think the market could return a lot better price to dairy farmers, than what we are getting out of these programs today.
    Mr. NUNES. Mr. Kozak, could you comment?
    Mr. KOZAK. Yes, I think I would like to comment on that. First of all, let me be clear. My testimony today did not advocate any new programs. So when it said we need more programs that, we did not advocate new programs. What we are saying is the programs are not being administered properly. And if they were administered properly we wouldn't have the kind of prices that we have now.
    Second, we have done some analysis of whether or not we should eliminate classified pricing. And our analysis is pretty clear. And we would be happy to give you in written form further details.
    But if we were to eliminate the present classified system, producers stand to lose more money. And that is one of the reasons why we don't share that view. I do think that we are in agreement in one case, and that is about the retail level. If you look at the farmers share of the retail price of dairy products, it is now 28 percent. Which means that somebody else is getting a great deal more money in the chain. And as Connie mentions, they don't represent retailers. We don't represent retailers, but one of the reasons why you have seen consolidation for instance, in the cooperative area, is that we can become larger, so that we have a greater say as we negotiate our contracts. It is not working very well, because the farm to retail spread is continuing to grow, and I think that is another area, that this committee needs to have review and analysis on. I would encourage you to see what is happening there, and why farmers are only getting 28 percent.
    Mr. NUNES. Thank you. Thank you, Mr. Chairman.
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    Mr. GUTKNECHT. The gentleman's time has expired. Governor Janklow do you have questions?
    Mr. JANKLOW. Very briefly.
    Mr. GUTKNECHT. And Mr. King, do you have questions? All right, then here is what I am going to say we should do. We will take 5 minutes of questions here, and then we will dismiss this panel. We have got a series of three votes, we will have to recess for a half an hour. But we will let Governor Janklow go ahead, and then we will dismiss the panel. Thank you.
    Mr. JANKLOW. I will be extremely brief. Is there anything with respect to the current operation of the dairy programs, you two agree on?
    Ms. TIPTON. They don't work right.
    Mr. JANKLOW. Well is there anything that you two agree?
    Mr. KOZAK. They are not administered properly. That may be as close as you come.
    Mr. JANKLOW. So you don't even agree on that. Let me ask you if I can, Ms. Tipton. Is there any program that you folks would support, your group supports, other than the market system?
    Ms. TIPTON. Sure, we and we are not advocating getting rid of the Federal Order Program either. We would like to see the classified pricing system looked at, and perhaps collapse a kind of a safety net we have. We have talked about we have both the Dairy Price Support Program, and this Milk Income Loss Contract right now. And that doesn't seem to be working very well, we seem to be sort of counterproductive here and not letting the market signals get to the producers. So I think we need to revisit what is the safety net, and we need to have a safety net that works across all regions of the country. Yes, we can be supportive of those kinds of things, but we want to let the markets have the say in what is happening with milk prices.
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    Mr. JANKLOW. Mr. Kozak, in Mr. Collins' testimony, unfortunately, he testified before you did. His written testimony has that it that USDA has taken action involving the imports of American cheese. Do you agree with what they have done, and just say they have not gone far enough? I am going to run you through all five of these real fast.
    Mr. KOZAK. OK. Well the first thing is, it took them 3 months to respond to our request from National Milk to do the safeguards on cheese. And when they did it, they did it at the same time they did the safeguards, they put a new tilt in which wiped out any benefit, that we would have seen from that program.
    Mr. JANKLOW. The use of nonfat dry milk for humanitarian foreign assistance. Do you agree with what they have done there?
    Mr. KOZAK. I agree completely with you, I think that we need to be much more aggressive in how we administer our donation programs.
    Mr. JANKLOW. The Dairy Export Incentive Program, do you agree with what they have done there?
    Mr. KOZAK. Absolutely not, they need to make those allocations available to the industry all at one time. Allow the commercial marketplace to administer DEIP, which was the way it was operating and not do it in trounces, and certainly not hold back on the butterfat DEIP any longer.
    Mr. JANKLOW. The Livestock Compensation Program?
    Mr. KOZAK. Do it in a way that it impacts the producers who need it the most.
    Mr. JANKLOW. And the MILC Program, you have already testified on the MILC Program. With respect to the Milk Price Support Program?
    Mr. KOZAK. Well I think it is clear, we have submitted the information. The only way the Price Support Program works is when manufacturers can clear the market in selling their product to the Government. Our survey shows that the cost of selling to the Government are far higher, than what the Government is willing to pay, and that is making the Price Support Program ineffective.
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    Mr. JANKLOW. Mrs. Tipton, you saw the charts I assume, that Mr. Kozak put up during his testimony?
    Ms. TIPTON. I glanced at them, yes. I didn't have time to study them.
    Mr. JANKLOW. Could I ask you if you would please, on behalf of the organization, look at those charts and submit in writing to the committee, what it is that you think has caused each of those fluctuations in changes in the charts?
    Ms. TIPTON. Absolutely, I would be happy to do that.
    Mr. JANKLOW. I have no further questions, Mr. Chairman. Thanks for your indulgence.
    Mr. GUTKNECHT. The gentleman yields back his time. And I am going to excuse this panel. But I would advise members of the subcommittee, that we do have some producers coming in, people who actually meet these cows everyday. And they are going to be testifying when we come back. I am going to recess the committee until approximately 1:20, when we hope to come back, and we will actually hear from some real people, who actually milk real cows.
    Mr. JANKLOW. Mr. Chairman, I can only not come, because I have to speak on the floor on Healthy Forests Initiative, otherwise I would be here.
    Mr. GUTKNECHT. The subcommittee stands to recess.
    Mr. GUTKNECHT. I call the subcommittee back to order. We have on the floor right now, we are debating the Healthy Forests Initiative which is a bill that we are in part responsible for not only on this subcommittee but on the full committee, and so a number of the committee members are down there participating in the debate on the Health Forest Initiative.
    But we are pleased to have a distinguished panel of real dairy producers representing different regions, herd sizes and perspectives from all around the country.
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    First of all, Mr. Bill Rowekamp from Lewiston, MN. Mr. Charles Ahlem, am I saying that right, from Turlock, CA. Mr. Brian Boehning, from Earth, TX. Mr. Sidney Grove, from Ridgewater, VA. And finally, Mr. Gordon Hoover, from Gap, PA.
    We are so happy to have you here today. We apologize that this subcommittee hearing has gone on a little longer than we had originally anticipated, and Members have an awful lot of other things going on. But we are so happy to hear from you, and we will start with Mr. Rowekamp. Welcome to the subcommittee.


    Mr. ROWEKAMP. Thank you, Chairman Gutknecht. I want to thank Chairman Gutknecht and other members of this subcommittee for asking me to testify and my review of the current state of the dairy industry. It is a privilege to testify before a subcommittee, led by my representative, Chairman Gutknecht. His hometown of Rochester, MN, is located near my family dairy.
    For more than 80 years, members of the Rowekamp family have lived and milked cows in southeast Minnesota. I began helping my father Everett Rowekamp milk 28 cows in the late 1950's. When dad retired in the 1980's, we were milking 100 cows. Today, my family is milking 235 cows, with plans to build a new 2,500 cow dairy in the near future.
    It is ironic that I am planning an expansion while milk prices are at a 25 year low, but I am bullish. I am bullish, however, on an industry that has long been my family's livelihood and a Midwest stronghold.
    The Midwest dairy industry has been struggling to maintain producers and infrastructure. I know firsthand, the State is working to reinvent its industry. About 73 percent of the Minnesota dairy farmers recently surveyed by the Minnesota Department of Agriculture, plan to maintain or increase herd size in the coming 5 years. This is good news after years of falling cow numbers and stagnating production levels.
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    This industry could turn around with the help from agricultural leaders such each of you. When taking steps to improve the dairy industry, I ask you to focus on the existing dairy price support system and the need to close milk protein and trade loopholes.
    Allow me to first examine the Dairy Farm Income Support Program, included in the 2002 farm bill. Quite frankly, the dairy price support system is not working. The farm bill calls for USDA to maintain a safety net of $9.90 per hundredweight. This has not happened. Class III prices have fallen below that level for 8 of the last 10 months.
    To maintain the price system, dairy manufacturers sell surplus dairy products to the Commodity Credit Corporation, at prices determined by the USDA. These prices should reflect the support price called for in the farm bill.
    That system, however, has not been effective. For several weeks, commercial markets remained 5 cents per pound under CCC prices, indicating that USDA calculated prices are too low.
    Too make the farm bill effective, I recommend 2 improvements. The first is asking the USDA to increase its purchase price of cheese, butter, nonfat dry milk to reflect the additional costs manufacturers will face when selling products to the CCC.
    The second improvement would be for the CCC to become an active trader on the Chicago Mercantile Exchange. The CCC could purchase products on the CME whenever prices dip below the established CCC purchase prices. USDA could actively ensure the price levels called for in the farm bill.
    In addition to support prices, the farm bill provides an additional safety net through the MILC payment. Without MILC payments, the rate of dairy farmer loss would be much higher. Though my farm production has surpassed the annual MILC payment limit, I appreciate the positive effects it has had on my fellow producers, our communities and the dairy infrastructure.
    If USDA improves the price supports I have outlined, Minnesota dairy producers could be less dependent on MILC payments. Proper administration of the support program, however, would lower the MILC payment and generate more money from the market. This is a win-win situation for dairy producers and taxpayers.
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    Let me also draw your attention to another win-win for dairy producers and their communities. In addition to milk, dairy farms could be generating electricity with anaerobic digesters that produce methane. This renewable fuel source powers generators. The energy bill should contain tax credits to encourage the production of this alternative energy source.
    Also, on the State and local level, talking about Minnesota now. The State and local policies and politics, have played a major role in the lack of reinvestment in the existing facilities and the building of new ones. In Minnesota and the upper Midwest have overhauled their rules regulating feed lots and now has some of the strongest, most complete and environmentally sound rules in the Nation.
    These rules are not the problem. The problem begins with how the rules are interpreted by pollution control officials. Also, a bigger problem is local citizens oppositions spurred on by lies, fear tactics and intimidation of local producers and officials in using the threats of lawsuits, by so-called environmental groups. There are good environmental groups that want to work with farmers, but also, there are other groups that are no more than social change and social justice activists, that are a danger to agriculture.
    We need laws protecting us and our rights to use our land, while protecting the land and the environment for the next generation. This might be more of a State issue, but I think leadership from the Federal Government would send a strong signal to the States that farmers have rights, and they need to be protected.
    Finally, I want to talk about the problem of imported dairy proteins, such as milk protein concentrate and casein.
    Clearly, imports of milk protein concentrates are not the sole cause for low dairy prices. They do, however, displace domestically produced nonfat dry milk that is purchased by the USDA under the Dairy Price Support Program. This purchase then leads to a buildup of support of surplus dairy proteins.
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    When reviewing the 300 percent surge in dairy protein imports since the mid 1990's, it is clear to see how the import loophole had affected dairy producers in the past. But in many ways, the dairy protein tariff legislation is about the future.
    The MPC bill does not seek to stop all MPC imports. Rather, it brings consistency to the dairy tariff schedule, so loopholes don't allow import surges that prevent our domestic dairy industry from recovering.
    If milk markets recover, the U.S. dairy industry will grown even more vulnerable to MPC imports. Some U.S. manufacturers want to purchase cheap MPC's from other world markets, before supporting their own domestic industry.
    Chairman Gutknecht, effectively administrating existing dairy price support systems, maintaining the MILC payments, and imposing tariff-rate quotas on imported dairy proteins, would move this industry forward. It would help the Rowekamp family farm continue to be a Southeast Minnesota dairy producer. Thank you.
    [The prepared statement of Mr. Rowekamp appears at the conclusion of the hearing.]

    Mr. GUTKNECHT. Thank you, Mr. Rowekamp. Mr. Ahlem.


    Mr. AHLEM. Mr. Chairman and members of the committee, I thank you for the opportunity to speak before you today. My name is Chuck Ahlem, I am a dairy operator and part owner of Hilmar Cheese Company, in Hilmar, California.
    I would also like to let you know, that our family just celebrated 100 years in this country, being that our grandparents migrated from Sweden during the famine. At that time they didn't have the Government to put the wheels on the wagon to get them here. They made it here in one way or the other.
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    As you know milk production continues to move West. In the last decade, we have seen California grow over 58 percent, Idaho 160 percent, New Mexico 191 percent, and Arizona 92 percent. Traditional States have remained flat or tended to decrease in supply. Basically because the capacity and efficiencies of some of the cheaper land, and the opportunities in California, the weather and environmental situations have limited them to a more efficient way of producing milk.
    And that part of those processing facilities tend to follow the raw milk supply, it is easier to ship finished product, than it is raw product. Farm growth size there has been dialog that all of the dairies are going to be 10,000 cow dairies and very few of them. I think the reality is, there is going to be some larger dairies, but the medium size dairies are going to continue to flourish for a number of years. They will provide the kind of market and provide the efficiencies that are needed. 1,000 cow herds to 3,000 will probably be a norm amongst a lot of them, because of some of the bioterrorism issues of animal health issues, and putting all your eggs in one basket, and I don't think the Government would be willing to pay for those animals if you have an outbreak of some sort.
    I really believe that the Government should not interfere in the marketplace. I think an example is that our MILC program which really stimulates over production, it sends the wrong signals, depresses the milk prices, and to our Californians it created a net loss according to the FAPRI studies.
    I have seen very successful examples of the Federal and State Government and the producers working together to solve some of our problems. Focusing on long-term viability, I think the voluntary self-help programs are a very positive way to go, not over the Government mandated programs. One area, an example, the tax policy. I think the tax policy needs to provide the dairymen an opportunity to stay in or to get out. Often the tax structure creates a person, the only way they see of getting out of the business, is with feet first. The idea of selling and tax consequences, doesn't give them a lot of hope.
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    Federal Milk Marketing Order system. I am supportive of the order system, as long as it doesn't create an interference in the marketplace. The regulated price must be as low as possible to enable the marketplace to work and to send the appropriate signals. I feel the system does support a place to provide a true safety net, so if we have 1 or 2 bad years, the industry can actually, the individual farmer, efficient farmer can stay in business.
    It is not for short-term fixes. So I think the Secretary must make timely adjustments in the butter-powder tilt, in order to develop more efficient methods on sales and transactions for cheese. The Government should not be the processor's regular customer. An example of some of the impacts of the burden of moving nonfat dry milk through the livestock industry has been a real depressor on the whey markets.
    Current Government programs. While I support the Federal Milk Marketing Order and support price. But I think we have got some, as evidence to hear today, some very, very strong producer and co-op organizations and entities that show that they can work together and work on solving some of their own market problems. The Federal Milk Market Order Program came into being when the owner entities, or producers were very small and inefficient.
    This is a new day, now we have multibillion dollar co-ops, large producer organizations that really have the size and scale to perform the kind of functions that the Federal Milk Marketing Order is performing today, in working with those market issues.
    I do support the DEIP Program, but I feel that it should be a policy of developing markets, finding new markets out there, not a dump and run policy.
    The State and local governments, I have seen them where they can work together through partnerships of our environmental, our Dairy Quality Assurance Programs.
    In conclusion I would like to offer, rather than spend billions of dollars in the MILC programs and other Government programs, support us on the other side, the environmental structure, research and development of new dairy products expansion and penetrations into new markets, and improved technology. We clearly need more investment in these areas, we do not need a mechanism that creates larger milk supplies, the products that may be made to go into Government warehouses.
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    There will never be enough money to satisfy every dairymen's need to stay in business. I think the tough reality is we need to be targeting those funds so they can best be used for long-term sustainability to the dairymen in this country.
    Thank you very much.
    [The prepared statement of Mr. Ahlem appears at the conclusion of the hearing.]

    Mr. GUTKNECHT. Thank you, Mr. Ahlem. Mr. Boehning.


    Mr. BOEHNING. Chairman Gutknecht and ranking member Dooley, my compliments to you for calling this hearing to examine the general state of the dairy industry.
    My wife and I own and operate a family dairy farm in west Texas. I believe my opinions are generally reflective of the views of most dairy farmers in the southwestern United States.
    Though it is not a good time to be a dairy farmer, I do not necessarily believe that the Government can or should be the salvation of dairy farmers. Sometimes the ''help'' is the problem. While the Government can play a critical role in the stabilization of milk prices and the dairy economy, that role should be limited. Now dairy producers are experiencing problems when Government does more than it should. I appeal to you to curtail the financial assistance you are providing the dairy industry through the MILC Program, because those payments are leading to depressed milk prices nationwide.
    What dairy farmers like me need are markets, not Government markets for powder that consumers do not want, but for bottled milk, cheese, ice cream and the like. A growing domestic market has been developing for milk protein concentrates. These are showing up in nutrition bars, power drinks, and other products. It is apparent consumers want MPC. In response to that, DFA has built an MPC plant in Portales, New Mexico. Also in the Southwest, Select Milk Producers operates several wet MPC plants.
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    The MILC Program is a poorly designed and costly program put in place, to replace the Northeast Interstate Dairy Compact. In spite of warnings of some dairy farm representatives, that the MILC Program would greatly exceed cost estimates and depress milk prices on all producer milk, we were told that the program was a necessary evil to reach a final agreement on the farm bill.
    The Northeast Dairy Compact was market-distorting, but the amount of milk covered was small enough not to have a big impact on the national market. However, due to the national nature of the MILC Program, the impacts have been greater and a segment of the dairy production sector has not received the market signal that lower milk prices have been sending since the end of 2001.
    The MILC Program sends signals to overproduce, while the Dairy Price Support Program requires the Government to buy the product of the overproduction. This situation will cause continued low dairy prices, even after the MILC Program is over. This will also cost the Government billions of dollars in years to come, because the MILC Program and the Dairy Price Support Program can not coexist.
    The MILC Program is causing lower milk prices for all sizes of dairies, in all regions of the country. In the 15 month period beginning in January 2002 and ending in March 2003, class III prices averaged $10.24 per hundredweight. In the same time period, class III prices and MILC payments on 100 percent of a producer's production, totaled $11.63 per hundredweight. The 5 year average class III price is $12.15 per hundredweight. So even producers eligible for MILC payments on all of their production are receiving 52 cents a hundredweight, less than the 5 year average.
    This program negatively affects the income of average producers, while devastating the income of producers with above average production. Because I feel like the cost of 25 cents per hundredweight is way too low, that we have been hearing today as far as the impact MILC has had on a dairy industry.
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    The target price selected for the program is really the root of its price-depressing effect. The $16.94 a hundredweight class I Boston price, which translates to a $13.69 a hundredweight class III price, is too high. From 1998 through the end of 2002, the Boston class I price was above the target price less than 28 percent of the time. This guarantees the program will be in effect more often than not. It is a price enhancer, and not a safety net. The price sends a signal to produce more milk, even during an overproduction situation, like the one we face today. The research that has been done by several respected dairy economists, shows MILC has and will continue to hold milk prices at historically low levels.
    Another problem is the payment cap. Payments are only eligible on 2.4 million pounds of milk per year. The average dairy in the United States, produces 2.3 million pounds annually. Therefore, this program puts the entire burden of reduced prices causes by overproduction on the shoulders of producers with above-average production.
    The dairy industry has had a support price for the last decade around $10 a hundredweight. And in the past, when class III prices were at or near support levels for 2 to 6 months, economics would cause producers to adjust their operations through feeding, culling, or even retiring altogether. Then supply would correct itself without the Government buying very much product. This trend caused dairies to get larger and more efficient. The MILC Program goes against this 20 year industry trend.
    From the early 1980's to the early 1990's, the dairy support price level slowly dropped from $13.00 a hundredweight, to the current $9.90 a hundredweight. This decrease in support level was implemented slowly to give the industry time to adjust, unlike the MILC Program, which was sudden and unexpected.
    When the 2002 farm bill was adopted, the Congressional Budget Office estimated the total program cost of MILC to be $1.3 billion for the 5-year life of the program.
    As of April 1, USDA had already paid farmers $1.25 billion. The fiscal year 2003 spending is projected at $2.4 billion. In March, the CBO upped its estimates for the total cost of the MILC Program, to over $4.2 billion, more than three times the price tag the committee agreed to last summer.
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    To put this in better perspective, from 1998 through the end of 2000, the average total dairy program cost to the Government has been less than $500 million per year. 2003 alone has projected to cost $2.9 billion. It is obvious this program is cost prohibitive to the Government. Thank you.
    [The prepared statement of Mr. Boehning appears at the conclusion of the hearing.]

    Mr. GUTKNECHT. Thank you, Mr. Boehning. Mr. Grove.


    Mr. GROVE. Mr. Chairman, thank you for the opportunity to speak. I must say, Mr. Chairman, I don't know if it was an omen or not. But last night as I was looking over my notes I reached for a pen, my elbow hit the remote control switch, suddenly C-Span appeared, and there you were saying so long to Larry Combest, so I spent some time with you on C-Span last night, and appreciated your remarks.
    I am the owner-operator of a 100 cow family dairy farm in Virginia. I would make this statement that there is a world of hurt in the dairy industry. That statement was made at a meeting I attended in September 2002. Since that time, prices have continued to decline. The market for perishable products, whether it be fruits or vegetables or milk, overreacts, as you know, to demand and supply and balances.
    I am concerned that a market that behaves in an erratic pattern, gives an opportunity to bottlers and retailers, and others for ever increasing margins while dairy farmers suffer. You heard this morning from testimony that our share of the food dollar, the consumer dollar is about 28 cents. The Nation's largest bottler of milk, has just reported quarterly earnings of $63 million. During the past 3 years, their stock has doubled, exactly doubled. It was one of the only stocks that I purchased in recent years, that made any money.
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    Some would ask what new dairy programs do we need? I would suggest as others have, that more focus and attentions to the programs we have, would be in order rather than creating new programs.
    And some of these things I have to say, will direct attention to the MILC Program.
    The Dairy Export Incentive Program, and some of this we have heard, over and over, and I will be brief and go through it in a hurry. Still has 11,000 tons of butterfat left for export. This has caused lower prices to dairy farmers and because of that, the MILC Program cost has gone up. This 11,000 tons is what is left, in spite of what was announced this morning, that I believe had been released yesterday.
     If the Price Support Program is intended to floor prices at $9.90, why are prices being allowed to fall below this level? Lower price support levels create instability and in return again, add costs to the MILC Program.
     Passage of H.R. 1160 and S. 560 could prevent the loss of another $800 million or more in dairy farmer income in 2003. Last year imports of MPC and casein, cost dairy farmers about 48 cents per hundred. Which again, lowers farm price and again adds to the cost of the MILC Program. Dairy farmer efforts to balance supply with demand, will fail if we do not have the help of you and others on House bill 1160 and Senate bill 560.
     The Federal Order System is still needed to set minimum prices. This protects dairy farmer income from the negotiating powers of mega-retailers and marketers. Otherwise groups of dairy farmers, will underbid one another for market share, which will result in lower prices and once again, greater MILC prices.
     The recent changes in the butter powder tilt by the Secretary, lowered the floor price on powder to 80 cents, hurting the all dairymen across the country. The harm especially was done in the Southeast, and particularly in the Carolinas and Virginia. Rumors of another tilt by the Secretary persists, meaning lower paid price and once again, more cost to the MILC Program.
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    USDA must comply with its charge and fully inspect foreign plants that are exporting to the United States. This will ensure food safety and product quality to the American consumer.
    The MILC Program is vitally important and the preservation of the thousands and thousands of small and average sized dairy's in the Southeast and across the country.
    If attention is given to the programs already in place, these programs can help on farm prices and again lower the costs of the MILC Program, and allow most farmers to continue in business through the summer months and into fall. Should a market recovery not occur during this time, I would expect many of the dairymen, will exit the business to salvage the remaining equity in their farms.
    In our society we value open space. We value green space. We maintain parks and wilderness areas, National parks, State parks, city parks, in the interest of green space. Would it not be logical to look at our thousands and thousands of dairy farms across America, and particularly in the Southeast, where we are crowded by urban sprawl as a logical way of maintaining open green space, among the urban sprawl.
    In so doing, we justify the MILC Program, for partial relief to farmers and even could be viewed as a social program. We can't stop the evolving development of dairy in the West, or the slow decline in the East. But with sound agricultural policy, we can preside over gradual change in production patterns, and over the decades, and over generations of dairy farmers, by eliminating the shock to the sudden loss of a way of life, as well as a loss of economic activity in our rural communities.
    If we do not take care of our dairy industry with sound policy, that addresses the issues in a rational way, the New Zealanders, the Australians, and the Europeans will take care of it for us. Thank you.
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    [The prepared statement of Mr. Grove appears at the conclusion of the hearing.]

    Mr. GUTKNECHT. Thank you, Mr. Grove. And Mr. Hoover.


    Mr. HOOVER. Thank you, Mr. Chairman. Mr. Chairman and members of the subcommittee, thank you for inviting me to speak on behalf of the Northeast Dairy Producers about the state of the U.S. dairy industry. While I am speaking primarily as a Northeast dairy farmer, my remarks will also reflect the fact that I serve on the corporate board of Land O'Lakes, a farmer-owned cooperative that markets milk for 6,000 dairy farmers nationwide. My insight into the dairy industry, and its infrastructure, and the trends facing the industry have been greatly enhanced by my involvement in the Land O'Lakes and other producer organizations.
    My name is Gordon Hoover, and I am a dairy producer from Gap, Pennsylvania, just outside of Lancaster and in the heart of the Amish country. I milk 120 cows on my farm, which has been in my family for three generations. As an extension of my dairy business, I serve on several leadership roles, including Land O'Lakes Dairy committee chairman, National Milk Producers Federation Board, Pennsylvania Dairy Stakeholders and the Professional Dairy Managers of Pennsylvania.
    Through my involvement in these organizations, I have seen the mood of my fellow dairy farmers change drastically in the past several years as we have learned to deal with dramatic price swings and market volatility.
    Eighteen months ago, the price I received for my milk dropped 34 percent, and it stayed there ever since. In Pennsylvania, the average cost production for the first 3 months of 2003, was $13.50. Last month's on-farm milk price was $12.50. The price that we receive for our milk isn't even covering our costs.
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    Right now, there is a lot of depression and an apathy among dairy farmers. My neighbors have maxed out their credit lines and taken off-farm employment just to make ends meet. And that is with the supplemental milk payments we receive through the USDA's Milk Income Loss Contracts. With conditions as drastic as they are, it is more important now than ever that producers and the dairy industry work together.
    In the Northeast, the milk supply is stagnant to decreasing. According to Sparks Commodities Companies reporting, we have experienced a 2 percent decline in 2001, followed by a 1.5 percent increase in 2002, and a projected 1 percent decrease this year. My concern as a dairy farmer is this: Where will the milk come from in the future to meet industry needs in our region?
    As producers continue to exit the business, or to relocate out of the region due to declining profitability and other issues, fluid milk customers and other Northeast processors who make cheese, butter, ice cream and chocolate lose their milk supply. These customers need a stable supply for their processing facilities, or they will relocate to other viable dairy regions in this country, or elsewhere in the world.
    The Government's involvement in shaping dairy policy should attempt to ensure that all U.S. dairy farmers receive an accurate and realistic signals from the marketplace. Programs like the dairy price support program and the MILC payments have been beneficial in helping producers maintain profitability and limit their vulnerability to milk price volatility. However, it is unrealistic to expect that we can sustain prices at a level that encourages surplus milk production.
    That is why programs like USDA's Dairy Options Pilot Program are valuable in educating producers on protecting their operations in times when milk price responds to an excess supply or drops in demand. These long periods of low milk prices, like the one producers currently face, are just too damaging not to think about risk management options.
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    Another key factor in increasing milk prices must include finding ways to increase demand for milk and dairy products. I support the producer-funded efforts of the National Dairy Board, Dairy Management, Inc., and the various State and regional milk promotion organizations. I urge USDA to implement the provision included in the farm bill that requires importers of dairy products, to pay their fair share for dairy promotion.
    With 120 cows in my herd, I am one of the producers who benefits from the MILC payments authorized in the 2002 farm bill. These payments do help in period of low milk prices. And any small or medium size farmers would have already been out of business, if it were not for these payments.
    Unfortunately, producers who milk more than 200 cows feel abandoned and left to bear the brunt of low milk prices without any significant assistance from the programs restrictions—because of the programs restrictions.
    Although the MILC Program has proven to be an important safety net for many dairy farmers, I feel that the Dairy Support Program is the bedrock of the Federal Dairy Program. When we went through the last farm bill debate, this was something that all dairy farmers could agree on. However, implementation of the program does need some refinements. Through an internal survey, National Milk Producers found out that CCC needs to increase the price of purchased dairy products, particularly cheese, to assure that the program supports producer prices at no less than $9.90 a hundredweight.
    I do want to commend the Federal Government on its implementation of the Dairy Export Incentive Program. DEIP continues to be one of the most effective ways to combat foreign subsidies that distort the world market for dairy products. It provides an opportunity for the U.S. dairy industry to target export markets for our products.
    It is my belief that the U.S. goal in negotiating new trade agreements should be to achieve a dramatic reduction in export subsidies on dairy products, and to eliminate trade barriers.
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    However, as a dairy farmer, I am opposed in negotiating a free trade agreement with Australia or New Zealand. For the simple reason, that such an agreement would be a one-way street for dairy. Instead the administration should focus its efforts on negotiating a comprehensive multilateral agreement in the WTO. In that forum, dairy farmers have a reasonable hope of gaining new markets.
    That said, I support passage of H.R. 1160, which would establish new tariffs on MPC imports. This bill would impose a new tariff rate on MPC imports and close the MPC loophole. Getting this legislation passed, is part of a three-prong strategy to address MPC. Through this strategy, we hope to prevent MPC from further displacing domestic supplies.
    Again, I thank you for the opportunity to testify before your subcommittee today. From my testimony, you may think there is a lot of doom and gloom out there in the dairy industry. But from my perspective, there is a lot of hope too. Dairy farmers are eternal optimists. We love what we do, despite the hardships we face. Within our industry, we have come a long way in realizing we need to take more responsibility in shaping our future.
    An example of our cooperative efforts, is the first ever industry led program to balance supply and demand, without any Government involvement. Cooperatives Working Together or CWT, is a farmer funded, self-help program, proposed by National Milk, has the support from 31 U.S. cooperatives, and is indicative of how far we have come in working together as an industry to control our destiny.
    In addition to cooperative efforts like CWT, we will continue to need your help and support. As I said earlier, programs like the Dairy Price Support Program and the DEIP Program are working to benefit producers, and we need you to continue to give them your continued support. We also need you to continue to keep the farmer's best interests in mind, when developing legislation that affects dairy trade obligations, environmental restrictions and income subsidies. Our goal as dairy farmers, and as an industry, is to create a marketplace where supply and demand work together to generate reasonable and realistic profits for producers, without substantial dependence on Government subsidies. Anything you can do to help us to build and sustain that marketplace, is greatly appreciated. I thank you very much.
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    [The prepared statement of Mr. Hoover appears at the conclusion of the hearing.]

    Mr. GUTKNECHT. Well thank you, Mr. Hoover. And let me just say to the entire panel, this testimony has been excellent. We heard from the farm economist's earlier, but in many respects, you do an equally as good a job of explaining the problems in the dairy industry as they did, and in some respects, in a much more understandable way. So we all thank you, and we appreciate your being here.
    Mr. Rowekamp, you mentioned, and one of my concerns in my opening statement was how much we have seen in terms of a decline in overall dairy production, numbers of herds and so forth, in the State of Minnesota. And you said you were attempting to expand your dairy operations in Minnesota, and you alluded to the fact that you are encountering some problems. Would you talk about that for just a minute?
    Mr. ROWEKAMP. Yes, I would appreciate talking about it. As I said in my testimony, we are going through the permitting process to build a 2,500 cow dairy right now. Some of the problems that we have encountered, really they don't involve following the rules that MPC has set up, and the State has set up.
    Most of the problem comes in at the local level. And the problems that we have encountered, is local opposition to the dairy. It is, I don't know if there is an acronym for these people, its not in my backyard, or something like that. But a lot of this local opposition has been initiated by some environmental groups. One in particular, and what these groups do, or this group, when a feed lot is proposed and it could be hogs or dairy. They will come into the area and go door-to-door, and pass out information, saying how bad this feed lot is going to be, otherwise going to destroy the economy of the community and on and on. And people get concerned, they get worried about it, and that is where the opposition starts. And what we have done is we stopped our permitting process, and two townships set up a review board, and they have been going through all of these concerns for about the past, I think it is going on 16 weeks now. And they are coming to a conclusion, they should conclude their process in June, we are hoping. And from there, from whatever their recommendation is, then we will move forward.
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    Mr. GUTKNECHT. Do these groups understand for example, the use of anaerobic digesters, and what that ultimately will do in terms of reducing the amount of potential odor that is coming from that facility?
    Mr. ROWEKAMP. I think they fully understand what the anaerobic digestion process is and the reduction of odor, the reduction of pathogens and other stuff that digesters do. Create green energy from a renewable resource. They are very aware of this. What their agenda is and this is not only my opinion, they do not want to see large farms.
    Mr. GUTKNECHT. Don't confuse me with the facts, we have already made up our mind.
    Mr. ROWEKAMP. Yes, yes.
    Mr. GUTKNECHT. I want to get back to Mr. Boehning, because you talked about something that really is hot of an issue in the committee and in the Congress, and that is the issue of milk protein concentrates. I would have you talk a little bit about that, because one thing we know is that there is a market here in the United States for milk protein concentrates. And you are involved in a co-op in your region, that is actually going to start producing those. Do you see this as a market opportunity or well, I'll just leave it open ended. Tell us about milk protein concentrates in the co-op that you are involved with?
    Mr. BOEHNING. I definitely view it as a market opportunity, because with MPC, if we don't get started making it ourselves, and get involved in the business of making it, we will never be able to, even if the tariff situation was corrected, we wouldn't have the technology or you to go forward with MPC production and manufacturing. So I definitely view it as an opportunity and I hope to see more interest, and more plants being looked at.
    Mr. GUTKNECHT. Can you tell the committee how many pounds do you expect to produce in that plant, do you know?
    Mr. BOEHNING. Yes, if I can find it.
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    Mr. GUTKNECHT. Well maybe what we have.
    Mr. BOEHNING. I found it here. The plan is capable of receiving and processing 5 million pounds of raw milk per day. Let us see, it also produces some nonfat dry powder, cream, and other dairy ingredients. That is about all I have on it.
    Mr. GUTKNECHT. Well we will try to find out, because we are very interested in what is happening down there in New Mexico and hopefully, some other groups will come together and look at the same opportunity.
    My time has expired, the gentleman from California, Mr. Dooley.
    Mr. DOOLEY. Thank you, Mr. Chairman.
    First off I want to once again thank Dr. Brown and Dr. Cropp for the great work that you did. And I apologize to you, I interchanged you at one point, and I didn't intend to do that.
    And I would also ask the panelists. If you have the opportunity to read Dr. Brown's analysis that he did in conjunction with FAPRI? It is really interesting, because they did an analysis in terms of what would happen to milk prices over the next decade, if you didn't have the milk program in place, the Milk Loss Program. If you had it as without the caps on it, in terms of production. They also go further, and do an analysis in terms of what would be the impacts on producer prices, if you did away with the Federal orders entirely, as well as the purchase program. And what is fairly remarkable, is after you get over the first 2 years, you actually see minimum impacts on prices, in terms of if the market does work and it does adjust.
    And I guess what has been a little bit frustrating to me, and some of the prior panels is, you know we have had a lot of people talking about charts, putting charts up on the easels and what not. But no one has put up a chart that really showed a deviation that would be from what we would expect in terms of supply and demand and prices.
    I mean there is a lot of frustration out there that maybe USDA ought to be doing more, but there is a limited amount that USDA can do to overcome, and over supply in terms of what the marketplace is dictating now. And I think that is the challenge we face here, and I would hope that some of the groups in the production industry would really try to take an objective overview of this. I have become somewhat familiar with the Cooperatives Working Together Program, and I think anything that brings the cooperatives together is an interesting approach.
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    I guess though, when I look at it though, I wonder if it is not just another band-aid. It is a 12 month program supposedly, it is going to have an 18 cent a hundredweight deduction, which for an average herd, the 1,000 cow herd in my district, would mean that producer would be contributing $42,000 a year to this program, that is supposedly on the promise if they are going to see an increase in a dollar in production.
    In one of the components of it is you are going to have a herd reduction of 125,000 cows. Well that is 1.3 percent of the 9.2 million head we have out there now. You can expect that you would see that 125,000 wouldn't be the most productive cows that are out there, it would be the least productive cows, so you are going to have maybe a producer response on that, and a production response of less than 1 percent. And we are spending a lot of money on this out there, how do you guys really expect this thing to work? And you know Chuck, why would you be in one contributing $42,000 to a program on a promise, by this reduction in herd size nationally of a very insignificant amount is going to result in that significant of a price response?
    Mr. AHLEM. Well I think the reality, I support the voluntary process, whether short-term or long-term. If the industry felt that was an appropriate way to steer, I would support it. I think it is probably a band-aid approach, I think the market is going to work eventually, but I think the industry has to grab, put its teeth into something, to try to move away from the mentality that hey, we can help ourselves, we don't need the Government to fool around in our marketplace all the time.
    And I think through this process, we will start learning what works, and what doesn't. It doesn't cost us anything, if the Government does it. If it doesn't work generally I mean, at least we can get some more dollars for another disaster program or something else to feed me. I think those dollars ought to be spent in dealing with some of the issues, where he wants to be a more efficient dairymen and grow, help with the plumbing, the infrastructure, dealing with some of the regulatory burden it has put upon us. Those are the long-term economic issues that we are going to be dealing with. Dealing with that infrastructure, and the bureaucracy.
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    I served on the regional water board for California's Central Valley for 4 years. I understand what the regulatory process is and those burdens, and some of the solutions that are going to need to be put out there. And those are going to cost an awful lot of dollars for us to continue going, and to become the kind of efficient suppliers that we want to be.
    Mr. DOOLEY. I would like to, Mr. Hoover, maybe a response from you. We have the cooperatives that are coming together to generate this fund which is projected from some figures. I know they are all preliminary, maybe $250 million in terms of trying to deal with some of the supply challenges.
    You know we also have this same industry that said, that they don't have the financial where with it all to be competitive with milk protein concentrates, in terms of have been reluctant in the past to invest in the infrastructure to be you know, to respond to this consumer demand. Why are we using this $250 million, why hasn't that been available by the co-ops to invest in meeting a consumer demand in the past years. Because the Land O'Lakes itself, has been a purchaser of imported milk protein concentrates. So you acknowledge there is a need for these, and they are different than powder because, Lord knows we have got enough powder in the country. So you know, why are we dedicating some of these same resources to, you know in terms of meeting consumer demand?
    Mr. HOOVER. Well thank you. We do dedicate quite a few dollars from the dairy, from the producers side of the industry, and to advertising and creating more demand through the National Dairy Board and those programs. Land O'Lakes as well as many other cooperatives have brand names that they support, and try to get more demand created in the industry.
    That is a limited amount, I mean we can only create so much demand that we are putting as many dollars as we can afford against it. One of the theories, purposes behind the CWT Program, is this is an area on the production side, that we can affect. We have 100 percent control on it, whereas many of our other programs, are out of our direct control. Many of them like the previous Herd Buyout Program, the Diversion Program, some of those programs. Even the MILC Payment basically, was devised within these walls, and it wasn't you know, on the forefront of the whole farm bill agenda, and it kind of came about the 9th hour. You know like a lot of other programs, and a lot of people in the country, it was free money, and it was at a time when we needed it so we accepted it.
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    But again, that was an area that realistically, you fellows had more control over that program, than we actually did as producers.
    Mr. DOOLEY. I didn't, it wouldn't have happened.
    Mr. HOOVER. You know, so the real thrust of the CWT Program, is that farmers can take a direct response to their market, by controlling the production side. You know, it is the only area, that we can have a direct control over, we can have a direct affect and control our own destiny.
    Agricultural commodities have been given the power of the Capper-Voltsead Act, and we have never utilized that. And so this is an opportunity, where we are trying to utilize that power we have, to manage our own market. And it is one of the few times, this is the closest we have ever gotten to doing it, in this large a scale.
    So that is the real drive behind it. We spent a lot of dollars on the demand side, and this is our attempt to manage the supply side.
    Mr. GUTKNECHT. Well thank you, Mr. Hoover. And I will just say from my perspective, I hope it works. I mean we just have to wait and see, but anyway. The gentleman from Michigan, Mr. Smith.
    Mr. SMITH. Mr. Chairman. So put up with some of my curiosity questions. Life was just so much easier after we sold the cattle.
    Mr. GUTKNECHT. It isn't like that in the dairy business.
    Mr. SMITH. Then I go down the line and give me roughly the percentage of the feed that you might grow on the farm operation, to feed the cattle. Just sort of a round to round figure.
    Mr. ROWEKAMP. All the feed I grow goes through my cows.
    Mr. SMITH. No, no, what percentage of the feed needs is grown on the farm? What is grown on your land that you own?
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    Mr. ROWEKAMP. All of it.
    Mr. SMITH. So you will be able to accommodate a 100 percent of the feed needs for that 235 head?
    Mr. ROWEKAMP. I will be able to accommodate all of the roughages, and the greens. I do buy soybean, meal cottonseed, beet pulp, pellets, some commodity products to mix into the ration, but all of the roughages and greens are grown on the farm.
    Mr. SMITH. And Chuck, California doesn't do that, do they?
    Mr. AHLEM. No I actually grow all of the silage's that I feed my cows, the alfalfa, hay, corn, byproducts, an awful lot of byproducts we feed, that used to be a burden on it.
    Mr. SMITH. I am just trying to get a little bit of a feel.
    Mr. AHLEM. I probably raise 20 percent of my feed actually of the total ration.
    Mr. SMITH. I am trying to get a little feel for how the other farm programs play into the whole dairy situation. Those that grow their feed are eligible for some of the support price that we have on the greens. Those that don't grow their feed, probably experience a little lower price, because of the Federal Farm Programs for that corn. Mr. Boehning.
    Mr. BOEHNING. We grow probably 35 percent of the total feed fed, which all of that is on the forage side of the ration.
    Mr. SMITH. Mr. Grove.
    Mr. GROVE. We grow all of the forages that are fed, none of the concentrates. There is an ongoing argument in our area by some, that you can buy those feeds cheaper than you can grown them, so it is an ongoing debate, I think the issue what percent you grow, is not an indication of efficiency. But we do grow all of the forages, and buy the concentrates.
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    Mr. SMITH. I mean some years there is no question, it would be cheaper to buy them. Mr. Hoover.
    Mr. HOOVER. We are the same scenario, we raise all of our own forages, and buy all of our concentrates.
    Mr. SMITH. Tell me about your plans to participate in the EQUIP Program, and any suggestions you have on the EQUIP. Let us just go down the line again.
    Mr. ROWEKAMP. As of right now, we have got our farm pretty well in compliance with all of the conservation. It is all contoured, waterways and everything. And in Minnesota the EQUIP Program will not put any money into new facilities. They want to use all of that money to upgrade existing facilities. So I won't be using any of that.
    Mr. SMITH. So the State's conservationist has that latitude of making that decision that they can't use any of the money?
    Mr. ROWEKAMP. Yes.
    Mr. SMITH. I know they had a payment limit authority, as far as you couldn't receive more than $100,000 without the approval of the conservationist. Chuck.
    Mr. AHLEM. Well we just in the last week to see what kind of monies were available, and in Merced County we have, I think there is a $1 million, which is not enough money to do virtually anything, when you spread it out. I think they said they had something like 200 applicants. I think the EQUIP Program's concepts is a great idea, we just need to get more dollars, to shift these dollars into that type of a program.
    Mr. SMITH. I mean by and large, farmers were complaining that the $450,000 that is in the farm bill, that they are probably not going to get because of all of the applicants.
    Mr. AHLEM. We also have the air side. So part of the money is going into looking at the air pollution side. And that is a whole issue we have in the valley, as far as dealing with some of the air quality issues.
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    Mr. SMITH. Brian.
    Mr. BOEHNING. I am just now looking into it, but I will probably apply for a small update on my waste water system, through the livestock EQUIP, and then I will probably also apply for some help on lowering the drops on some center pivots on the farm side.
    Mr. SMITH. Mr. Grove.
    Mr. GROVE. We have participated in the past with a number of issues. The rotational grazing, lots, and the fencing of the streams and probably to an extent, that we are pretty well where we need to be, and probably will not participate at a great level from here on.
    Mr. SMITH. Mr. Hoover.
    Mr. HOOVER. Our farm is in compliance with most areas of those programs. We have the same scenario at our county, that there is more applicants, than dollars to go around. So again it is a program that is of good design, can help a lot of farmers, but there is just not near enough dollars to go around.
    Mr. SMITH. It was sort of, at least it was my view on it. And it was sort of a compromise on the whole CAFO Program and the intrusion of the law there, versus trying to help farmers sort of give in and build up the best possible system. Thank you, Mr. Chairman.
    Mr. GUTKNECHT. Mr. Nunes.
    Mr. NUNES. Thank you, Mr. Chairman. Earlier today we have had an ongoing discussion regarding whether or not the importation of milk protein concentrate is impacting the dairy industries prices, essentially. And I would just like to get a quick answer, whether you think it is, whether you think it is not. I know in some of your testimony, you did indicate it. But I would like a quick answer, from all of the panel, so that we can get a better feel for those of you who are actually producers, versus some of the folks who are not producers. So I think we can start with Mr. Rowekamp, please.
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    Mr. ROWEKAMP. Well like I said in my testimony, I don't think it is the total reason why prices are low, but it does impact prices somewhat.
    Mr. NUNES. Mr. Ahlem.
    Mr. AHLEM. Sure, it has an impact, but we do export products. And I think realistically, this is my short answer because I didn't include it in the testimony, that you know I think we need to look at opening these markets realistically, to add a tariff on that isn't in good faith, and this period of negotiations. And we really need to look at opening other opportunities, other markets when we negotiate defreighting figures.
    Mr. NUNES. So you are not in favor of H.R. 1160?
    Mr. AHLEM. No, I am in favor of letting the market work, and let us develop some marketplace for our MPC, here in this country.
    Mr. NUNES. Mr. Boehning.
    Mr. BOEHNING. I am in favor of H.R. 1160. I feel like it is, while we are developing a product here in the United States, we do need some help closing the door on imports or at least holding them to current levels, while we are developing these plants like, that I have eluded to earlier. And I feel like it is you know, part of the problem you know with low milk prices, but definitely not, you know there are several other factors that we have talked about also.
    Mr. NUNES. Do you know when your plant, or the DFA plant is going to come into production?
    Mr. BOEHNING. It I believe, December 1 it did come onto production.
    Mr. NUNES. Well it has already?
    Mr. BOEHNING. It has had some, it had some breakdowns at first, and it is kind of getting off to a slow start, being up to full capacity. But it is producing MPC, I believe.
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    Mr. NUNES. Thank you.
    Mr. GROVE. Could I comment?
    Mr. NUNES. Sure, sure.
    Mr. GROVE. One of the problems that plant has been used as a balancing plant, and there is so much milk in the Southwest coming that way to turn into powder, that we have actually had trouble you might say, slowing down that powder conversion to get into the MPC business. Bu the test runs have been made, and we are operating the plant as an MPC plant partially, today. But that is a critical balancing operation in the Southwest milk supply. And they are covered with milk.
    Mr. BOEHNING. I guess currently it is trying to do both, make MPC and balance the milk supply on producing powder also, so they are trying to give time to both, at that plant.
    Mr. NUNES. OK, I think we need to at some point, Mr. Chairman, we need to maybe investigate this new technology that is being developed to produce MPC's here in this country. I know that you have every intention of doing that but——
    Mr. GUTKNECHT. Well yes, and we are starting to sort of try to get our arms around just how big a problem this is, and what the real solution is long-term. This testimony today has been helpful, but we need to learn a little bit more.
    I for example, was interested in the testimony earlier by the economist, and there seemed to be some disagreement exactly, how much cheese we import every year. It strikes me, that we ought to be able to get at least a definitive answer to that question. You get back to the issue of milk protein concentrate. When we first heard discussions about this, there were cooperatives who promised that they were not using them, subsequently, we learned that they in fact were, and so sometimes we had it, and that is why I said at the opening of this hearing, facts are stubborn things, and what we really want to do, is get the facts.
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    Mr. NUNES. Yes, and that is what we are trying to do here, but I think we do need to at some point, explore these new, and we need to get an understanding of what exactly these plants are doing, and how or if, they can be competitive against the EU, or Australia and New Zealand.
    Mr. Grove, I notice you are from Virginia, I forget, are you part of the Federal order, or are you a State order, I can't remember. And could you explain that.
    Mr. GROVE. We operate——
    Mr. NUNES. Briefly, I know it is difficult.
    Mr. GROVE. We have a State Milk Commission, perhaps the last one in the country, that sets a minimum price on milk. And I guess you would say it is a unique system. Again, it is the only one, the only one left I believe. A number of those have been——
    Mr. NUNES. So you are not in the Federal order?
    Mr. GROVE. Well we are under the State Milk Commission and of course if our product leaves and goes into an order, we would participate, where we market. If we market into an order, we participate.
    Mr. NUNES. Right. OK, thank you. Thank you, Mr. Chairman. I am out of time.
    Mr. GUTKNECHT. We are going to, if you don't mind, and I know this hearing is going on much longer than we ever anticipated, but you have come in from a long ways. And if you wouldn't mind sticking around for a little bit longer, to allow for another round. I know that Mr. Dooley would like to ask a few more questions, and Mr. Smith would like to ask a few questions, if it would be alright with you, we would go to another round of questions. With that, I will recognize the gentleman from California, Mr. Dooley.
    Mr. DOOLEY. I want to hear from you in terms of your support or opposition to an extension of the forward contracting provisions that we had. That a number of years ago, we passed legislation that would allow for forward contracting, on a voluntary basis that would allow those producers that sell to proprietary companies the same options, that basically are now available for co-ops. And I was wondering if this was something that you know you folks, any of you have participated in, or if any of you have any opposition to an extension of this, I would like to hear your reasons why.
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    Mr. ROWEKAMP. I just recently participated in it this last few months. I have been marketing my milk on the Chicago Board of Trade for about 4 years now, and I did it more or less just to use the program. I mean it was there, it saved me some money basically. To extend the program I think my recommendation would only be to extend it to educate producers on how to use what is and stuff, I wouldn't say necessarily we need to extend that to subsidize their margins or their cost of the put. I think it is a good tool, I think it did educate some producers. I know up in our area, the co-op that I sell to, there are still not enough producers, it is only like 5 percent or something like that, that do use the futures.
    Mr. DOOLEY. And in terms of being able to enter into a contract with the proprietary company, in terms of contracting, locking in a price, you would have no objections to that either?
    Mr. ROWEKAMP. I don't quite understand the question.
    Mr. DOOLEY. I mean that is essentially, you know there are two different programs here. There is one which was dealing with the options in the pits, and there was another that allowed you to enter into a voluntary contract at a set price, that would be negotiated and would keep the pool hold too, that would allow you to manage some of the volatility in prices.
    Mr. GUTKNECHT. I think I understand the question. Currently the co-ops have the ability to forward contract with producers, for-profit processors do not. I think his question was: Would you have any objection if for-profits were included in the option of allowing people to forward contract with those processors?
    Mr. ROWEKAMP. No I wouldn't have any problem with that.
    Mr. DOOLEY. Yes, well the private. Does anyone else, Mr. Ahlem?
    Mr. AHLEM. I definitely support the opportunity to lock in my market for a period of time, or at least take a segment of that opportunity, of that market, where I know I can make money and look at the different markets for different opportunities, you know want to bet on future higher markets, you go to the put option and go that way. But I think it is just another management tool, that we ought to be able to use, and unfortunately, we can't as we are shipping to a processor at this point.
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    Mr. BOEHNING. I have been involved with the futures for 3 years with forward contracting. But I don't necessarily feel that the Government should have to promote it. I feel like it is an economic decision on the producers, you know just like forward contracting feed, or not you know that it should be entirely up to the producer, whether to use it or not.
    Mr. DOOLEY. Mr. Grove.
    Mr. GROVE. I think to try to beat the market is risky, and probably impossible. I would suggest that if you can lock in a price that you can live with, that is the way to have a price you can live with. I met a dairyman in Florida, some years ago, well 2 years ago at a National Meeting. He was from Idaho. And he had locked in forward contracted his milk, and locked it in. And we were getting tremendous prices, good prices for our milk at that time, and he informed me that his wife hadn't spoke to him for 6 months. I mean there are some risks involved there too. And there are some levels of sophistication involved, when you really get deep into the countryside so to speak, I question on a broad basis the opportunity here for a majority of the dairymen.
    Mr. DOOLEY. Mr. Hoover, do you have any comments?
    Mr. HOOVER. My only comment would be that there was some experience with the integrity of the program, when I came to the relationship between the producer and the company that he was forward contracting with, you know that is one thing we want to try to avoid, although you know that is a relationship that I don't think we need the Government to get involved with a whole lot. But I think the opportunity to manage your price is something that should be available to everybody.
    Mr. DOOLEY. Well I appreciate all of your comments, and I would hope that you would communicate to the National Milk Producers Federation, who has sent up a letter in opposition to allowing us to extend this program. That it does nothing more than allows a dairy producer to voluntarily, on his own you know cognizant, to enter into a contract with the proprietary company. And as much as any dairy producer is part of a co-op today, to do the same thing with their co-op. And as a farmer myself, I find it difficult that we have one of the national organizations, supposedly representing producers out there that would preclude a risk management tool from being available to producers who choose to market, to a proprietary or private company.
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    Mr. GUTKNECHT. Mr. Smith.
    Mr. SMITH. To maybe Mr. Ahlem and Mr. Boehning. Do you grow your replacements?
    Mr. AHLEM. Yes, I grow 100 percent of my replacements now. I have previously, have bought an awful lot of animals, most of them were bought in Maine and New Hampshire, supporting that program over there.
    Mr. BOEHNING. I have always grown 100 percent of my replacements.
    Mr. SMITH. No, but will 100 percent of your replacements accommodate maintaining your herd size?
    Mr. BOEHNING. Yes, they will more than accommodate it.
    Mr. SMITH. I mean around to us, and I was wondering if it is a national problem. Some of the big herds coming in three times a day, milking, and BST. The productive life of the cow is 3 and 4 years, and now they are having a big problem in the price of heifer calves and heifer replacements have just sky rocketed, and I was wondering if that is sort of a National problem?
    Mr. BOEHNING. I feel like if a person does a good job of raising their calves, and has a good replacement program, that he can raise more than enough you know, replacement cattle as long as his co-rate, you know stays within reason, say 25 to 35 percent of his herd a year or something.
    Mr. SMITH. So what would the average production life of one of your cows be?
    Mr. BOEHNING. On my farm it would be 4 years, but a lot of the farms in my area, it is probably about 3 years.
    Mr. AHLEM. And we are looking to much the same, you have co-rates of some folks that are doing, culling 35 to 40 percent a year. We cull about 22 percent, so we can actually show some pretty substantial growth with a very good cattle raising program. It all depends on what kind of losses. One producer can raise 10 percent, and lose 10 percent and the other one could lose 50 percent pretty easily.
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    Mr. SMITH. I am assuming, Mr. Hoover and Mr. Grove, probably have a couple to sell?
    Mr. GROVE. No, we don't have any to sell, but we do maintain our numbers, on that productive life you mentioned. I think there are some areas of the country, hot weather country, the Southeast. Deep in the deep South, there are some of those areas where they breed those heifers back once or twice, and if they don't catch, they are not bred back. There are herds, I would dare say where 2 to 3 years, would be a productive life. Not in my area, but further South, they are not. Again, in hot weather areas.
    Mr. SMITH. Is BST a recommended farm management practice, for dairy farmers?
    Mr. GROVE. It has been somewhat controversial, but I use it.
    Mr. HOOVER. It is a tool that is out there like artificial insemination, better feeding practices that is available to farmers if they choose to use it.
    Mr. SMITH. I think we sort of passed over the negative parts of it, at least that is my impression.
    Mr. HOOVER. I used it, but my son about a year ago, thought he could do a better job not using it, so you know who won.
    Mr. SMITH. Anyway, I want to add my thanks gentlemen, to you being able to find somebody to milk the cows while you are here and thank you for being here. Mr. Ahlem.
    Mr. AHLEM. Can I make a short comment? One thing we didn't cover, is any of the outbreak issues. Being in California, we have had the poultry issue with an outbreak, where we have got 60 percent of the USDA field staff, about 80 percent of the California field staff tied up on this outbreak. I don't know what would happen if we had a foot and mouth or a BSE issue, I would certainly like to see more dollars go into the kind of rapid testing programs, so we can if we do get something, we can get our arms around it and deal with it. The USDA and the CDFA has done a very good job dealing with some of these initial impacts, and some of the outbreaks from Brucellosis in New Castle and they weren't getting a great deal of experience, but all of this discussion is beside the point. If we get an outbreak of any magnitude in the U.S. So if we can keep that on our minds.
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    Mr. SMITH. Good point.
    Mr. ROWEKAMP. Could I just add onto that a little bit? I think along with that, you know the possibility of outbreaks and stuff, in order to if we ever forget we never will have one, but I think implementing a national I.D. system would help get our arms around, if we ever did have an outbreak.
    Mr. SMITH. I heard the estimates from $4 an animal to $40 an animal.
    Mr. AHLEM. Actually I am working with a system now, just in the early stages, they have actually started production where they can, for $2.50 can put an I.D. where you can read 32 pages of information into that I.D. So the cost of some of these I.D.'s is getting down, and I think there is going to be several systems that work, where that animal will actually carry that information with it.
    Mr. SMITH. Bill just came back from Canada, and they are very upset by the country of origin labeling with a lot of the cattle going back and forth. I am not sure how many, if anybody has really, I guess you are not that close to the Canadian border, but it is this country of origin labeling for a lot of our food products is going to be tremendous task too. Gentlemen, thank you very much.
    Mr. GUTKNECHT. Thank you. This makes an interesting segway, I was just handed a statement from Secretary Veneman, that there appears to have been an outbreak, or at least an isolated case of BSE in Canada. It was just announced today. And so we have been very fortunate here in the United States. We don't know enough about the situation yet, but it is the first example, that we know of in Canada. So interesting segway, when you ask that question.
    Let me add my thanks again, to all of you, and all of the witnesses who appeared before us today. This has been an incredibly informative hearing. We appreciate your coming from long distances to join us and be with us today. Let me also say thank you to the staff, for helping to put this together. I think this has been a very, very good hearing, and hopefully, it is the beginning of the process of trying to get our arms around exactly what is happening in the dairy industry.
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     As I said at the beginning, I think most of us have a special place in our heart for dairy producers. The folks who actually meet those cows at least twice a day, 365 days a year.
    Without objection, the record of today's hearing will remain open for 10 days, to receive additional material and supplementary written responses from witnesses, to any questions posed by a member of this panel.
     This hearing on the Subcommittee on Department Operations, Oversight, Nutrition, and Forestry is adjourned.
    [Whereupon, at 2:35 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
Statement of Gordon Hoover
    Chairman Gutknecht and members of the subcommittee, thank you for inviting me to speak on behalf of Northeast dairy producers about the state of the U.S. dairy industry. While I am speaking primarily as a Northeast dairy farmer, my remarks also reflect the fact that I serve on the corporate board of Land O'Lakes, a farmer-owned cooperative that markets milk for 6,000 dairy farmers nationwide. My insight into the dairy industry, its infrastructure and the trends facing the industry has been greatly enhanced by my involvement in Land O'Lakes and other dairy producer organizations.
     My name is Gordon Hoover, and I am a dairy producer from Gap, Pennsylvania, just outside of Lancaster and in the heart of Amish country. I milk 120 cows on my farm, which has been in my family for three generations. My farm is slightly larger than the average herd size in Pennsylvania, which is right around 75 cows, and my milk is typically sold to Hershey Foods to use as an ingredient in chocolate. As an extension of my dairy business, I serve in several leadership roles, including
    Land O'Lakes Dairy Committee chair, National Milk Producers Federation board member and as a member of the Pennsylvania Dairy Stakeholders and Professional Dairy Managers of Pennsylvania.
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     Through my involvement in these organizations, I have seen the mood of my fellow dairy farmers change drastically in the past several years as we've learned to deal with dramatic milk price swings and market volatility. Eighteen months ago, the price I received for my milk dropped 34 percent, and it has stayed there ever since. In Pennsylvania, the average cost of production for the first three months of 2003 was $13.15 per hundredweight, and last month's on-farm milk price was $12.50 per hundredweight. That means that the average price producers receive for our milk isn't even covering our costs to produce it.
    Right now, there's a lot of depression and apathy among dairy farmers. My neighbors have maxed out their lines of credit and taken off-farm employment just to make ends meet. And, that's with the supplemental payments we receive through the USDA's Milk Income Loss Contracts. With conditions as drastic as they are, it's more important now than ever that producers and the dairy industry work together.
    As a dairy farmer, I believe in the cooperative spirit, working together with other producers, through industry organizations, within our cooperatives like
    Land O'Lakes, and with government officials, to continually improve our industry and increase dairy farmer profitability. That's why I've dedicated part of my time and efforts to participating in the industry organizations I listed earlier. It's through organizations like these that dairy producers shape and influence our future and our viability in the industry.
    In the Northeast, the milk supply is stagnant to decreasing. with According to Sparks Commodities Companies, reporting we experienced a 2 percent decline in 2001, followed by a 1.5 percent increase in 2002 and a projected 1 percent decrease this year. My concern as a dairy farmer is this: ''Where will the milk come from in the future to meet industry needs in our region?''
    As producers continue to exit the business or relocate out of the region due to declining profitability and other issues, fluid milk customers and other Northeast processors who make cheese, butter, ice cream and chocolate lose their milk supply. These customers need a stable supply for their processing facilities or they will relocate to other more viable dairy regions in this country or elsewhere in the world.
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    I believe producers need to work together, as individuals and through our cooperatives, to assure an orderly allocation of milk to our customers in a way that optimizes the value of the milk we produce. If we don't, the dairy infrastructure in the Northeast will deteriorate as it has in other parts of the country, and those producers who haven't exited the business will have to do so because they will not have access to supplies or market outlets.
    The government's involvement in shaping dairy policy should attempt to ensure that U.S. dairy farmers receive accurate and realistic signals from the marketplace. Programs like the dairy price support program and the Milk Income Loss Contracts have been beneficial in helping producers maintain profitability and limit their vulnerability to milk price volatility. However, it's unrealistic to expect that we can sustain prices at a level that encourages surplus milk production. What we want to prevent is losing a lot of good, solid dairy producers due to the low milk prices, while we wait for the economy to turn around and demand to rebound. If we do lose a substantial number of producers during this milk price slump, we could face a shortage in milk supply should demand rebound a year from now.
    That's why programs like USDA's Dairy Options Pilot Program are valuable in educating producers on ways to protect their operations in times when the milk price responds to an excess supply or drops in demand, such as the situation we're in now. Since the 1990's, producers have made progress in learning how to use the futures markets as a risk management tool. Many cooperatives are being more creative in offering price protection opportunities. For instance, Land O'Lakes offers fixed price contracts to members, regardless of their size, who want to protect their incomes.
    Personally, I have to do a better job at taking advantage of these opportunities. Although I participated in the Dairy Options Pilot Program, I haven't used forward contracting since then because I felt the low debt structure of my operation enabled me to weather market volatility on my own. However, long periods of low milk prices, like the one producers currently face, are just too damaging not to think about risk management options.
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    Like many other producers, I still need to learn more about these programs, and I need guidance on exercising my risk management options appropriately. Providing expertise and training to producers on risk management would be an excellent way for land-grant universities and State government, as well as the USDA, to get involved in protecting the long-term viability of our Nation's dairy farmers.
    Thirty-one cooperatives representing U.S. dairy farmers developed another avenue for potentially bolstering producer incomes—the proposed establishment of a voluntary, farmer-funded and industry-led program to bring supply and demand back in balance. The program, called CWT or Cooperatives Working Together, was developed by National Milk Producers Federation (NMPF) to respond to a crisis situation caused by the low milk prices.
    There's a lot of skepticism in the industry about the program. But I believe it can work because we (the NMPF board and staff) put a lot of time and effort into making sure it will work. If this program fails, then the market will exercise its discipline eventually. Unfortunately, until then, many producers will be forced out of business by low milk prices. If the program does succeed, the dairy industry will have a model in place that we can quickly implement in future situations when an imbalance in supply and demand is driving low milk prices for farmers.
    Another key factor in increasing milk prices must include finding ways to increase demand for milk and dairy products. I support the producer-funded efforts of the National Dairy Board, Dairy Management, Inc., and the various State and regional milk promotion organizations. This is another way that we can work together for mutual benefit, by promoting our products and conducting research on the benefits of milk and dairy products. In this regard, I would urge USDA to implement the provision included in the farm bill that requires importers of dairy products to pay their fair share for dairy promotion. The dairy promotion programs tend to increase demand for all dairy products, including imports. But, until now, importers have been free-riders of our promotion efforts. It's time for them to pay their fair share, too.
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    With 120 cows in my herd, I am one of the producers who benefits from the Milk Income Loss Contract payments that were authorized in the 2002 farm bill. These payments do help in periods of low milk prices. However, many good, solid producers are frustrated by some of the limitations and guidelines established by the MILC program.
    The program has done what it was intended to do. Many small or medium-sized farmers would have already been out of the business if it were not for the MILC payments. Unfortunately, producers who milk more than 200 cows feel abandoned and left to bear the brunt of low milk prices without any significant assistance. Looking forward, I am concerned that, if the industry fails to take effective voluntary action to balance supply and demand now, regardless of the MILC payments, we will undermine the willingness of Congress to provide this kind of support for producers in the future.
    The MILC program has proven to be an important safety net for many dairy farmers. However, I feel that the dairy price support program is the bedrock of the Federal dairy program. When we went through the last farm bill debate, this was something that all dairy farmers could agree on. Having said that, implementation of the program does need some refinements. NMPF recently did an internal survey to determine the actual cost of meeting CCC requirements for selling products to the government. They found the CCC needs to increase the purchase price of dairy products, particularly cheese, to assure that the program supports producer prices at no less than $9.90 per hundredweight.
    USDA's decisions on when to implement butter/powder tilts also cause frustrations among producers. It sometimes appears that the department is exercising its authority to adjust the tilt at times when the action will have a detrimental impact on producer incomes. This seems contrary to the program's purpose, which is to establish a safety net of $9.90 for producer milk prices.
    Besides dairy price support programs, the other major element of dairy policy is the Federal Milk Marketing Order system. To the extent that the Committee chooses to address marketing order issues, I strongly recommend that you bear in mind a simple statement of principle for the system: ''The Federal orders exist to assure orderly marketing of milk and equitable sharing of market revenues among those producers who serve the market.'' It seems the most troublesome issues arise when an organization or group of producers either chooses to take advantage of an order's provisions in order to avoid equitable sharing of market revenues or seeks to exclude themselves from the order to gain a competitive advantage over other producers in the order.
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    Within Federal Order 1, or the Northeast, producers face similar challenges as dairy farmers in other parts of the country—escalating input costs, increasingly stringent environmental restrictions and limited access to a dependable labor force. Specifically, in Pennsylvania, producers deal with continuing pressures from urban sprawl, increasing land values and corresponding property taxes, the extensive permitting process required to expand or upgrade facilities, and discrepancies in the over-order premium structure. Organizations like the Pennsylvania Dairy Stakeholders and Pennsylvania Farm Bureau are working with State legislators and the Pennsylvania Department of Agriculture to address many of these issues in order to maintain a viable dairy industry in the State.
    The discrepancies in the over-order premium structure are another issue. Over the past five years, Land O'Lakes dairy producers in the State and others have worked with the Pennsylvania Milk Marketing Board (PMMB) and State legislators to adopt a pooling regulation that would pool the Class I Over-Order Premium among all farmers in the State. The reason we feel it should be distributed among all producers is because the PMMB established the regulation to help all Pennsylvania dairy farmers better manage local market conditions, especially in times of economic hardship, and receive greater value from their milk. This is similar to the principle behind the Northeast compact. Unfortunately, under the current distribution guidelines, less than one-third of the State's dairy farmers receive nearly 85 percent of the premium proceeds. The PMMB continues to delay the outcome of that regulation, preventing the majority of Pennsylvania's dairy producers from receiving their fair share from the premium.
    I do want to commend the Federal Government on its implementation of the Dairy Export Incentive Program. DEIP continues to be one of the most effective ways to combat foreign subsidies that distort the world market for dairy products. It provides an opportunity for the U.S. dairy industry to target export markets for our products. As a producer who is concerned about how we overcome foreign subsidies and build viable export markets for dairy, I strongly support using DEIP to the fullest extent allowed under WTO trade rules, and I urge full funding of DEIP by Congress.
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    It is my belief that the U.S. goal in negotiating new trade agreements should be to achieve a dramatic reduction in export subsidies on dairy products and to eliminate trade barriers. If our negotiators achieve this goal, then U.S. dairy farmers will have an opportunity to develop new markets for their products at profitable prices. This is the only way that dairy farmers in this country can afford to grant imports any greater market access to the United States.
    As a dairy farmer, I oppose negotiating a free trade agreement with Australia or New Zealand for the simple reason that such an agreement would be a one-way street for dairy. Our industry joined the rest of the agriculture community in supporting the Bush Administration's quest for Trade Promotion Authority. It is very disappointing that the Administration is choosing to use that authority to pursue bilateral agreements that would hurt the dairy industry. Instead, the Administration should focus its efforts on negotiating a comprehensive, multilateral agreement in the WTO. In that forum, dairy farmers have a reasonable hope of gaining new markets.
    That said, I support the passage of H.R. 1160, which would establish new tariffs on Milk Protein Concentrate imports. This bill would impose a new tariff rate quota on MPC imports and close the MPC loophole. Getting this legislation passed is one part of a three-pronged strategy to address MPC. The other two prongs include getting U.S. Customs to adopt a standard definition of MPC and establishing a protocol to stimulate a domestic MPC industry. Through this strategy, we hope to prevent MPC from further displacing domestic milk supplies.
    I want to personally thank the 100+ Representatives who have agreed to sponsor H.R. 1160. Dairy farmers throughout the country appreciate your support. For those of you who haven't agreed to sponsor the bill, or who haven't decided to vote for the bill yet, I encourage you to extend your support for this important piece of legislation benefiting U.S. dairy farmers.
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    I also encourage the United States Department of Agriculture to respond more quickly when imports coming to our country exceed safeguard levels. Under the current trade rules, the United States provides substantial access to our markets for imported dairy products. Those same rules include safeguards to assure that imports do not have an excessive impact on the U.S. dairy industry. In recent years, USDA has not acted quickly enough to trigger those safeguards when imports exceed the maximum.
    The same rules that require the U.S. to allow imports give us the right to cut off imports if they exceed the levels specified by the WTO. The Administration needs to demonstrate its support for U.S. dairy farmers by exercising those safeguards promptly when the trigger levels are exceeded.
    Again, I thank you for the opportunity to testify before your subcommittee today. From my testimony, you may think there's a lot of doom and gloom out there in the dairy industry right now. But, from my perspective, there's a lot of hope, too. Dairy farmers are eternal optimists. We love what we do, despite the hardships we face. I truly believe by working together as producers, within our cooperatives, with industry and non-industry organizations, and with legislators like you, we can build a stronger, more viable future for all U.S. dairy producers.
    We do need your help and support, though. As I said earlier, programs like the Dairy Price Support Program and the Dairy Export Incentive Program are working to benefit producers, and we need you to give them your continued support. We also need you to continue to keep the farmer's best interest in mind when developing legislation that affects dairy trade obligations, environmental restrictions and income subsidies. Our goal as dairy farmers, and as an industry, is to create a marketplace where supply and demand work together to generate reasonable and realistic profits for producers, without substantial dependence on government subsidies. Anything you can do to help us build and sustain that marketplace is greatly appreciated. Thank you.
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National Family Farm Coalition
    The National Family Farm Coalition (NFFC) serves as a national link for grassroots organizations working on family farm issues, representing 32 grassroots organizations in 30 States. Through the NFFC, these organizations collaborate regionally on nationwide campaigns making the most of every group's experience, resources, and impact. Member organizations, comprised of farm families and concerned citizens, all suffer from the ongoing and deepening economic recession in rural areas caused primarily by historically low farm prices and the increasing corporate control of agriculture. NFFC unites these farm organizations in their common concerns and provides a forum in which to work for a change in farm policy.
    To address the current dairy crisis across the Nation, NFFC created a dairy subcommittee, a sector of its Farm & Food Policy Task Force. Farmers from Vermont to California participate in the dairy subcommittee, formulating national strategies to: combat corporate campaigns for milk protein concentrates (MPCs), write effective dairy policy alternatives (found in NFFC's Food From Family Farms Act) and petition government agencies to uphold the law.
    It is no secret that dairy farmers find themselves in devastating times. Bryan Wolfe, Vice President of the Ashtabula, Geauga & Lake County Farmers Union in Ohio, touched base with his local farmers. ''Clearly they felt great frustration and despair about the future of their farms,'' Wolfe said. ''They commented on totally inadequate milk prices, dismal crop progress (or total lack of progress) due to recent weather conditions, their inability to secure bank loans or support, and the extremely high costs of maintaining equipment—these farmers are desperate.''
    The average dairy farm lost $1.21 per hundredweight in 2001. U.S. Department of Agriculture (USDA) officials claimed a national dairy industry expansion led to 2002 price plummets. Rising land values in California, however, provided an opportunity for some dairy farmers to expand in western States, like Utah and New Mexico, where land costs prove significantly lower. Therefore, in 2002 production expanded in only five out of the 15 major dairy States, all concentrated in the western United States.
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    ''The ever-expanding factory-style dairy farms in the West led to an oversupply of milk,'' said executive director of the Hartford Food System Mark Winne. ''This left dairy farmers across New England receiving the lowest milk payments in 25 years—$1.04 per gallon—yet their production costs are more than $1.50 per gallon.''
    None of these issues came up during the House Agriculture Subcommittee on Department Operations, Oversight, Nutrition and Forestry hearing on May 20, 2003, however, held to discuss the state of the dairy industry. Various dairy industry representatives testified—all from the largest sectors such as the National Milk Producers Federation and the International Dairy Foods Association. Almost all testifiers uttered the phrase ''current dairy policies and programs are not working,'' at one time or another during their statements—at no time, however, did they stop to explain why. U.S. dairy policy fails because it does not: include a cost of production formula, re-establish fair farm-gate price funding in the market place, and/or allow the market place to stabilize properly.
    Milk cooperatives began with good intentions, authorizing farmer associations to form voluntary cooperatives for the producing, handling, and marketing of agricultural products. This risk management tool, designed with farmers in mind, delivered prices at the cost of production plus a return on investment to producers. Current dairy policy, however, does not include a cost of production formula. Furthermore, dairy payments allotted in the 2002 farm bill, while helping a small amount with farmers' monthly cash flow, further depress farm prices at a time of increasing national budget deficits.
    Therefore, the NFFC strongly supports a national dairy policy that would implement a cost of production formula using USDA Cost of Production figures plus any additional factors not adequately reflected in these data. This policy approach would also apply to feed grains and wheat. America's current cheap grain policy is fueling the expansion of corporate livestock and dairy operations because it is ''cheaper'' to buy the feed than to grow it. Farmers who produced feed for dairy cows lost $76.98 per acre in 2001, down from a loss of $128.17 in 2000 for corn production . For soybeans, the other important feed ingredient, crop farmers lost $85.68 per acre in 2001.
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    Today, the largest milk cooperatives in the U.S. abuse the power to collectively bargain on behalf of dairy farmer members in order to obtain just and equitable milk pricing. In fact, many milk cooperatives and dairy processors work collaboratively to keep farm milk prices low, reducing corporate costs. Thus, re-establishing fair farm-gate prices in the market place proves vital to effective dairy policy.
    As it stands today, however, the U.S. government allows corporations to work both sides, buying domestic products significantly below the cost of production while generating additional profits from low-cost imports also supplemented by taxpayers money. For example, Dairy Farmers of America (DFA) is a dairy cooperative for U.S. dairy farmers. It controls 29 percent of the Nation's milk, holds 11 import licenses and maintains multiple partnerships with foreign and domestic institutes that hold a vested interest in keeping farm milk prices low.
    The record shows that in the first week of May 2003, DFA sold 1,533,019 pounds of cheese to the USDA's Commodity Credit Corporation (CCC) surplus program. In the same week, DFA, in a joint venture with New Zealand giant Fonterra, sold 1,061,748 pounds of powdered milk to the CCC from Portales, New Mexico. Thus, in one week, DFA and its New Zealand partner garnered $2,583,856.10 from U.S. taxpayers, contributing to the illusion that America's dairy farmers produced more than the market demands.
    The Subcommittee only heard one ''family farmer voice'' during its hearing. This farmer, a dairy producer from Bridgewater, Virginia, spoke for 5 minutes—he also happens to be a DFA Corporate Director.
    John Bunting, a New York dairy farmer and NFFC dairy subcommittee member, compiled several graphs illustrating the dairy industry situation using USDA data. Bunting found that domestic milk production is actually in a deficit situation, not meeting U.S. consumer dairy demand. Moreover, USDA skews the data for domestic dairy consumption by not including imported dairy powders such as MPCs. Including these figures would demonstrate an additional shortfall of U.S. milk production by five to 10 percent.
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    In 2000, over 52,000 metric tons of MPC entered the U.S.—the equivalent of 4.6 billion pounds of domestic milk. MPC is shipped to the U.S. as a chemical or pharmaceutical product, circumventing dairy tariff and quota rate schedules, allowing corporations to skirt the limits imposed by current trade agreements. Since 2000, use of MPC imports in dairy products dramatically increased each year.
    Increasing MPC use leaves more dry milk on the market, which CCC buys under its price support program. From 1996 to 2000, CCC support program costs increased by $572 million: an additional cost to taxpayers directly linked to displaced dry milk saturating dairy markets.
    Dairy processors directly link MPCs use to higher profits and depressed farm milk prices. A current MPC patent application by Kraft Foods North America, Inc. states:
    ''It would be beneficial to provide a process cheese base prepared with edible powders as a substitute for some or all of the natural cheese normally used in the production of process cheese for several reasons. Unlike natural cheese, such powders have the advantage of an extended shelf life. Thus, unlike natural cheese, these powders can be purchased when supplies are high and prices are low, and then used over an extended period of time. Further, it is often cheaper to purchase such powders than natural cheese.''
    Thus, NFFC requests the 108th Congress work to prevent the illegal use of MPCs in standardized food products by forcing the Food and Drug Administration (FDA) to enforce Federal standards and take regulatory action against illegal, adulterated products. The FDA never approved MPC as a food ingredient because it does not meet ''Generally Regarded as Safe'' (GRAS) standards. By law, any food ingredient not in common use before 1958 must meet GRAS standards. In these vulnerable times, food safety should be of utmost importance to U.S. lawmakers; currently, MPC freely enters the U.S. as a white-powder substance, often times not inspected at port entries, much less for human consumption.
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    Finally, current dairy policy does not allow the market place to stabilize. As exemplified, current dairy policy is costing America's taxpayers while enabling dairy exporters and purchasers of U.S. milk to buy from the farmer at the cheapest possible price. Moreover, the government does nothing to protect the consumer, who continues to pay the same or increasing prices at the grocery store for dairy products while the processors and retailers reap record profits.
    For example, while New England dairy farmers suffer through the lowest milk prices in 25 years, the region's predominant dairy processor, Dean Foods (formerly Suiza) profit from an increasing wholesale-retail price spread. Currently, America's farmer receives only 28 percent of the product's retail price. Meanwhile, Dean's stock rises from just under $30.00 in September 2001 to $45.75 after profiting from low farm milk prices.
    Based on recent research published by Ron Cotterill at the University of Connecticut, the retailers gross nearly $2.00 for every gallon of milk supermarkets sold, proving current dairy policy failed to address obvious market signals.
    Perhaps the current dairy policy failed to respond to market signals because large dairy operations inherently fail to respond as well—if the market signals there is too much milk, large dairy operations respond to these low milk prices by producing more milk. If milk prices rise, large dairy operations tend to expand. Because large dairy operations depend on purchased stock for expansion, many also depend on cattle replacements to maintain its herd.
    From 1998 to 2002, the U.S. imported 298,000 dairy cattle from Canada whereas in 1997, the U.S. imported only 19,000. Therefore, in 2002 the U.S. dairy herd increased not because of high milk prices but because mainly large dairy operations imported 62,000 cattle to ''maintain'' and ''expand'' production. Under a diversified, sustainable dairy operation, this type of expansion is unnecessary. Moreover, the large dairy operations depend on a minimum-wage labor force, many that work long hours and perform multiple milkings everyday. Increasingly, this labor force consists of Latino immigrants.
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    During the hearing dairy producer Chuck Ahlem, owner of a 1,700-cow operation, referred to contamination risks like mad cow disease (bovine spongiform encephalopathy or BSE) and emphasized tracking system needs, especially within larger operations deemed more efficient by USDA economist Keith Collins. Country of Origin Labeling (COOL) as described in 2002 farm bill guidelines would require these tracking systems, yet many companies claim the tracking system implementation is too costly. Ironically, as Ahlem emphasized its need during questioning, Secretary Veneman announced the latest Canadian BSE outbreak. For public health safety, consumers must maintain the right to know where his/her food originates and what happened to it along the ever-shortening value-added chain.
    The question consumers should be asking themselves is: ''What is the price of public safety and why do corporations feel the need to hide this information?''
    In closing, consider this: in 1952, President Hoover reflected upon the policy path chosen during the Great Depression (1929). Hoover said: ''Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself had only one formula: ''Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.'' He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse.
    This testimony reflects the views and beliefs of NFFC's farmer members. If the present day ''leave it alone liquidationists'' dictating present dairy policy fails, then America's dairy infrastructure will collapse without a ''plan B,'' leaving the Nation's dairy supply vulnerable and completely dependent upon foreign imports. There will be no sustainable dairy farms. There will be no viable rural communities. There will be no dairy farmers left. ''Right now the hope of recovery is gone,'' said Bunting. ''Because of low milk prices, most farmers don't have the money to plant spring crops and farms are collapsing faster than anyone could have anticipated.''
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    NFFC urges the 108th Congress to establish sound dairy policy now—do not rely on the National Milk Producers Federation's (NMPF) ''quick-fix Band-Aid approach'' Cooperative's Working Together (CWT) Program. The CWT program, as proposed by NMPF, would charge every dairy farmer an assessment, or ''tax,'' used to finance a dairy-herd reduction, theoretically decreasing milk production. The fact of the matter is the CWT program will finance a ''herd retirement program'' in the western States, States that create America's dairy surplus, with taxes from farmers who can least afford it—those in the Northeast and Midwest. The CWT program is dangerous because desperate times call for desperate measures—if NMPF allows all farmers to participate, farmers in the most desperate economic situation will choose to sell-out. ''One farmer said that if the CWT whole-herd buy-out program is instituted, he will 'jump' on it,'' said Bryan Wolfe. ''Because he's had enough.''
    Unlike NMPF's unsustainable approach to managing a very serious dairy crisis, the NFFC's policy approach would help stabilize supply with demand and create a dairy system that truly works for the Nation's dairy farmers, rural communities, and consumers. A serious, long-term national dairy policy must be considered by the 108th Congress today—NFFC challenges Congress to tackle a much needed ''plan B'' approach to America's failing dairy industry.

NMPF Answers to Submitted Questions
    1. Assuming the CWT achieves the goal of 80 percent participation, how much revenue will be collected under the program and how will it be used?
     80 percent of 170 billion pounds of production, multiplied by the 17.9 cent assessment, will raise about $243 million. The money will be used by CWT to reduce milk production over the 12 months of the CWT program through three methods: a herd retirement program, a reduced production marketings program, and an export assistance program. Approximately 3 percent of the money will be used for administrative expenses.
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    2. According to your website, CWT will focus on milk reduction in those regions where the greatest increases in production capacity currently exist. How will the CWT regional allocations and controls work?
     The final program will have parameters to ensure that no one region within the country suffers a disproportionate loss of production capacity due to the level of program participation. In certain regions of the country, program participation will be limited to one-half of 1 percent of annual milk output to ensure that areas with stable or declining production are not disadvantaged. In other regions where expanding milk production capacities render such safeguards unnecessary, the regional ceilings for milk reduction will be much more liberal. This feature will ensure that CWT will focus on reduction in those regions where the greatest increases in production capacity currently exist.
    3. The CWT export price assistance program appears to present potential vulnerabilities for US dairy exports under WTO rules governing dumping and export subsidies. Please explain how the WTO rules may apply to the new CWT export program?
     We disagree that the CWT program presents any problems for US dairy exports under either the WTO rules governing dumping or the WTO rules governing export subsidies. The WTO agreements are trade agreements among sovereign nations that discipline the actions of those countries, but do not regulate in any way the private activities of citizens of those countries. The CWT will be a purely private activity conducted by dairy producers without any government involvement or assistance, and therefore has no WTO implications.
    First, with respect to dumping, the applicable WTO rules are contained in Articles VI of the General Agreement on Tariffs and Trade (GATT), and the WTO Understanding on the Implementation of Article VI of the General Agreement on Tariffs and Trade. Those rules impose certain requirements on Member countries with respect to the operation of their respective antidumping laws. In other words, WTO rules on dumping relate to the procedures and tests that a national government can apply when it seeks to impose additional antidumping duties on the goods of another country. These rules are entirely inapplicable to the actions of a private entity such as CWT.
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    Second, the WTO rules governing export subsidies on agricultural products are also inapplicable to CWT. The applicable rules are Articles 3.3, 8, and 9 of the WTO Agreement on Agriculture.
    Article 8 states that ''[each] Member undertakes not to provide export subsidies otherwise than in conformity with this Agreement and with the commitments as specified in a Member's schedule.'' Article 3.3 similarly provides, in relevant part, that ''a Member shall not provide export subsidies—in excess of the budgetary outlay and quantity commitment levels [in] its Schedule.''
    Under international law, a subsidy is a grant or benefit conferred by reason of governmental action. See e.g., WTO Agreement on Subsidies and Countervailing Measures, Article 1 (Definition of a Subsidy). Article 9 of the WTO Agreement on Agriculture lists the various types of agricultural export subsidies that are disciplined under WTO rules. All of those subsidies involve either direct payment by a government or some form of governmental action that results in a subsidy benefit.
    The CWT program is not a government program. It will not require or involve any governmental action or involvement in its implementation. Dairy producers will act in association to privately fund the various activities of the program including the export assistance component. There will be no government funds involved nor any government mechanism for funding or carrying out the program.
    The WTO Agreements are trade agreements among its Member countries and discipline the actions of those Members. The WTO Agreements do not regulate the private commercial activities of individual citizens or groups of citizens of those countries. WTO rules bind nations to certain obligations; they do not bind or apply to private individuals.
    4. Please explain how CWT complies, or doesn't comply with U.S. antitrust law, including but not limited to the Capper-Volstead Act?
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     The CWT will operate in a manner fully consistent with the antitrust laws. For nearly a century, Congress has provided specific protections under the antitrust laws, first pursuant to section 6 of the Clayton Act and subsequently under the Capper-Volstead Act for certain classes of persons acting cooperatively or in association. Section 1 of the Capper-Volstead Act specifically establishes protections under the antitrust laws for farmers acting in association, and provides that ''persons engaged in the production of agricultural products such as farmers, planters, ranchers, dairymen, nut or fruit growers may act together in association—in collectively, processing, preparing for market, handling and marketing in interstate and foreign commerce, such products of persons so engaged.'' The CWT program will be an activity of dairymen acting together in association contemplated by the statute. The CWT program will be established, constructed and implemented in strict accordance with the antitrust protections afforded by Capper-Volstead, as that law has been interpreted and construed by the courts.
    1. Do you support provisions of the farm bill which permit the Department [USDA] to adjust the butter/nonfat dry milk purchase price relationship? What is the best way to determine the appropriate relationship?
     The basic purpose of the dairy price support program is to provide a safety net for dairy farmers, to stabilize milk prices and dairy farm incomes. The program operates best when products are purchased and removed from commercial markets during times when milk and dairy product prices are low and when government stocks are sold back to the commercial market during periods when prices were high. Operating the program with the objective of minimizing government costs, or of reducing stocks, or to ''better align support prices with market prices'' is inconsistent with the basic purpose of the program, which is designed to affect market prices, specifically to maintain prices at minimum levels during periods when market forces would establish prices below those minimum levels.
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     Over time, Congress has made changes in the provisions of the dairy price support to ensure that the Department of Agriculture carried out the basic purpose of the program. Prior to the early 1980's, USDA had discretion to establish the price support level within a wide range, based on the parity concept. Since the early 1980's, the Congress has established the price support level. During the 1980's, when Congress provided that the price support level be established through a formula based on the milk equivalent of projected purchases, USDA exercised discretion in applying this formula by choosing the method of calculating milk equivalents that maximized the chances of triggering price support cuts. In the 1990 farm bill, Congress mandated the particular milk equivalent calculation to be used in applying this formula.
     In the 1990 farm bill, Congress also reduced the department's discretion to adjust the butter-nonfat dry milk purchase price relationship by limiting such adjustments to no more than two per year. Throughout the 1990's, USDA's use of this limited discretion was not disruptive to the dairy industry because producer prices were established almost entirely by a cheese price-driven adjustor, the Basic Formula Price. However, beginning in 2000, Federal milk order reform introduced dairy product price formulas, under which butter and nonfat dry milk prices established prices that dairy farmers receive for about 60 percent of their milk. Overnight, USDA's discretion to adjust the butter-nonfat dry milk price relationship changed from a fine-tuning mechanism to full discretion to adjust the support price for 60 percent of the milk produced in the United States. Yet USDA continues to exercise this discretion as if it were a fine-tuning mechanism, with devastating consequences for dairy farmer income. The tragic irony is that, by tilting the butter-nonfat dry milk price relationship in an attempt to reduce CCC costs and reduce CCC purchases and stocks of nonfat dry milk, USDA has actually increased CCC costs, due the existence of the MILC payment program, and has not reduced CCC purchases or stocks.
    The best way to determine the appropriate relationship between the butter and nonfat dry milk purchase prices is to take fully into account the impact on dairy producer income resulting from any adjustments to this relationship.
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    2. Do you see signs that CCC stocks of surplus powder are serving as a depressing factor on market prices? If so, what types of steps would best alleviate that impact?
     We are concerned that the current CCC stocks of surplus powder could limit future price increases, and we are encouraged by some of the efforts made by the Farm Service Agency to dispose of powder in a way that will not displace commercial sales on the market.
    A number of the more effective programs that FSA has used to move powder out of inventory include shipment as overseas food aid; domestic distribution to the poor, where donations represent a new demand for milk; and animal feed programs that offer powder for direct use for foundation livestock which don't normally consume milk-based feed.
    In addition, we have proposed to USDA a program to assist the domestic processing of dairy proteins, in order to meet the current domestic demand for high-end milk protein concentrates, casein, and caseinates. This could reduce CCC powder purchases by as much as 400 million pounds per year, which would contribute substantially to reducing the overhang. We look forward to continued progress on this proposal.
    However, not all of the programs are effectively avoiding displacement of commercial product. As cited in our testimony, the initial design of this year's nonfat dry milk assistance to drought-stricken foundation livestock producers did not require that the powder be used directly by the targeted herds, as was required last year. Instead, they offered powder to the states, giving them great latitude to put government powder (effectively donated by CCC) into the market at as low a price as they wish, and allowing them to offer non-dairy feeds to the stricken livestock. FSA responded to industry concerns with changes to the contract provisions; but we have already heard accounts of some of this powder—designated for animal feed—being offered in the market at deep discounts and in violation of the USDA's agreements with the states. If such abuse is taking place, it demands audit and enforcement; we hope USDA takes this responsibility seriously.
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    Other USDA programs are providing powder to states, which are using it to displace commercial fluid milk purchases for their prison systems. The cheese for powder swap recently initiated for USDA's feeding programs is also dumping powder on commercial markets at what is effectively below the nonfat dry milk support price. This simply displaces producer milk, which is diverted to the dryers and sold to the CCC.
    Under present circumstances, any program that attempts to reduce CCC powder inventories by moving powder into normal commercial channels must fail. This is because milk displaced by powder use will simply be turned into powder and sold to CCC. This rotation of CCC inventories can come at a higher cost per pound than that of destroying the original inventories.
    There is clearly considerable scope today for the movement of powder through foreign aid. We encourage USDA to overcome all the economic and logistical difficulties in acquiring U.S. powder that is suitable for these programs. In particular, CCC must recognize the full costs of providing the additional processing of these products in large volumes over a short period, and be willing to pay these costs.
    3. Considering the MILC program's taxpayer cost, market impact, and direct impact on producers, how do you rate or evaluate this program in terms of its bang for the taxpayer buck?
     The dairy price support program is the most efficient means of providing a safety net to dairy farmers. By purchasing a small fraction of domestic dairy product production when market prices are weak, the program provides a price floor for all milk marketed by dairy farmers. It is essential that the program provisions be properly implemented by USDA to ensure that producers receive at least the support price for their milk used for manufactured products. However, the program leverages taxpayer expenditures very effectively to provide downside price and producer income protection. The return to taxpayer investment in terms of producer income is many hundred percent.
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    Direct payments, such as the MILC program payments, cannot provide the same degree of leverage. A dollar spent can provide no more than one dollar of producer income. Furthermore, when the program has a negative impact on producer prices, as Dr. Brown has calculated, and as many in the industry believe, then the return to taxpayer investment in terms of producer income is less than one to one, i.e., less than 100 percent.
    4. Both the price support program and the MILC program have countercyclical impact. Can you compare the two: how are they alike and how are they different from the perspectives of taxpayers, consumers and producers?
     The price support and the MILC programs both have minimal effects on consumers, but they differ greatly in terms of their impact on producers. The price support program is scale neutral: all producers benefit equally regardless of size. The MILC program, by contrast, discriminates based on size. Smaller producers, whose payments are unaffected, or minimally reduced, by the payment cap, receive total returns (market price plus the MILC payment on a per hundredweight of milk basis) that are greater than they would receive in the absence of such a program, as Dr. Cropp has indicated. Larger producers, on the other hand, whose payments, averaged over their entire production, are less than the market price reduction due to the payments, actually lose money under the program. The MILC payment program is therefore divisive among producers, and has aggravated regional divisions that the National Milk Producers Federation has had considerable success in overcoming in recent years.
    5. Concerning a chart on milk prices, isn't this particularly unusual volatility in dairy prices? How can any component of the dairy industry make sound investments when basic product prices are so erratic? Are there particular underlying factors that are making dairy prices move so dramatically?
     Yes, prices have become more volatile since the support price was lowered from a level that regularly set the domestic market price to a true safety net program that only set the market price in exceptional circumstances. Today prices are low in part because USDA has aggressively tilted the nonfat dry milk price downward. With the current inventories, no milk price boost can fully stand up to reductions of the support price for nonfat dry milk.
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    Several structural issues are also contributing to the low lows, without necessarily boosting the highs:
    It is an unfortunate fact that in recent years, when prices have been low, the reduction in milk production has come primarily from the exit of small farms. In all parts of the country, dairy farms are getting larger and fewer. Just 10 years ago, herds under 100 produced nearly 45 percent of U.S. milk; so there was a lot of room for reduction through exit. Today, farms with less than 100 cows produce less than a quarter of U.S. milk. This means that there is less room for a supply response from small producers.
    Slowing demand growth is also causing problems. Rapid cheese consumption over the last 30 years has meant that the industry could rapidly grow out of low prices, whenever production outpaced demand. Today demand growth, though still positive, is slowing, so that a greater production response is necessary to return the market to balance. In recent years, the markets could balance without reducing cow numbers; today this is no longer the case.
    Of course, growing imports of products, coming through our trade loopholes, have also been contributing to low prices, by displacing substantial volumes of U.S. milk.
    Finally, the MILC program has been initiated at a time when all of the above are working against dairy farmers and the USDA is aggressively lowering milk prices. The MILC program is achieving its intended aim: it is keeping many small producers in business during the worst milk prices in a quarter-century, but by doing so, it is retarding what has become the normal means of returning the market to balance.
    6. Do you discern differences between the Federal order and various State orders that serve to disrupt the orderly marketing purpose of the government policies?
    We believe that the state and Federal orders work as complements to one another. There are distinct benefits in each; those who see them as in opposition to one another fail to recognize that each has evolved for its own reasons. We strongly encourage both USDA and the states to pursue constructive, complementary policies that allow them both to work in cooperation, not in opposition.
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    7. If the simple answer about why prices are low is that too much milk is being produced, why aren't producers responding? Why does milk production continue to increase?
     Milk production continues to increase, despite low milk prices, for several reasons. First, favorable prices in 1998, 1999 and 2002 stimulated significant expansion, which was generally absorbed by the growing commercial dairy market prior to 9/11. The subsequent economic recession, compounded by the slowdown in the travel and restaurant business, reduced the growth of dairy consumption, from over two percent per year to between zero and one percent during the last two years. This slowdown in demand growth will require a greater than usual reduction in milk production, and, hence, a longer period of low prices will persist before supply-demand balance can be restored and prices return to more normal levels.
     In addition, producers are reacting more slowly to the current period of low prices. Compared with previous years and previous price downturns, more milk is being produced on large dairy farms, which bankers are more hesitant to liquidate. Guided by the length of previous price downturns, many lenders have been reluctant to foreclose on non-performing loans to large dairy operations, because the cost of doing so outweighs the cost of carrying the loans for the length of a normal price downturn. In addition, the MILC payments are shielding small producers from the full impact of current low prices. Small producers have traditionally borne the largest share of the adjustment to previous period of low prices, by exiting the business in relatively large numbers. With the MILC payments slowing this traditional adjustment mechanism, the adjustment to current low prices has been borne by mid-sized producers.
    8. On February 11 of this year, USDA announced producer approval of new Class III and Class IV pricing formulas which were to take effect on April 1. This change was initially part of the 1996 farm bill directive, and of legislation enacted by Congress in December 2000. Now that this process is complete, please provide for the committee your views—on the process itself, and on the formulas that resulted?
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     The formulas themselves appear to be reasonable, and we look forward to their long-run implementation to verify that. They will inevitably need correction over time, if for no other reason than that the costs and efficiencies upon which they are based will change over time.
    The process is the problem. As noted in the question, it took over 2 years and four months to move these formula changes from legislation to implementation. This is symptomatic of a growing paralysis in the Department of Agriculture and the Federal Government generally.
    Over-centralization in executive branch departments may be aimed at increased accountability; instead, it creates bottlenecks in the offices of the Secretary and the Under Secretaries, who are unfamiliar with the details of the decision. This leads to long backlogs and repeated revisions of the same rule with little or no improvement. Such review should be re-engineered or reduced; in any case, it must be accelerated. (There are similar problems with interagency reviews.)
    Certain types of impact analysis can be very important for putting regulation into proper perspective. However, the required laundry list of analyses has added tremendously to the paperwork involved in rulemaking and often slows implementation unnecessarily.
    9. Concerning H.R. 1659 (Nunes bill), what is your view?
     NMPF supports the Nunes bill, H.R. 1659. This legislation would correct a situation in which a handler will exploit minimum pricing provisions in both Federal and State market orders. By locating outside the state in which the plant intends to sell the bulk of his sales, and that state having no authority to regulate the milk, and by virtue the sales will not be into a Federal market order, in effect neither regulatory authority will be able to ensure a minimum price for milk is met by the handler. H.R. 1659 corrects that inequity loophole.
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    10. Concerning forward contracting, what points of [the recent USDA report] do you regard as significant?
    A. USDA's Dairy Programs released its ''Study of the Dairy Forward Pricing Pilot Program and Its Effect on Prices Paid Producers for Milk'' in January. Here are some of USDA's highlights, with NMPF conclusions:
    Price Comparisons. The simple average price for contracted milk during the study period (September 2000 through March 2002) was $14.02 per hundredweight; the same milk would have been paid $14.51 without contracting. This means that the simple average loss, across months, was 49 cents per hundredweight. Calculating from the data in the study's appendix, the weighted average loss over the study period was even higher: $1.23. This would seem to be damning; how can a program that loses producers $1.23 per hundredweight be defended?
    An alternative approach was to compare contract prices with the future prices when contracts were signed. USDA did this for each quarter, but did not publish a weighted average for the entire study period and refused to provide it upon request. However, contract volume was greatest in the same months for which the contract price was substantially below the futures price. By this measure, it seems that the weighted average impact of contracting was negative for producers, compared to using futures markets. This raises a real concern about allowing handlers an opportunity to press producers into a contract price that is below the market's current expectations, without even a long-term responsibility to pay Federal order minimum prices.
    Pressure to Contract. USDA reported that 7 percent of contracting producers felt obliged to sign a forward contract or lose their outlet for milk. This percentage may seem small, but it is large enough to be disturbing. We anticipate that when the volume of milk under contract reaches a critical point, producers will be driven to accept disadvantageous contract prices under threat of losing their milk outlet.
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    Implications.The forward pricing pilot program has great potential to undermine the farmer's minimum price guarantee under the Federal or state order systems. This report seems to support that:
      (1) Contracting producers suffered a clear revenue loss compared to non-contracting producers during the study period;
      (2) There appears to be a bias towards lower producer prices for contracting producers, even in the long run; and
      (3) A small but significant percentage of contract producers felt that they would lose their milk outlet if they did not enter into a contract that stripped them of their Federal order price protection, and did not even offer them enforcement of the contract price, except through the courts.
    The report does nothing to lay to rest our suspicions about the ultimate effects of the program.
    Other Programs Already Available. Currently, there are approximately 8 billion pounds of milk priced in the Futures and Options markets, which is already available as a risk management tool.
    Cooperatives as Producers. Regarding the argument that proprietary handlers simply want the same opportunity to reblend and forward price that cooperatives already have, it should be noted that cooperatives are, in fact, producers and have always been assumed to act in the direct interest of their producer-owners. This is a completely different relationship from that of independent producers shipping to a proprietary handler.
    Conclusion: Minimum Price Integrity. Federal market orders and State orders provide for minimum pricing provisions to ensure that suppliers selling milk to handlers are paid at least a minimum price. The forward contract pricing program allowed by the current pilot project and covered by the USDA study does NOT ensure a minimum price will be enforced. This pilot program should be allowed to expire.
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    The farm bill authorizes the Secretary to alter purchase prices for dairy products under the price support program not more than twice a year. What is the history of the use of this authority in the last several years? What criteria does the Department use to make the decision? Does the administration's process for making that decision include the involvement of the public or of industry experts outside the Department?
    Four minor adjustments (3 cents or less) were made in purchase prices of cheese, butter, and nonfat dry milk (NDM) during the mid and late 1990's as the milk price support level was changed from $10.10 per hundredweight (cwt) up to a peak of $10.35 per cwt then down to the present $9.90 per cwt. Two minor adjustments in purchase prices were made in 2000 and 2001 to make the purchase prices consistent with Federal Milk Marketing Order (FMMO) reform.
    Larger adjustments were made once in 2001 and once in 2002, lowering NDM purchase prices about 10 cents per pound each time and increasing butter purchase prices about 20 cents each time. USDA followed the historical practice of reducing the support purchase price for the portion of milk—fat or nonfat solids-that is accumulating in CCC inventory.
    Factors considered in making the larger adjustments in purchase prices include: the impacts on government dairy product purchases, government inventory levels of dairy products, effects on milk producer income, and effects on milk and dairy product markets and market participants. Although public comments and industry experts' opinions are received throughout the year and used in determining the advisability of purchase price changes, CCC does not have a formal process to collect industry comment on each change in purchase price levels.
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    Actual class III prices in the last year have fallen below the support price of $9.90 established by the farm bill. What factors can you identify that explain this occurrence? In February, the National Milk Producers Federation (NMPF) petitioned USDA to adjust Commodity Credit Corporation (CCC) purchase prices to account for additional costs processors incur when they sell to CCC. What action has the Department taken with respect to this request?

    The Farm Security and Rural Investment Act of 2002 (2002 Act) states that the Milk Price Support Program (MPSP) purchase prices shall be sufficient to enable plants of average efficiency to pay producers, on average, a price not less than $9.90 per hundredweight (cwt) for milk containing 3.67 percent butterfat. The class III price calculated by the Agricultural Marketing Service (AMS) is a minimum price for milk containing 3.5 percent butterfat. Actual prices producers receive are typically greater than the minimum, and prices for 3.67 percent milk are about $0.20 per cwt higher when butter is near its support price of $1.05.
    CCC has historically interpreted-on average—to mean prices averaged over all cheese and butter/nonfat dry milk (NDM) plants (class III and class IV milk) on an annual basis. Weighted average prices, based on utilization, of milk used for cheese making (class III) and milk used for butter/NDM making (class IV) have exceeded $10 per cwt for the past three years. Annual average manufacturing milk prices reported by the National Agricultural Statistics Service (NASS) and the manufactured milk value calculated for USDA's Dairy Interagency Commodity Estimates Committee have also exceeded $10 per cwt.
    While USDA is meeting its historical interpretation of the legislative mandate, supporting milk prices at $9.90 per cwt on average, it has been found that class III milk is not being supported equally with class IV milk. Reluctance of manufacturers to market cheese to CCC at the CCC purchase price has resulted in class III prices below $9.90 per cwt. Fixed make allowances under FMMO reform ensures processor profitability making them less responsive to high or low prices for cheese, since cheese price changes cause proportional changes in class III milk prices, which is their major input. USDA surveys have also found higher costs incurred to sell cheese to CCC versus the commercial market. USDA is reviewing these factors to determine if any actions can or should be taken.
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    USDA has adopted several policy tactics that are designed in part to dispose of CCC NDM stocks. What has been the affect of these actions?

    NDM sales for animal feed, casein production, and unrestricted use and donations for domestic and foreign food aid have used much larger quantities of CCC stocks in fiscal year 2003 than in past years. About 170 million pounds of CCC NDM was used in fiscal year 2002 while 470 million pounds were added to inventory. Current NDM inventory, over 1.2 billion pounds, is similar to the fiscal year beginning level, 1.3 billion pounds, while purchases have exceeded 450 million pounds through May.
    The National Milk Producers Federation (NMPF) recently noted that under the Department's 2003 Livestock Feed Assistance NDM Program, in some States feed processors are being permitted to sell the powder into the open market. What information can you provide about this matter?

    Contract provisions were revised before any NDM was delivered to States to prevent marketing of powder into the open market. USDA is investigating a reported attempt by ranchers to sell NDM made available to food manufacturers. If abuse is found to be widespread, the sales of NDM by CCC for restricted use may be terminated.
    Separately, a concern has been raised as well that nonfat dry milk donated to the state of Texas is being transformed for use as beverage milk in the prison system. What information can you provide the Committee in this matter? Does it appear that NDM donations are displacing or will displace commercial sales of bottled milk to the prison system?

    This case has been investigated and prison officials have been informed that conversion of NDM to fluid milk is not an approved use of donated NDM.
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    When the farm bill Conference Report was passed, CBO estimated that the Milk Income Loss Contract program would cost $963 million over its lifespan of about 3 years. Under the CBO baseline released in March, the program is now expected to cost nearly $3.3 billion.
    What is the administration's estimate of how much this program will cost?

    The administration estimate is $3.5 to $4.5 billion for the full program for fiscal year 2003 through fiscal year 2005, with a few payments being made in fiscal year 2006 for fiscal year 2005 production.
    Has the administration established under the program a final date by which eligible producers must sign up? If not, why not?
    The final date by which eligible producers must sign up is September 30, 2005.
    To the extent that the Department continues to allow producers to sign up for the MILC program, what is the current pace of sign-up compared to earlier periods? How many operations have signed up for the program? What is the Department's best estimate as to how many operations will participate that have not yet signed up?
    We believe that most dairy operations have signed up for the program; however, exact estimates are being assessed pending modifications to the current software that will provide that information.
    Some producers have filed a lawsuit contesting USDA's interpretation of the volume limit on MILC program payments. What technical issues are raised in this lawsuit, what was the Federal Government's response, and what is the current status of the suit?
    The United States District Court for the Northern District of Ohio, Eastern Division, issued a decision in Fullenkamp, et al., v. Veneman on May 19, 2003, granting the Government's dispositive summary judgment motion in full and denying plaintiffs' motion for injunctive relief. Plaintiffs were large dairy producers challenging the Department of Agriculture's implementation of the Milk Income Loss Compensation Assistance (MILC) Program. Specifically they challenged whether the production cap of 2,400,000 pounds in section 1502(d)(2) of the Farm Security and Rural Investment Act of 2002, which authorized the MILC Program, should be applied to transition payments, that is for payments made from December 1, 2001 through the month preceding the month the dairy producers entered into the MILC Program contract. The Judge found the statutory language was ambiguous on the question whether the production cap of 2,400,000 pounds should be applied to transition payments, and then found the Department of Agriculture's application of the cap in its regulation to be a permissible statutory construction that deserved judicial deference. She dismissed the plaintiffs' secondary challenges with respect to the timing of the transition and contract payments for lack of standing. Plaintiffs have file a notice of appeal.
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    Dr. Brown's testimony today estimates that the MILC program has depressed the producer's price by about 25 cents per hundredweight. Dr. Cropp testifies that the program has been a great help to smaller dairy operations. Considering the program's taxpayer cost, market impact, and direct impact on producers, how do you rate or evaluate this program in terms of its bang for the taxpayer buck? Both the price support program and the MILC program have counter-cyclical impact. Can you compare the two: How are they alike and how are they different from the perspectives of taxpayers, consumers, and producers?
    MPSP and MILC are alike in that they are taxpayer-funded programs that support dairy farm income. The MPSP supports farm income by purchasing selected dairy products offered at prices that will yield $9.90 per cwt, on average. MPSP farm income support is indirect because purchases are made from dairy product manufacturers, while MILC payments go directly to farmers and are a percent of the difference between actual prices and $16.94 per cwt. Small changes in supply of dairy products lead to larger changes in their price, which means that MPSP's cost to taxpayers is usually lower than the MILC cost for the same farm income benefit. But MPSP leads to higher processor and consumer prices for dairy products. Producers usually prefer to get indirect support rather than direct support. Processors are better off with direct farm income support. Results for consumers are uncertain depending on whether higher product costs offset higher expenditures for direct payments.
    The all-milk price for March 2003 was reported to be $11 per cwt. That's the lowest level in many years. One and a half years ago the all-milk price was $17.10. One year before that, it was $11.80 and a year and half before that it was $18, and 9 months before that it was $12.10. These dramatic price swings take you back in time only to July 1997.
    Isn't this particularly unusual volatility in dairy prices? How can any component of the dairy industry make sound investments when basic product prices are so erratic? Are there particular underlying factors that are making dairy prices move dramatically?
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    If the simple answer about why prices are low is that too much milk is being produced, why aren't producers responding? Why does milk production continue to increase?
    Milk prices have always been cyclical. After a market disturbance, prices adjust more quickly and in greater proportion than does production. That in turn leads to adjustment, and sometimes over-adjustment, in production, and price changes in the opposite direction. Price volatility has been more pronounced since the mid–1990's. Record high corn prices in 1996 led to cutbacks in production that brought on high milk prices. High returns brought rapid expansion of western milk production, which drove prices down. Producer exits brought production down and brought higher prices. Moratoriums and permit delays slowed California expansion in 2000 and 2001, while rapid expansion took place in 2002. Structural change is a contributing factor as firms of different sizes react differently to market signals. Reduction in the milk price support level may have contributed to larger price swings, making dairy more like other commodities compared with the price stability it enjoyed when support prices were higher. The argument is that the lower price support level allows milk prices to fluctuate over a wider range and that leads to undue production adjustment. Of course, the price stability came at the cost of large government surpluses and high support program costs.
    Milk cow slaughter has been about 15 percent above a year ago through the first five months of 2003 and milk production has recently started to be below year earlier levels. Milk production reductions and milk price recovery is expected in the second half of the year. MILC payments may have delayed market adjustment by allowing smaller producers to stay solvent with lower milk prices, but production is responding to the unusually low prices of the past year.
    It has been some time now since USDA and the dairy industry completed reform and consolidation of Federal milk marketing orders. What is your assessment of the success of the changes that were made? Do you discern differences between the Federal order and various State orders that serve to disrupt the orderly marketing purpose of the government policies?
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    The Federal Agricultural Improvement and Reform Act of 1996 required USDA to consolidate the existing Federal milk marketing orders (33 at the time) into not less than 10 nor more than 14 orders. On January 1, 2000, the 11 consolidated orders became effective. During the process all the provisions of the orders were reviewed with an eye toward simplifying and streamlining the resulting consolidated orders. The consolidated orders contained provisions that replaced the order-by-order class I price structure with a single surface for the contiguous 48 states, substituted a multiple component pricing system for the basic formula price, established a new class IV price for milk used to make butter and dry milk products, and made other minor changes. A notice and comment rulemaking procedure was utilized to make the changes and the reformed orders required producer approval prior to implementation.
    Even though the consolidation process reviewed all aspects of the regulatory program at that time, marketing conditions within the industry are continually changing. Thus, some regulatory amendments made during reform, later yielded unintended and adverse consequences. As a result, a series of hearings are in process, or were recently completed, regarding pooling provisions of the consolidated orders.
    There are differences between the Federal milk marketing order program and State orders. In general, they work well together, and there is little disorder caused by the differences. However, the commerce clause of the United States Constitution does present challenges for State orders regarding the regulation of milk that comes into or leaves a State. As a result, Federal orders have replaced State regulations when the market disorder caused by incoming or outgoing milk becomes too significant.
    On February 11 of this year, USDA announced producer approval of new class III and class IV pricing formulas, which were to take effect on April 1. This change was initially a part of the 1996 farm bill directive, and of legislation enacted by Congress in December 2000. Now that this process is complete, please provide for the Committee your views—on the process itself, and on the formulas that resulted.
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    As a result of the Consolidated Appropriations Act, 2000, legislation mandating a review of the class III and class IV pricing formulas, USDA held a formal rulemaking hearing during May 2000. Based on the hearing record, a tentative final decision proposing regulatory amendments was issued and approved by producers. The new class III and class IV pricing formulas became effective on January 1, 2001. A court order was issued on January 30, 2001, that enjoined implementation of part of the amendments as approved. Further amendatory changes were made during 2002 and approved by producers. On April 1, 2003, the new class III and class IV pricing formulas became effective.
    The class III and class IV price formulas provide the basis for pricing all milk priced in the Federal order program. Prior to adoption of the product price formulas for class III and class IV milk, competitive pay prices were used. Originally the Minnesota-Wisconsin manufacturing price series and then the Basic Formula Price were used to price milk used in surplus products. These two price series relied on what plants in the Upper Midwest were paying for milk in an unregulated and competitive market. As increasingly less milk was marketed in this area order, a replacement pricing mechanism became necessary. Changing the method for pricing surplus milk from a competitive pay price to a product formula, that converts wholesale prices for butter, cheese, nonfat dry milk, and dry whey back to the raw milk used to make the products, was a complex undertaking for USDA and the dairy industry.
    USDA recognizes that the values used in the product price formulas will always be subject to criticism. Thus, to ensure that the formulas are adequately representing industry values, the formulas will need to be reviewed from time-to-time using the formal rulemaking process.
H.R. 1659 (NUNES BILL)
    Pending in the Agriculture Committee at this time is a bill—H.R. 1659—which is designed to ensure that a fluid milk bottler situated in Arizona is not able to avoid milk price regulation by selling across the State border into California.
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    Is the Department aware of the situation that has led to the introduction of this bill? Has the Department either considered or been asked to consider taking regulatory action with regard to the situation?
    The Department is aware that a plant located in the Arizona-Las Vegas marketing area has started processing and shipping fluid milk products into California. However, Federal milk marketing orders regulate fluid milk handlers based upon where they compete for sales, not on physical location. Under the current regulatory rules, if the handler (plant) has no sales in any Federal order marketing area, the plant will not be regulated by a Federal order.

    IDFA comments on the graphics introduced by National Milk Producers Federation during the U.S. House of Representatives Committee on Agriculture Subcommittee on Department Operations, Oversight, Nutrition and Forestry held on May 20, 2003.
    Comparing class prices under Federal Milk Marketing Order regulation with the support price established under the Dairy Price Support Program is not a valid comparison. The class III price for milk used to manufacture cheese products is a minimum price which processors must pay to dairy producers and cooperatives, and in no way indicates the actual amount paid for such milk. In addition, Federal Order minimum prices are stated for milk at a standard butterfat content of only 3.5 percent.
    On the other hand, the legislative mandate to the Department under the Dairy Price Support Program directs the Department to insure that the average price paid to dairy producers for milk used in all manufactured dairy products be at least $9.90 per hundredweight. In addition, this $9.90 is for milk testing 3.67 percent butterfat.
    The only farm milk price series available to estimate the average price paid to dairy producers for milk used in manufactured dairy products is the manufacturing grade milk price series published by the National Agricultural Statistics Service in the monthly Agricultural Prices report. Since 1985, the annual average price of manufacturing grade milk, as published by USDA, has never been lower than $10.38 per hundredweight adjusted to 3.67 percent butterfat. For the most recent 12-month period (May 2002 through April 2003), the average price paid for manufacturing grade milk, adjusted to 3.67 percent butterfat, was $10.15 per hundredweight.
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    As every witness appearing before the Subcommittee testified, the low milk prices currently experienced in the dairy industry are the result of many factors, but the key factor had been the high milk prices on average during the previous five years, coupled with strong demand growth for milk and dairy products. The current situation is the result of milk production growth far outpacing the growth in demand for milk in dairy products, a fact of the dairy markets. IDFA believes that it is critically important for USDA to operative the Dairy Price Support Program to maintain alignment between the actual market prices for dairy products and CCC purchase prices.
    IDFA believes that USDA must carefully consider the potential impact on our domestic dairy markets prior to accepting bids under the Dairy Export Incentive Program. As this chart clearly shows, the domestic market price of butter increased following the late February announcement by USDA of an additional allocation for butterfat under this program. Two other key market data not on this chart are the fact that the world market price for butter during the time of the DEIP bid acceptances was about 60 cents per pound (about 45 to 50 cents per pound less than the CME price), while the average DEIP bonus awarded by USDA was over 70 cents per pound of butter equivalent.
    IDFA has taken no position on the administrative details of the Milk Income Loss Contract program payments for the transition year.
    As this chart clearly shows, the total volume of imports of these products has declined significantly in the past two years from the peak level seen in calendar year 2000. What the chart does not show, and IDFA believes is very important for the Subcommittee to note, is that dairy exports account for about 5 percent of U.S. milk production. In addition, in comparing our volume of total dairy exports to the volume of imports, on a total milk solids basis exports amounted to 1.067 billion pounds in 2002, while imports were only 852 million pounds on a total milk solids basis—about 80 percent of the level of exports.
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    Similar to charts 2A and 2B, this appears to imply that recent low milk prices are the result of actions taken by USDA to adjust the CCC purchase prices of nonfat dry milk and butter. In fact, the current situation is the result of milk production growth far outpacing the growth in demand for milk in dairy products. IDFA believes that it is critically important for USDA to operative the Dairy Price Support Program to maintain alignment between the actual market prices for dairy products and CCC purchase prices.