SPEAKERS CONTENTS INSERTS
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OVERSIGHT OF THE DEPARTMENT OF AGRICULTURE'S PROGRESS IN IMPLEMENTING DAIRY REFORM
THURSDAY, MAY 15, 1997
House of Representatives,
Subcommittee on Livestock, Dairy, and Poultry,
Committee on Agriculture,
Washington, DC.
The subcommittee met, pursuant to call, at 10:05 a.m., in room 1302, Longworth House Office Building, Hon. Richard W. Pombo (chairman of the subcommittee) presiding.
Present: Representatives Goodlatte, Smith, Lucas, Lewis, Jenkins, Peterson, Holden, Johnson, Condit, Dooley, Farr, Boswell, and Stenholm (ex officio).
Staff present: John E. Hogan, chief counsel; Pete Thomson, legislative director; Christopher D'Arcy, John Goldberg, Callista Bisek, assistant clerk; and John Riley.
OPENING STATEMENT OF HON. RICHARD W. POMBO, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. POMBO. Good morning. We are going to call this hearing to order.
Today's hearing is designed for this subcommittee to exercise its oversight responsibilities with regard to the ongoing reform of America's dairy industry, as outlined and mandated under the Federal Agricultural Improvement and Reform Act of 1996, more commonly known as the farm bill.
As anyone familiar with the work of this subcommittee knows, dairy policy in this country is a complicated patchwork involving many economic and regional variables. The reform of Federal dairy policy and the desire to transition to a more market oriented approach to dairy consumed most of the attention of this subcommittee last year. It has now been over a year since the farm bill became law. Today we will receive a progress report from the Department of Agriculture on their efforts to date, as well as a time line for their continued activities on dairy reform.
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Following that, representatives of the dairy industry are here to give their perceptions of how the reform process is proceeding and to share their vision of the future of these reform measures.
Let me be clear about one thing. We are not here to re-debate the farm bill. All of our discussions today need to be built upon the framework established last year. Clearly, it is time to move the process forward.
I know it is unrealistic to expect America's dairy industry to speak with one voice. I do hope, however, that at least those different voices can be more harmonious. Parochial, regional, and often narrow perspectives have too often deluded the ability of the dairy industry to influence and to contribute to the national debate on the future of America's agriculture. I hope we can change this. I know that we should.
Increased cooperation within America's dairy industry will allow it greater opportunity to take advantage of international trading possibilities. Clearly, we are entering into an era of increased dependence on both domestic and international market forces instead of Government supports.
The goal of dairy reform initiated last year was to enhance our ability to remain competitive internationally. The Agriculture Department's Foreign Agricultural Service has concluded that, as a result of the Uruguay Round subsidy reduction requirements, there will be a potential for U.S. expansion into 17 percent of the world market for nonfat dry milk, 23 percent of the world cheese market, and 31 percent of the world's butter market by the year 2000.
I am committed to working with the American dairy industry, as well as the Department of Agriculture, to make that potential a reality.
I know that dairy reform is not an easy process and that many of America's dairymen are uncertain as to what tomorrow holds. The recent slump in milk prices is added to those concerns, and I share them. I am interested, as well, to hear the Department's short-term plan to address this matter.
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I look forward to receiving today's testimony, and I welcome all of our witnesses and guests here this morning.
At this point I would turn to my colleague, Mr. Peterson, for his opening statement.
OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MINNESOTA
Mr. PETERSON. Well, thank you, Mr. Chairman, and I want to thank you for convening this hearing where we can have an opportunity to have an overview and discuss the progress of the Department of Agriculture in implementing the dairy reforms that were included in last year's farm bill.
These reforms, I think, have the opportunity to be wide ranging, and as you know, Congress eliminated the dairy price support system as of January 1, 2000, and directed the Department of Agriculture to make the full use of the DEIP Program, and to establish a recourse loan program for commercial processors, and ended the Government's imposition of assessment on producers and required a consolidation reform of the Federal milk marketing order system.
Some of us wanted to move this process along a little faster, but I think that from what I have seen so far within the Department, they are looking at the relevant issues, and I wanted to commend you on your statement and the things that you mentioned I associate myself with.
I think that any of the changes that we are considering or that the Department is considering, given the climate within the dairy industry, would pose significant challenges, and I think the combination of all of these changes, if we are able to make them, is going to be a profound turning point within the industry.
Prior to the consideration of the farm bill last year, this subcommittee held field hearings throughout the country to give all segments of the dairy community the opportunity to tell Congress where dairy policy should go. I took part in those hearings. We approached that understanding that there are deep and historical regional differences that threaten our ability to develop a truly national policy.
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However, I think national unity is crucial to the success of the long-term implementation of whatever policy comes out. If we managed to develop a broad consensus regarding dairy policy, one that recognizes that there are particular realities of milk production, that recognizes that particular needs exist in different regions of the country, and that acknowledges that there are limitations on the Federal budget, and that demonstrates that there is consideration that needs to be given to the needs of the consumer, then I think we have a chance of instituting a policy that will be durable enough to allow the dairy industry to focus on opportunities for growth and economic prosperity.
If consensus is not achieved, whatever policy approach we will choose, I think, will continue to be vulnerable to political pressures that have plagued us for the last two decades. Without a stable policy, producers and the whole dairy industry as a whole, I think, will be limited in their ability to plan and to operate in an efficient manner and will not be able to, frankly, take advantage of some of the opportunities that are out there.
The reform process, I think, is a true opportunity for us to make some lasting changes for the benefit of the entire dairy industry, and I just would echo what you said, that we need to somehow or other end these regional differences and come to a place where everybody can support a national policy because, frankly, where we are heading, we have got to work together in this country to develop what is the only solution that I see at this point, and that is developing an export policy where we can get into these other foreign markets.
And if we are divided amongst ourselves, fighting amongst ourselves, that is not going to happen. So I very much appreciate you having this hearing today, and I look forward to hearing from the Department and from members of industry, and hopefully this will be helpful in moving this whole process along.
Thank you, Mr. Chairman.
Mr. POMBO. Thank you.
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We are going to temporarily recess the hearing. I have just been told that there is a vote on the House floor. We will go vote and return. It will be a very temporary recess.
I apologize to all of you to start this hearing in this manner, but it will just be a temporary recess, and we will return.
[Recess.]
Mr. POMBO. If we can get started again, I am sorry about that.
Obviously our first panel has already been seated. I would like to ask if you can keep to the 5-minute time limit, if possible. Your entire statements will be included in the record, but it will give us, the members, opportunity to ask more questions.
Our first panel, Mr. Lon Hatamiya, who is the Administrator of the Agricultural Marketing Service. He is accompanied by Dr. Keith Collins, who is the Chief Economist at USDA, and Dr. Kenneth Clayton, who is the Deputy Administrator the Agricultural Marketing Service.
Mr. Hatamiya, you may begin.
STATEMENT OF LON S. HATAMIYA, ADMINISTRATOR, AGRICULTURAL MARKETING SERVICE, U.S. DEPARTMENT OF AGRICULTURE
Mr. HATAMIYA. Thank you very much, and good morning.
Mr. Chairman, we appreciate the opportunity to discuss with you and members of this subcommittee USDA's work to reform the Federal Milk Marketing Order Program.
As has already been stated, I am Lon Hatamiya, Administrator of the Agricultural Marketing Service at USDA. With me today is Dr. Keith Collins, USDA's Chief Economist, and Dr. Kenneth Clayton, AMS' Deputy Administrator.
As requested, I will keep my remarks very brief this morning.
Mr. Chairman, as you know, the 1996 farm bill directed the Department to consolidate the present 32 Federal milk orders into 10 to 14 orders by April 1999. In so doing, it also will be necessary to examine the various pricing mechanisms and other future Federal orders.
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Shortly after President Clinton signed this legislation into law, the Department developed a plan of action that will enable us to have the new orders in place by the 1999 deadline. Our approach consists of three phases, and let me just briefly go through those.
The first being a developmental phase.
The second, a rulemaking phase.
And the third, the implementation phase.
We are currently in the developmental phase. We have formed several internal committees within USDA, engaged academic consultants, sought public comment, and participated in several meetings around the country, all in an effort to elicit views and ideas that can help shape the Federal order system of the future.
Also during this developmental phase, to stimulate discussion and focus everyone's thinking, we have released a series of papers and reports. Last December 3, we released a report and map detailing one possible reconfiguration of milk order regions.
On March 7 of this year, we issued three additional reports, first identifying possible class I pricing options; the second framing issues related to classification; and the third suggesting ways to simplify and harmonize terminology across orders.
Just last month we released a report that suggested possible alternatives for the basic formula price.
Let me emphasize with the release of each of these reports, we also requested that timely comments may be made back to us regarding the substance of these reports. In addition, we have continued to encourage and solicit comments and proposals from anyone and everyone interested in the future of the Federal milk marketing order system.
As a result of this interactive developmental phase, we expect to publish a proposed rule later this year. At that point we will shift from the developmental to the rulemaking phase of milk order reform. After all parties have had an opportunity to comment on the proposed rule, we will move toward issuance of a final rule, probably late in the summer of 1998.
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Our efforts will then shift to implementation, including educating producers and processors about the particulars of the milk order reform system and the conduct of referenda for the various resulting orders.
Mr. Chairman, we are working diligently to have a new Federal order program in place by the mandated April 1999. Our goal is to craft the set of orders that meet the mandate of last year's farm bill, as well as the Agricultural Marketing Agreement Act of 1937, under which these orders were initially authorized.
In so doing, we are striving to address the need of orderly milk markets to support the bargaining position of America's dairy farmers and to insure that there are adequate supplies of fresh fluid milk for consumers.
However, as we go through this process of milk order reform, it will be important that we sort out the appropriate role of this program. Particularly with the scheduled elimination of the Dairy Price Support Program, we need to be precisely clear about our expectations for the Federal order program. Historically at least, milk orders have not controlled how much milk farmers may produce. Neither have they guaranteed a market for milk, fixed prices into the future, nor set prices at the retail level.
Mr. Chairman, the challenges that we face in reforming the Federal milk order program are great. However, we believe that we are up to this task.
Again, we thank you for the opportunity to be here this morning, and my colleagues and I are prepared to answer any of the questions you might have.
[The prepared statement of Mr. Hatamiya appears at the conclusion of the hearing.]
Mr. POMBO. Well, thank you very much, Mr. Hatamiya.
At the beginning of the year, most dairy economists, including those at USDA, were projecting an average annual BFP for 1997 somewhere around $12.50 per hundredweight. Now there is speculation that CCC could soon be buying cheese. What happened in the interim to make these projections faulty?
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Mr. HATAMIYA. I am going to turn to our chief economist, Mr. Collins to discuss that issue with you.
Mr. POMBO. I figured you would.
Mr. COLLINS. Well, it is true, Mr. Chairman, that we have revised down our price expectations, in fact, just last week. I think we were going along fine on track for the first 3 months of the year. We had an all milk price that was running about $13.50 a hundredweight.
However, what we saw over the last several weeks has been something that happens every year at this time, seasonal changes in production and demand. During the month of March, we saw an increase in milk production of about 11 percent compared with the previous month. Year over year, it was not very great. It was only a slight increase. Nevertheless the market has to absorb that 11 percent increase in milk.
At the same time we started to see a weakening of product prices across all markets of butter, nonfat dry milk, but the one, of course, that got all of the attention was the cheese price declines.
During the end of March through April, the cheese price on the National Cheese Exchange fell about 15 cents a pound, which translates into a very substantial decline in the equivalent price of milk. Now, why did that happen?
Well, what we saw during that period was a big increase in cheese production, particularly on the West Coast. California production was up something like 40 percent year over year.
We also saw an increase in inventories. At the end of March, American cheese inventories were about 9 percent higher than the previous March and about 20 percent higher than the March before that.
We also saw something a little peculiar in March. We saw a decline in commercial use of cheese of about 3 percent.
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So when you put all of those factors together, it suggested that the cheese price should have come down and the milk price with it. As a result of that, we have revised our projections down.
Mr. POMBO. And what are you projecting for the remainder of the year?
Mr. COLLINS. Well, you mentioned the calendar year price. I did not bring that with me. I can tell you our estimate for the fiscal year, the current milk marketing year we are in right now. We are projecting for the basic formula price $12.05. Last month we were at $12.35. So we have lowered it 30 cents because of the drop that we are experiencing in this quarter.
The BFP that we announced on May 5 was $11.44. If prices were to stay, product markets were to stay where they were when we announced that, the BFP would go down again in June probably to under $11. After that we would expect to see some increase through the fall.
For all milk price, our projection for the milk marketing year we are in right now is $13.55.
I might say those prices, as we look at them right now, are low, and they are low relative to what we have seen in much of the 1990's, but we also had higher prices earlier in the year, and if we have the seasonal increases in the fall, our projection for the year is not a whole lot different than what we have seen over the whole of the 1990's.
The basic formula price from 1991 through 1995 marketing years averaged $12.18 a hundredweight, and we are talking about a current forecast of $12.05, but there is no doubt right now prices are extremely low. If we could figure out how to capture the increases and put them where the decreases are, it would not look so bad, but right now we are quite low.
Mr. POMBO. If the problem is too much cheese inventory, what is USDA doing to help move this cheese out of storage?
Mr. COLLINS. Well, let me make a more general response to that, first of all, we have gone through this before. We went through this in December when the BFP went down to, I think, $11.34, and at that time, the Department of Agriculture announced a series of initiatives to try and stabilize and help milk prices.
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I would say that people look for us to do that, and we do our best to respond to that, but we have very limited tools to do that. It is very hard for the Department of Agriculture to turn around a $1 or $2 decline in the price of milk when our support price is well below that, and we run a milk marketing order program, as Mr. Hatamiya mentioned, that has not been designed to support prices.
So our main tools are on the demand side of the market, and they come from trying to creatively use the Food Assistance Program, while not trying to disadvantage that in any fiscal way.
We also try to support exports, and so what we announced back in January was that we were going to accelerate the purchase of cheese for the Food Assistance Programs, and we have done so. We announced that we would also buy some cheese to augment those accelerated purchases, and we have done that. We announced that we would work with private voluntary organizations to get more dairy products into Food Assistance Programs overseas, humanitarian programs, and we have done that under Food for Progress, not a large amount. We announced that we were going to reactivate the DEIP Butter Fat Program, and we did that, and we have had some sales of butter under the DEIP Butter Fat Program, and we announced that we were going to collect cheese prices, and we did run a 9-week pilot survey in collecting cheese prices and recently announced we were going to use that to establish the basic formula price in the future.
So we have been doing those things. We continue to do those things.
I might say that we normally purchase ahead for the Food Assistance Programs about 60 days. Right now, we have purchased cheese for the Food Assistance Programs for delivery through next October. So we are still purchasing cheese in advance. So far this fiscal year we have purchased about 28 percent more cheese than we did the year before for our school lunch programs.
So the DEIP Program and the other export programs and the Food Assistance Programs are the main tools that we are utilizing.
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Mr. POMBO. Just one final question. The farm bill requires that you max out on the DEIP Program. What are you doing to make sure that you are in compliance with that section of the farm bill?
Mr. COLLINS. We are attempting to max out on the DEIP Program. As you know, in 1996, we had very little DEIP activity. I mean, that was a year of record high milk prices in the United States. Our market shares fell dramatically in foreign markets. We made few DEIP sales through the fall.
We have had the program up, running. We reactivated the DEIP Butter Fat Program in January to try and increase activity. Since January, we have made quite a large amount of sales.
In the 1996 fiscal year, our commitments under DEIP were about $20 million in bonus value. Right now we are on a track to triple that. We will probably have somewhere in the neighborhood of $60 million this year. Seventy-five percent of all the activity we have had on DEIP has come since January. It has mostly been in the nonfat area. We are about 46,000 metric tons.
The Uruguay Round maximum permitted subsidized quantity for nonfat is about 100,000 tons. So we are only running about 46 percent of the total. So we are below the maximum, but we are doing our best to encourage offers from the industry, and I think we have been rejecting very, very few.
Mr. POMBO. Thank you.
Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman.
I would, first of all, like to ask a question about the change that you put out on how you are going to establish these prices not using the cheese exchange. Now you are going to use these different basing points.
I sat through the hearing on the cheese exchange and all of the debate that has gone on, and when looking into that, looking at most of the contracts that were involved out there, most of them used the cheese exchange for the price in their contracts, and so even if you change the formula to basing points, you would end up using the same criteria from what I could tell.
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Now they have shifted to the Merc. They are going to have this pricing there. The question is with this change that you have implemented is there going to be any practical difference because you are using, I assume, contracts that are out there. Have the contracts changed in how they determine what price they are going to use? Is there going to be any practical difference at least short term?
Maybe there will be long term, but can you kind of explain to us what you think this is going to change relative to what it has been?
Mr. HATAMIYA. Let me try to answer that very briefly. What we have done is shifted away from the use of the National Cheese Exchange prices to an internal review done by NASS of cheese prices in terms of processing plants around the country.
We believe the prices that we are acquiring by NASS represent a much larger percentage of what is traded. So that is a distinction that is already being made. We believe that based upon the NASS survey we will be receiving about 85 percent of the bulk cheese sales out in the industry, which is much larger than what was reported under the National Cheese Exchange. So I think that is a major difference there.
Mr. PETERSON. But in most of these contracts that I looked at, they used the cheese exchange as a way to determine what the price is. Isn't that true?
Mr. COLLINS. That is generally what we understand. I mean, we have no way to really pin down how much.
Mr. PETERSON. You have not looked at that?
Mr. COLLINS. We have never taken a survey to find out how people price those contracts, but generally, informally from talking with people in the trade, the overwhelming majority of contracts are established at some premium and discount off of the cash market.
Mr. PETERSON. The cheese exchange.
Mr. COLLINS. The National Cheese Exchange or the Chicago Mercantile Exchange.
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Mr. PETERSON. And now that we have changed from the cheese exchange to the Merc, would those contracts then, I assume, be changed from some price up and down to the cheese exchange to some price up and down from the price on the Merc? Is that what is going to happen?
Mr. COLLINS. That may well be the case, yes.
Mr. PETERSON. And so the real effect of this is to broaden the pool so that we are going to be sampling from all over the country, but most of these contracts are still using this one basing point.
So I guess the bottom line question is: is there going to be much change in what actually happens here in reality?
Mr. COLLINS. My guess would be no. I think the key point is that we are taking a national survey. We are not taking cheese prices transacted during a half an hour. We are taking cheese sales transacted over the course of a week. We are getting a volume that is 25 times to 50 times greater than what was traded on the National Cheese Exchange.
So in that sense we have a thicker market, and thinness was one of the concerns of the cheese exchange, and we have a longer period of time over which we are evaluating prices.
But in the end, if the industry continues to trade and establish a price off the visible cash market in Chicago, then largely we are going to pick that up over time.
Mr. PETERSON. The other big concern, looking at all of these different plans that you guys are considering this is so complicated that there are very few people that can follow all of this. What has concerned a lot of folks in my country and, I think, around the country is the spread in the farm retail price, and it seems like the retail price goes up when there are high prices, and then it never comes down, and this is a real frustration for producers.
Are you looking at this issue when you get into the pricing component of this? Because we have not had good information, in my opinion, on that, and I think it would be useful as we go through this process that we somehow or other take a look at that so that we can have some better answers for people. Is that going to be considered?
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Mr. COLLINS. Yes, sir. In fact, when Mr. Pombo asked me about price declines, I should have mentioned that as a factor. I do think that is a factor in the marketplace now.
If you look at the month of March, for example, the consumer price index for cheese was 6 percent higher than it was a year ago. The wholesale price of cheese was 6 percent lower than it was a year ago. That spread got much wider. As we moved through the fall of 1996 and into 1997, it has not come down that much.
So clearly, a higher retail price when milk prices are low does not allow use to grow as much as you might hope or expect. So, yes, we are looking at that, and we are using that as one of the factors to make our estimates of commercial disappearance for milk.
Mr. PETERSON. And we will hopefully at the end of this process have some better answers on what is happening with this.
Mr. COLLINS. I cannot promise that. This problem with margins is one that pervades most agricultural markets. It is prominent in hogs and cattle as well, and we do have trouble explaining from month to month.
Mr. PETERSON. Just following up on Richard's questions on the prospect for prices, I had some people in my office yesterday that were claiming that they had heard that we are going to go down to support. Is that anything that you guys have got when you are doing your projections, that we have the possibility of going down to support on prices?
Mr. COLLINS. Well, this is one encouraging thing in this dark cloud out there. For farmers, it is hard to see prices going that much lower because we are just about at support now. Cheese price last week was $1.15 and a quarter-cent per pound. Support is $1.13. Powder prices are just about at support on the west coast. We do get reports that there is powder and cheese being packaged for sale to USDA. However, we have made no purchases at this time.
Mr. PETERSON. But the mailbox price is not down to what it was some of the other times.
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Mr. COLLINS. Right. In fact, the margin between the BFP and the all milk price has been unusually large over the past year. It has been running $1.30, $1.40, $1.50 a hundredweight instead of the normal $1.10 or so.
Mr. PETERSON. Thank you.
Thank you, Mr. Chairman.
Mr. POMBO. Mr. Lewis.
Mr. LEWIS. Thank you, Mr. Chairman.
I just want to get into the pricing just a little bit myself. This is a very complex issue. No doubt about it, but I looked at the price of retail milk in 1946 when I was born. It was like 70 cents a gallon. Today it will range from $2.00, $2.25 a gallon, retail price. The price of milk has increased three times since 1946, 50 years.
And if you look at everything else on the market, bread, fuel, housing, income, it has gone up from 10 to 15 times the amount it was in 1946. Why?
I know this is a complex problem, but why can't we do the farmer better than that?
Mr. COLLINS. Well, let me answer that question with another example. In 1920 if you made a telephone call from Connecticut to California and saw what that cost and then you inflated that based on inflation, a 3-minute telephone call from Connecticut to California would cost you about $350 to $400 today. In actuality what does a telephone call cost you? Pennies per minute.
It is very difficult to look at commodity by commodity and say that because the CPI has gone up for everything in our economy that the price of that product should also go up. You have to take into account the productivity changes that have occurred, all the factors that affect supply and demand.
So there is no clear-cut answer, I think, to that question.
Mr. LEWIS. In looking at a price mechanism though and the various ways of discovering of price, in any of those plans, do you see any of those increasing milk prices across the board on a consistent basis for the producer?
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Mr. COLLINS. I am not sure I understood your question.
Mr. LEWIS. Well, in trying to discover a price mechanism, do you see any real benefit as far as increased prices for farmers in the long term?
And I know it fluctuates, but something better than what we have been seeing?
Mr. COLLINS. I think our goal in trying to discover a price mechanism for example, to operate the order program, such as the basic formula price, we are trying to discover the accurate representation of the supply and demand forces in the marketplace. So we are trying to measure the actual price that is out there.
Under the order system, the minimum price for class III milk is supposed to be a reflection of supply and demand factors. So we try to measure that price.
Now, there are different ways to measure the price, and people had hoped, for example, following up with Mr. Peterson's question, people had hoped that when we shifted to a different type of price discovery, such as our own survey price, that that would somehow mean that the price of milk is higher than it otherwise would be or really is. We are finding out that that is not the case.
If we are really trying to find the market price, there is only one market price, but we are not great at necessarily finding that. There are different ways to measure that.
Now, people have gone beyond that and said, well, maybe the actual market price cannot be discovered and that you ought to be using something else in your order system. Maybe it ought to be something that is indexed to cost of production or something else. That is not a market price.
Our job is to try and find the true market price, understanding that we are trying to measure a price that is heavily influenced by regulation.
Mr. LEWIS. Thank you.
Mr. POMBO. The ranking member of the full committee, Mr. Stenholm, has joined us, and, Mr. Stenholm, if you had a statement or questions that you would like to make at this point, I would yield to you.
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Mr. STENHOLM. At this point I would just ask that my statement be inserted into the record at the appropriate place. And I will take my turn in the regular order of the committee for questioning. Thank you.
Mr. POMBO. Without objection.
[The prepared statement of Mr. Stenholm follows:]
PREPARED STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
Mr. Chairman, thank you for holding this important hearing and giving the subcommittee an opportunity to examine USDA's progress in the implementation of milk marketing order reform.
Dairy farmers have faced extraordinary price volatility in recent years, and particularly so in the past year. Prices have fallen dramatically in the past 2 months and the mailbox price for the dairy farmer will go even lower by the summer. The economic stress faced by dairy producers is sever and in my district I know that many are having a difficult time meeting their obligations with the revenues they are receiving.
This, however, is the situation we must address in dairy policy and today's hearing focuses on one of the key tools we have to help ensure that Americans continue to have a safe and adequate supply of fresh milk.
After nearly 2 decades of lowering support prices and assessing dairy producers to offset costs, Congress last year decided to end the dairy price support program. In taking that action, we recognized that we must focus our attention on effectively using those remaining public resources committed to the dairy sector in the best manner possible.
For example, we committed to using the Dairy Export Incentive Program to the maximum extent allowable under GATT and we strongly directed the Department to utilize that program so that it positions the U.S. dairy industry to be a significant exporter. The Europeans continue to heavily subsidize their dairy exports as a surplus disposition measure. Our relatively modest DEIP Program is focussed on market development. That focus will help ensure that export markets are viable for our increasingly efficient dairy sector as nations meet their GATT obligations to eventually withdraw from export subsidies. As always, I urge the Department to be aggressive and firmly committed to using the DEIP Program to the fullest extent allowable under our international obligations.
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The other tool we have retained is the Federal Milk Marketing Order System. Again, the farm bill recognizes that this program must be modernized if our dairy sector is to compete. I commend the Department for its open process in soliciting public comment.
Mr. Chairman, the decline in our competitors' export subsidies and the increasing efficiency in our dairy industry present a great deal of opportunity. We all know that Federal dairy policy is constantly complicated by regional divisions within the industry. Even at those times when we all agree that something must be done, we find ourselves unable to act because of those divisions. Today, they threaten our dairy industry's ability to exploit the opportunities of a more open world market. It is crucial that we make every effort possible to set aside our regional issues and work towards developing a milk marketing order policy that recognizes the uniqueness of dairy marketing challenges; that continues to ensure a safe and affordable supply of fresh milk; and that allows our industry to be well-positioned to take advantage of new marketing opportunities both domestically and abroad.
Mr. Chairman, you have assembled three excellent panels of witnesses today and I am grateful to all of them for taking the time to share their expertise with the subcommittee today. I especially want to recognize Mr. Jack Parks who is a dairy farmer from Erath County, TX and a constituent of mine. Jack and the other producers on the panel will help us understand the impacts of Federal policy on the farm, where it all begins.
Mr. POMBO. Mr. Johnson.
Mr. JOHNSON. Thank you, Mr. Chairman.
I am wondering, and I guess I can address this to any of you, for dairy farmers and dairy producers you have laid out the various options and, I think, done a very good job in terms of getting it out via the Internet and public meetings and trying to do as much as you can to reach every producer in the country.
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Any chance, anywhere between five and six options roughly, any chance you will make moves to have even simpler formulas or fewer choices so that perhaps it is easier for everybody to understand and see the clear relationship between the product and price?
Mr. HATAMIYA. Mr. Johnson, let me try to answer that, hopefully simply.
The process by which we have engaged in is one of, as I said earlier on, an interactive process. We presented a series of papers and reports. I do not want to call them proposals because they are not really the opinion of the Department, but based upon what we have reviewed and done through our internal committees, we have presented those back out to the industry and back out for comment.
We are open to any suggestions and proposals. As I mentioned, all of those papers and reports requested comments be back. We have deadlines now of June 1 on the pricing mechanism that I mentioned, as well as some of the others. So we have been open to this.
We have held meetings around the country to also encourage that type of input.
I would suggest also to you and to all the members here that we're receptive to comments, and I understand that as we're trying to reach a consensus, we all know that does not exist at this point, but we are trying to move towards a focus that I think that we will have an ability to review what is given us to come forward with a proposal that makes meaningful sense at the end of this year.
So a simple answer to your question, yes, we want to look at it in simplified forms if, in fact, those in the industry are going to be proposing them back to us, and we will also look in our review, as Dr. Collins has mentioned, at how we can approach this internally as what we have got out there.
But we are really looking to see what can be commented on and what can be proposed back to us as well. So we are very open. This is a different process by which we have operated for milk marketing orders. In the past, there was a formal rulemaking process that only the things that were included in the record could be considered. Here we have an open process even before we get to a comment period, and so I do want to encourage you again and highlight that fact that it is a different approach that we have engaged in.
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Mr. JOHNSON. Kind of a followup to Mr. Lewis' question in terms of the retail pricing and how you might think these new proposals for milk pricing for the producer can be related to retail pricing. Is there any relationship that you see?
Mr. COLLINS. At this point I would say probably not. There is no clear one that we have seen. Among the basic formula price options that we have put forward of which there are four, and among the class I differential options of which we put forward, and there are six, there is no link to retail markets. We are focusing completely on the market for fluid milk and the manufactured products of fluid milk.
Mr. JOHNSON. Have you gotten any feedback at all suggesting that there should be a relationship?
Mr. COLLINS. We have received comment on that. For example, going back to the earlier question about how we discover prices, there are people who suggest that we cannot discover the true market price. Therefore, what we ought to do is develop a proxy for that price, and that proxy should be a function of a whole bunch of supply and demand factors, such as the cost of production, such as the national income, such as the retail price for dairy products, and so on.
So we have gotten comments that have suggested that approach.
Mr. JOHNSON. And a followup to Chairman Pombo's question about the DEIP purchases and maxi. Now, is there any penalty if you do not fully comply with the 1996 farm bill mandate to max out the DEIP Program?
I know you said you were working toward that.
Mr. COLLINS. Right.
Mr. JOHNSON. If you do not make it, is there any penalty if you do not make it?
Mr. COLLINS. No, there is no penalty.
Mr. JOHNSON. Thank you very much, Mr. Chairman.
Mr. POMBO. Thank you.
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Mr. Smith.
Mr. SMITH. I want to also, I think, followup on the debate on Mr. Lewis' questions on the price of milk and how elastic it really is.
Let me start though with how much cheese is sold to the ultimate consumer in the form of cheese. What percentage of this domestic production is sold to the consumer, the ultimate consumer, versus processing, et cetera?
Mr. COLLINS. You mean like buying barrels of cheddar cheese?
Mr. SMITH. The families that go into the grocery store and buy cheese for home consumption versus processing.
Mr. COLLINS. As opposed to eating it in the form of pizza, you mean?
Mr. SMITH. Yes.
Mr. COLLINS. I do not know the answer to that question. Honestly, I just do not know.
Mr. SMITH. We do not have any idea how much cheese will----
Mr. COLLINS. Oh, I am sure we could find it, and we will be happy to.
Mr. SMITH. Through the grocery stores?
Mr. COLLINS. I am sure we could find that and try and provide that to you, but off the top of my head I really do not know. You would have to define processed cheese. There are all kinds of boundaries. You can actually go and buy cheddar cheese that looks a lot like it comes out of the primary processing plant, but you can also buy tubs of Cheese Whiz or something. I mean, do you define that as processed?
You have to define the product.
Mr. SMITH. How much is sold through the grocery stores and the supermarkets, et cetera, versus how much goes into processed foods, how much goes to the restaurants, et cetera?
And part of the reason I ask is because I am still--did you want to take a stab at that, Mr. Hatamiya?
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Mr. HATAMIYA. Oh, no, Mr. Smith. I was just going to followup on what Dr. Collins said. We do not have that information available to us now, but we can look into that and provide it for you for the record.
Mr. SMITH. Part of the reason I ask is I stood at Meyer's Thrifty Acre on the cheese counter watching consumers select cheese. Only about one in 60 looked at the price of the cheese. The rest seemed to see some of the kind of cheese that they wanted, and they threw it in their shopping carts.
Also, as I observe the change in the price of milk at those stores in relation to the prices that farmers receive, when we had the high here 9, 10 months ago, whenever the high was on farm prices, the store prices went up consistent with the prices the farmer is receiving, but those prices have not come down in the stores.
And so I am wondering if somebody is taking a new look at the elasticity of these dairy products. You mentioned earlier, Dr. Collins, that you see a wider gap between what the farmers are paid and the price that consumers are willing to pay.
Mr. COLLINS. Right, right.
Mr. SMITH. And so I am wondering who is the watchdog and how much Kraft or any other processor cares about the price they pay for milk. As a general rule, they want to get it as cheap as possible, but would they automatically put their mark-up and their profit percentage on top of the price, whatever they pay? Would other processors do likewise? Would the people that transport that milk and that dairy product put their price on regardless of the price they happened to pay for that product?
Are we looking more carefully at how realistic this whole base price concept is?
Mr. COLLINS. That is a lot of questions, Mr. Smith.
[Laughter.]
Mr. COLLINS. I would say, going back to the elasticity question, we do periodically try and estimate the elasticity of demand for fluid milk and for the products. Generally the demand for milk is quite inelastic. The supply of milk is quite inelastic. As a result of that, when you get small changes in product manufacturing, such as a build-up in cheese inventories, even though it is only fairly small, you can get big swings in price at the processor and producer level because of that inelasticity of both demand and supply.
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Going on to the retail side of this, I do think that there are often mark-up formulas that are used in marketing, but we also observe that that is not true for all retailers. We can see branded products be much more persistent when they mark up their price. Because the wholesale price of cheese went up, that price will be much more persistent perhaps than a generic or store brand that might come down more quickly when milk price declines.
So it depends on the marketing strategies of the retailer.
Lastly, this question about the margin. We do publish the margin between farm and retail. That margin has gotten wide.
Mr. SMITH. Wider in fluid milk than cheese even. That would be my observation. Is that true?
Mr. COLLINS. I do not know the answer to that question. I think it is wide for both. It has widened for both.
If we go back to December or January, that is when we sort of reached the peak. We were running about 10 percent above a year earlier in the dairy product CPI, and that was generally true for all of the dairy products, fluid milk and cheese, as well.
Since then we have come down a little bit. Quite frankly, I did not look at the subcomponents of the CPI recently. So I am not sure whether cheese is that much different than fluid milk. They have all come down a little bit.
I think the spread, however, for both cheese and fluid milk is wider than normal. I think that does discourage consumption to some extent, but your earlier point about consumers not looking at prices also seems to be valid. I mean it still is a fairly inelastic demand. We have seen strong demand for cheese throughout much of the 1990's, even though prices bounced around a little bit.
In fact, commercial use of milk through the 1990's has gone up fairly steady, 2 to 3 percent a year, until last year, until we had a cutback in milk production and retail prices went way up and milk consumption only went up about 1 percent, and this year we only foresee it going up about 1 percent again, as well.
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And we attribute part of that to the higher prices, but your point is right, that I think retail consumers are somewhat unresponsive to the price change.
Mr. SMITH. Mr. Chairman, thank you.
And I would ask if you would furnish me that additional information and maybe also to the committee Chairman.
Mr. COLLINS. Sure.
Mr. POMBO. Thank you.
Mr. Dooley.
Mr. DOOLEY. Thank you.
Dr. Collins, I would just be interested in terms of what is happening with milk supply currently. Is it increasing, decreasing?
Mr. COLLINS. It is increasing. The year over year increases have been fairly slight. For the last several months they have run half a percent or a percent at most. However, from month to month, of course, they are quite large. I mentioned earlier that the month of March--in fact, we have a milk production report coming out this afternoon. So we will see April--but March is our most current data, and that is up 11 percent over February.
Mr. DOOLEY. So milk supply is up 11 percent?
Mr. COLLINS. Production.
Mr. DOOLEY. Production.
Mr. COLLINS. Yes.
Mr. DOOLEY. And what we are seeing happen with the basic formula price declining is a direct correlation to that increase in production.
Mr. COLLINS. That, plus all the other factors going on in the cheese market, retail purchases, the whole thing.
Mr. DOOLEY. Now, did I understand you to say what was the percent increase in cheese production?
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Mr. COLLINS. I am not sure I gave you a percent. I think I mentioned that I thought California was up about 40 percent.
Mr. DOOLEY. And what do you attribute that to?
Mr. COLLINS. They found it profitable to make cheese. I am not sure I can say much more other than that.
I think for a long time we always looked at, class III(a) prices keeping milk in the butter-powder area and not moving to cheese. It strikes me that cheese has still probably been profitable enough in the West region and not just California. The Pacific Northwest has been increasing their production of cheese as well. Cheese has been profitable enough to attract milk into that use.
Mr. DOOLEY. In terms of regional production of figures, are we seeing any significant changes in terms of production from one region to another?
Mr. COLLINS. I think the long-term trends are still continuing, yes. We are still seeing declines in a lot of areas of the East. We are seeing declines in the upper Midwest. We are seeing expansion in the West.
Mr. DOOLEY. From your estimation then, when you are seeing these changes which are basically occurring because of market forces in terms of maybe some economies that some region has over another, the Department then clearly when they are looking at the various formulas and proposals in pricing, it certainly is going to not institute anything that would impede what would be a normal market response.
Mr. COLLINS. That is certainly one of the principles that we are approaching this exercise with. There are a lot of legal constraints and other constraints, but certainly insuring that market prices are not masked and are able to send the signal to allocate resources in our economy and send the signals to consumers to increase or decrease their cheese consumption, we would like to see that occur.
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Mr. DOOLEY. Just in closing, Lon, I would just like to commend you for your statement where you clearly identified what the intention and objective is in terms of finding a new pricing formula. It is not to increase prices. It is basically to have a price discovery mechanism that is going to reflect what the market signal is sending.
Some of the questions earlier in terms of trying to use a retail price as a reference point, I think, is not really related in terms of the supply and demand situation with the production of milk, and I appreciate the fact that none of the 6 formulas that you are looking at really include that.
I also appreciate the fact that this cost of production also has no place in a formula because there is no consistency in terms of the cost production from one region to another, and to try to incorporate that is a prescription for really having a disruptive effect in the market.
So I think you folks are doing a terrific job with a very complex issue, and I applaud your efforts in that regard.
Mr. HATAMIYA. Thank you.
Mr. POMBO. Mr. Goodlatte.
Mr. GOODLATTE. Thank you, Mr. Chairman.
Gentlemen, I wonder if you would mind telling me what the status of the Northeast Dairy Compact is.
Mr. COLLINS. As you know, they have put out a proposal for a $16.94 over order price. My understanding is that yesterday they locked in that price to be in effect in July.
Mr. GOODLATTE. Are there court cases challenging this compact at this point in time?
Mr. COLLINS. There are.
Mr. HATAMIYA. Yes.
Mr. GOODLATTE. Can you tell me about that?
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Mr. HATAMIYA. I believe there is a hearing to discuss that next week, as a matter of fact.
Mr. GOODLATTE. And what court is that?
Mr. HATAMIYA. The 22nd of May.
Mr. GOODLATTE. Do you know what court has jurisdiction over that?
Mr. HATAMIYA. It is U.S. District Court here in Washington, DC.
Mr. GOODLATTE. What role is the Department playing in that?
Mr. HATAMIYA. I guess we are playing a major role because we are the defendant.
[Laughter.]
Mr. GOODLATTE. What about the states involved in the compact? Are they defendants as well?
Mr. HATAMIYA. I believe they are considered intervenors because it does affect their interest.
Mr. GOODLATTE. I am not a big advocate of more and more lawsuits, but this is one that I hope you lose. I think the Northeast Dairy Compact is an abomination. I cannot think of any other instance where the Federal Government has ceded to the States the authority to regulate interstate commerce to the disadvantage of other States. I think it is a horrible precedent. I was dead set against it in the Judiciary Committee where we held hearings on it in the last Congress, and I hope that this precedent does not stand because I think it is very, very bad for the Government to be involved in ceding your responsibility, your authority to others in something that the Federal Government clearly has.
This is not a State's rights issue because what you are talking about is playing favorites. You are talking about favoring certain States over others.
Do you have any comments on that?
[Laughter.]
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Mr. HATAMIYA. Mr. Goodlatte, as we obviously respect your opinion on this, but because it is in litigation, we really cannot comment on these issues.
Mr. GOODLATTE. Boy, that is a common answer in response.
[Laughter.]
Mr. GOODLATTE. I hear that all the time.
Mr. HATAMIYA. It is an easy answer for us right now.
Mr. GOODLATTE. Yes. Well, you can comment on what your underlying thoughts were in deciding or for the Secretary deciding to go forward with this compact. He could have played a role in opposing it and chose not to.
Can you tell us about the history of it?
Mr. COLLINS. Well, I would only say that we went through an arduous process to come to that conclusion. The Secretary was clearly put in a difficult spot to determine whether there was a compelling public interest in the Northeast, and he did that by going through almost a rulemaking-like process, holding a national public comment period.
And he also issued several quite definitive statements elucidating the basis of his decision, and I do not think we can add or subtract anything to those. They are certainly in the public record.
Mr. GOODLATTE. Well, the Secretary served on the Judiciary Committee with me as well, and I know he is an able lawyer. Did he consider the constitutional implications?
Mr. COLLINS. Our attorneys were involved every step of the way.
Mr. GOODLATTE. Are you concerned about other groups wanting to have similar types of economic authority, whether it is in other agricultural areas or in dairy policy in other parts of the country?
I know there is a move afoot to do the same thing in my part of the country, or in regulating interstate commerce in other areas. I mean, it just seems to me that it is a glaring example of the Federal Government abdicating something that the United States Constitution very, very clearly spells out is a Federal responsibility, not because we do not trust the States to do what is in their best interests, but because we know they will do what is in their best interests, and where we are talking about the difficulty of being fair to other States and the citizens of other States and the taxpayers of other States, to go forward with a favoritism type approach in any area of economic regulation concerns me greatly.
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And if the Department can cite to me one other instance in the entire history of the United States where the Federal Government has allowed a group of States to regulate interstate commerce in the manner that you are allowing the New England States to do so, I would be very interested in seeing that.
Thank you.
Mr. POMBO. Mr. Stenholm.
Mr. STENHOLM. To go back to the current supply and demand numbers you were giving, the month-to-month is up. The year-to-year is up 1 percent. Currently what is the surplus of milk that is causing the rapid decline in prices?
Mr. COLLINS. I do not know that I would call it a surplus. There has been an increase in production of milk.
Mr. STENHOLM. There is constant reference to the free market system by many witnesses here, but we all know this is not a free market system. In a free market system, when you have excess production, the price goes down.
Mr. COLLINS. Right.
Mr. STENHOLM. How much of a milk surplus are we producing today?
Mr. COLLINS. Again, that is kind of a normative question.
Mr. STENHOLM. If you cannot answer it, do not answer it because I will go on to the next point.
Mr. COLLINS. Yes, right.
Mr. STENHOLM. I heard that California has increased cheese production by 40 percent. Over what period of time?
Mr. COLLINS. That is just year over year for the month of March.
Mr. STENHOLM. For the month of March?
Mr. COLLINS. Right. One year over 1 year.
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Mr. STENHOLM. And according to the recent comments and statements, this was done because the production of cheese was more profitable. Is that correct?
Mr. COLLINS. That is what we are speculating, yes.
Mr. STENHOLM. The fact that one State makes a decision of that magnitude, does that affect the price of milk in other regions of the country under the current pricing system?
Mr. COLLINS. That can have an effect. I will hypothesize one. To the extent that California cheese producers were very aggressive to market that cheese elsewhere in the Nation, particularly in the Midwest, it could affect the price of cheese in the Midwest over that period of time, and we use the price of cheese to establish our minimum price for class III use under Federal orders.
So there could be a linkage that way.
Mr. STENHOLM. All right. Let's assume for the moment that there is a linkage; I believe there is one. That would mean, under a free market system, that price declines in some areas would create a continued decline in production in other areas. If that continues indefinitely, ultimately California or other States would be producing more of the milk. If they continue to satisfy the needs, they would continue to grow and prosper, assuming that they are prospering at the price of milk that created the current situation.
At some point then could we ship milk from the West to other regions of the country at the same price that we are looking at today, that is creating the 40 percent increase in cheese production in California?
Mr. COLLINS. I suppose that is possible.
Mr. STENHOLM. Possible?
Mr. COLLINS. I mean I think what you are describing is the kind of thing that happens when one country or one State or one region has a comparative advantage. Production will migrate to that area, and that is what we have seen over some period of years now.
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The cost of production by our measurements in the West is, for example, if you take total economic costs of production in the West, they are $5 a hundredweight less than they are in the Southeastern United States.
So that kind of cost advantage over time has led to exactly the pattern of production and distribution you are talking about. Now, where that will end, I do not know. California may bump up against higher feed costs, limitations on hay supplies, environmental limitations, water limitations. There may be things that prevent them from being able to supply the Nation's milk, and I would think that is likely the case.
Mr. STENHOLM. This is all short term. Now I want to ask a question in the area of DEIP. It is my understanding we will not be able to utilize our full legal DEIP funds under GATT this year because the prices were high at the first part of the year. The DEIP year, or the GATT year, is July 1 to June 30 and it is my understanding that, even though we are selling a considerable amount of product today, we are only going to use half of the available or allowable DEIP funding for this year. Is that correct?
Mr. COLLINS. Half or less.
Mr. STENHOLM. Half or less?
Mr. COLLINS. Right. We have four categories of Uruguay Round commitments for dairy products. We will come close in cheese, but we will not come close in the other 3 categories.
Mr. STENHOLM. I would hope you would use every tool at your disposal this month and in coming months to move this surplus product.
I agree with you. I have always just almost wanted to cry because we have been through this for years. You get a 1 or 2 percent surplus of milk, which is really a blessing for this country. It is not a surplus. It is a blessing.
Mr. COLLINS. Right.
Mr. STENHOLM. But we allow through our system and through individuals 1 or 2 percent surplus to kill and wipe out numerous dairymen and women all over this country. It is a shame, and that is the challenge you have in the new pricing formula.
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Personally I think there is some relevance to the California question. We do not have the time today to go into that, but I think it is time for regions of the country to spend a little more time looking at how they can be part of an overall dairy industry that works a little more favorably for the producer than what we have today. That is the challenge you have and the challenge of the farm bill.
But in the meantime, DEIP it. And get rid of it, and if we have hungry people who have got WIC needs, find a way to use the surplus. I would rather you could find dairymen, and I would hope this would be unanimous, who would provide this and get rid of it so that the market will come up quicker.
DEIP it. We have got the money. We have got the permission. Do it.
Mr. COLLINS. Yes, the only thing we are dependent on is the shippers coming to us, and we think they will come to us more over the coming months. We are in the period of time where Asia generally comes in looking for product now. I think we are going to be able to pick up our DEIP activity over the summer.
Mr. STENHOLM. Well, we are all frustrated with the European Union, but it is time we use the 2 by 4 with some of their policies in this too. I am very encouraged with the hearing that was going on privately with the Secretary and others of your team and am very impressed with what we are doing now in the area of trade.
This is one area that we need to improve upon.
Mr. COLLINS. Right.
Mr. POMBO. Thank you.
Mr. Jenkins.
Mr. JENKINS. I do not have any questions.
Mr. POMBO. I believe we do not have any further questions at this point.
Mr. Peterson.
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Mr. PETERSON. If you do not mind, if I could just followup on Mr. Stenholm's, and this is kind of a broader question, but the current system of orders of pricing, would you say that this current system produces more milk than we would produce if we did not have any order or pricing system?
In other words, does the outcome of the current system in the broad terms encourage more production than we would have if we did not have the system?
Mr. CLAYTON. Well, if I could, Mr. Peterson, there are probably a couple of ways to approach that, has it or might it. I think historically as the Department has attempted to operate the program, it, in fact, has attempted to set minimum prices that, in fact, would be below sort of full market clearing level prices for the reason that we did not want the order program to basically overwhelm market signals and in and of itself become the market signals.
Does that say that in every case as industry changes, as patterns of consumption geographically change; in every case has the pricing structure absolutely kept pace in terms of not sending incorrect price signals? I probably cannot say that. There probably are situations where it has played more of a role than was intended, but certainly the basic approach with the program is one of really trying to address equities between producers and processors, trying to capture or reflect whatever prices are out there and speak to the issue then of basically how that money got divided up.
The intent though was not to actually establish prices in lieu of the marketplace working on its own.
Mr. PETERSON. I am not sure I know what you said. [Laughter.]
You have a higher pay grade than I do.
Mr. CLAYTON. I could have said maybe, but I did not think you would like that answer.
Mr. PETERSON. So yes or no. [Laughter.]
Is the current system producing more milk than if we did not have the system, or can't you give me an answer on it?
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Mr. COLLINS. There have been studies, Mr. Peterson, of that. There was one prior to the farm bill done at the University of Wisconsin. The Food and Agricultural Policy Research Institute has it on their agenda this summer to do a study of no orders.
One of our six options is a much smaller, fixed class I differential which would have the same qualitative effects as no orders, and we are going to do a study of that. So maybe I can punt a little bit and say there are things forthcoming that will answer that question.
To the extent that the order system might cause a price in some area to be higher than it would otherwise be the case because of bargaining power or whatever, in that region the price might come down if there were no orders. You would have less production.
On the other hand, if there is less production, there is going to be higher prices somewhere else, and there will be more production somewhere else, and that will tend to be an offset.
Where you come out in the end will be chapter 12 of these studies that are going to be done this summer.
Mr. PETERSON. Well, apparently what we have pretty much reflects the market is what you are saying. You will not say that it has increased production. I understand what you are trying to get at, but I think that some of us think that the current system is producing more milk than would be produced if we did not have the system.
So I think where we are trying to get is to a situation where that is not happening and we can all be on a level playing field, and I think what you just said is encouraging because for all of us I think that is where we are trying to get, just to the point where we are not encouraging production for reasons that do not have to do with what the actual situation is.
I mean I have been to the Southeast. I fully understand why they need higher differentials down there. I encourage anybody who has not been down there to go down and see their production, but we also need to be careful that we do not distort things, which I think we have done to some extent in the past.
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So thank you, Mr. Chairman.
Mr. POMBO. Mr. Lewis, you had a followup question?
Mr. LEWIS. Yes. When will the new marketing orders' regional maps be released?
Mr. HATAMIYA. Mr. Lewis, as I mentioned, we released the first one back in December. We invited comments from the industry and interested parties. We hope to release a new map shortly, hopefully next week.
Mr. LEWIS. Oh, OK. Thanks.
Mr. POMBO. Thank you. I thank the panel.
Mr. STENHOLM. Mr. Chairman.
Mr. POMBO. Yes, Mr. Stenholm.
Mr. STENHOLM. May I ask one additional question?
Mr. POMBO. Sure.
Mr. STENHOLM. One of the witnesses who is testifying today will point out in their testimony that, while some regions of the country have class I differentials that are greater than the upper Midwest differentials, mailbox prices are actually higher in the upper Midwest.
Can you address this relationship, its causes, and explain how it might relate to the order reform process we are going through today?
Mr. CLAYTON. That, too, as you might expect is kind of a complicated question, but let me try to give a short answer this time to that one.
Mr. STENHOLM. So that Mr. Peterson can understand it.
Mr. CLAYTON. I will try. [Laughter.]
Mr. PETERSON. That is a tough job.
Mr. CLAYTON. I think I would point to just a couple of points. One, the intent certainly under the order program is to establish minimum prices, to try to assure minimum prices back to producers for milk which they are marketing. In so doing though, obviously the market can operate on top of that, and premiums for a whole variety of reasons can be forthcoming.
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As often as not, you may be in situations in parts of the country where there just is a strong demand for that milk separate and apart from the Federal order program's purpose of fluid milk. The Midwest would be a case in point where if there is very strong cheese demand, you will see very high or relatively high at least prices being paid to farmers for milk which will be used in the manufacture of cheese.
It is the difference between a minimum price system and actual market prices.
Mr. STENHOLM. Thank you for that very clear explanation, and I will help Mr. Peterson understand it on our own time.
Mr. POMBO. I thank the panel. I understand that Dr. Collins is going to stay around just in case there are questions.
Mr. COLLINS. I am sorry, Mr. Chairman. I do have to go back to the Department this afternoon, but we will have other people here from USDA.
Mr. POMBO. As long as there is someone who is here to answer questions that may come up at the end, I would appreciate that, but thank you very much for your testimony.
I would like to call up the second panel. Mr. Jack Laurie, Mr. Jim Tillison, Mr. Richard Walker, Mr. Brad Brunner, Mr. Will Hughes, and Mr. Larry Jensen.
Mr. SMITH. Mr. Chairman, while this panel is coming, I would ask unanimous consent to have a statement of Robert Van Winkle, Jr., be made a part of the record in the appropriate place.
Mr. POMBO. Without objection, it will be included in the record.
Mr. SMITH. Thank you.
[The statement of Mr. Van Winkle appears at the conclusion of the hearing.]
Mr. POMBO. And while this panel is being seated, I would say that we have received a number of written statements that without objection of the committee will be included in the appropriate place, including a petition that was given to me earlier in the week from several dairymen, that that be included in the appropriate place in the record.
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[The information appears on page 83.]
Mr. POMBO. I welcome this second panel to the hearing. Mr. Smith would like to introduce our first witness.
Mr. SMITH. Mr. Chairman, thank you.
I would just like to introduce Jack Laurie. He is an old friend, will be an excellent person to testify on the dairy industry; is not only a practicing farmer, but has been president of our State's Farm Bureau for the last several years; as an old friend, as a Kellogg Foundation Fellow, but more than that, somebody that I have gained a great deal of respect for as an astute dairy economist.
So I would like to welcome Jack to the panel and to my colleagues.
Thank you, Mr. Chairman.
Mr. POMBO. Thank you, Mr. Smith.
We do have the 5-minute rule on the oral testimony. Your entire statements will be included in the record, but if you could summarize those and stay within the 5 minutes, the committee would greatly appreciate that.
Mr. Laurie, you may begin.
STATEMENT OF JACK LAURIE, PRESIDENT, MICHIGAN FARM BUREAU
Mr. LAURIE. Thank you, Mr. Chairman and members of the subcommittee, Congressman Smith.
I appreciate that introduction. There may have been a little extra emphasis on the ''old'' however that was notable.
Thank you for allowing us to be a part of this panel this morning. My name is Jack Laurie. I am president of the Michigan Farm Bureau and a dairy farmer in Michigan. I also serve as a member of the board of directors of the American Farm Bureau Federation, and my testimony today is on behalf of our several thousand dairy producer members of the Farm Bureau.
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The Federal Agricultural Improvement and Reform Act of 1996 included several provisions relative to dairy. I would like to share several of our observations relative to their implementation with you today. Some of my comments may be somewhat redundant as to the comments that were made by the previous panel, but I think will serve as an emphasis in those areas.
The dairy industry is undergoing significant structural change in most areas of the country and is likely to continue to do so for several years. Since the farm bill was passed, we have also seen substantial price volatility in both farm milk prices and feed prices.
This month we have again experienced a steep price drop, and we will see further drops next month. This is putting additional financial stress on many producers and resulted in calls by some producers and organizations for congressional action.
We recognize the stress, but rather than seek a quick fix legislatively that could have long-term negative impacts, we have chosen to work with USDA and encourage use of existing tools that can work with the market to strengthen producer prices.
Last fall USDA responded to our request, and measures they took, such as advanced purchases for the School Lunch Program, were effective in raising farm gate prices. We encourage similar actions to be taken again to address the current situation.
Such actions will benefit both producers and the public. Purchases made at current price levels will provide the needed products for feeding programs for the smallest amount of tax dollars, and at the same time will stimulate market demand, which will boost farm prices.
We continue to prefer to emphasize actions such as this, which encourage the markets to work, as the best long-term way to increase producer prices.
The USDA process, the FAIR Act, required USDA to use an informal rulemaking process to reduce the number of Federal milk marketing orders from the current 32 to between 10 and 14, with one of those available for California if it chooses to become a part of the system.
It is our observation that the Department has been working diligently to meet the requirements of the reform process. AMS personnel working within the reform process have been extremely cooperative in working with all interested parties on that reform process. They have taken every opportunity to meet with our industry to discuss the proposals and have provided easy access to desired information.
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The significant problem in the process, however, is that in several cases proposals from AMS have taken a long period of time to receive clearance from the Department. This has delayed the release to the public. Given that informal rulemaking is being used in this process, it would seem that a less stringent review process might be used within the Department to facilitate the release of information. The process would function best if such information were shared with industry as quickly as possible.
Along this same line we have received indications that the next series of AMS committee reports may not be released until after the proposed rule is published late this year. We strongly encourage USDA to make these reports available to the public in a more timely manner, and would ask that you do likewise.
Our actions in the Farm Bureau have been involved in the reform process. We support change, but want to assure that the producer's voice is heard in the reform process.
Last year we established an order reform working group to advise our board of directors on order reform and to facilitate our input to USDA. Our working group is comprised of 24 dairy producers and five State Farm Bureau staff members from across the Nation.
They have met through conference calls and face-to-face meetings with USDA officials and university and industry personnel to review both USDA and industry proposals and recommended needed changes to the orders.
While the group represents all regions of the country and the concerns that are present in time, they have succeeded in finding many areas of agreement on needed reform. We are now in the process of working with other producer groups and organizations in an effort to identify areas of agreement that can be communicated to USDA on behalf of all the Nation's dairy producers.
In fact, we will be meeting next week to move this effort forward.
In general, we find that the order reform process is moving forward in an appropriate manner. We are working to assure that active producers are heard in the process. The FAIR Act included an aggressive timetable in which to accomplish the reform. We encourage you to allow that process which you have defined to work. We see no need for any additional action on the part of Congress in this area. Any additional requirement which you might place on the Department would only serve to delay the process.
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Section 141 of the Dairy Title of the FAIR Act put the Milk Price Support Program on a glide path to elimination as of December 31, 1999. This process is underway with the first reduction now in place.
While farm prices have not been at support levels during this decade, the reduction and eventual elimination of the Price Support Program does make producers in the industry vulnerable to even greater price volatility than we have seen during the past year.
A tool that was provided to help address some of the potential problems associated with this volatility was the Recourse Loan Program authorized in the act. While the price level associated with the loan is below recent market values, we encourage you to be certain that the program is operational by the 1st of January of 2000 in case that it is needed. It certainly would be a tool for processors to use if extreme volatility were to occur.
The seasonal base plan. One item that was not included in the FAIR Act of 1996 was the reauthorization of seasonal base plans. They have been used in several orders to help balance local supply and demand. They have provided a way to send price signals to producers relative to market demands.
Many producers in these orders have modified the management of their operations to work with this system. They changed their normal calving pattern in order to provide more milk in the fall when local markets needed it.
Elimination of this authority has placed these producers at an economic disadvantage. These plans are not needed by all markets, but certainly I would encourage you to reauthorize these provisions so they can be used where they are needed.
International trade is vitally important to the future of the industry. If we are to grow as an industry, we need additional markets. Exports are the obvious place where growth can occur.
The FAIR Act included several provisions dealing with exports. In general, they appear to be working, but it is wise to provide oversight for them.
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The act did encourage the use of dairy promotion funds to support the development of export markets. This has been effectively done through funding of the U.S. Dairy Export Council. This organization is aggressively and effectively promoting U.S. dairy products internationally. The growth in exports of value added products during 1996, when prices were at an all time high, demonstrates this effectiveness.
The FAIR Act authorized full funding of the Dairy Export Incentive Program, but the maximum amount allowed is reduced annually by the general agreement on tariffs and trade. DEIP provides an important tool for the industry as we seek to increase our presence in world markets. The GATT did reduce, but is far from eliminating our foreign competitors' export subsidies for dairy products.
We strongly encourage Congress to appropriate the maximum funding allowed by GATT and to monitor its use.
The dairy industry in our country is increasingly competitive in world markets, but the need still exists for the use of DEIP funds to be competitive in many developing areas.
Another tool for development of export markets is the Export Trading Company. We encourage you to monitor this development, as well.
And a final area relative to trade in the FAIR Act was a required study by the Department of the impact of the Uruguay Round on the dairy industry, and we are awaiting the results of this study with interest. Hopefully it is going to identify some ways that we can be even more effective in opening world markets to dairy producers.
In conclusion, once again, we appreciate the opportunity to share these thoughts and observations on the implementation of the Dairy Title of the FAIR Act of 1996 with you. In general, we believe that implementation is proceeding as planned. We encourage your continued oversight of the process, but would discourage any legislative action relative to it.
Thank you for this opportunity, and if there are questions, we would be happy to answer them.
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[The prepared statement of Mr. Laurie appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Tillison.
STATEMENT OF JAMES TILLISON, EXECUTIVE VICE PRESIDENT AND CEO, ALLIANCE OF WESTER MILK PRODUCERS
Mr. TILLISON. Thank you, Mr. Chairman.
The Alliance of Western Milk Producers is a trade association that represents 5 major operating cooperatives in California which market milk and manufactured dairy products for more than 1,200 producer-owners producing 60 percent of the State's milk.
Regardless of whether or not California milk producers ultimately decide to join the Federal order system, the changes that USDA makes to the Federal marketing orders and prices will significantly affect what our producers are paid for their milk.
While markets for manufactured milk tend to be national in nature, markets for fluid milk products and farm milk are regional. Regional supply and demand factors and regional price factors and market conditions should be the primary influences on establishing milk prices.
Therefore, we have recommended to the USDA, No. 1, that they develop a national product base pricing system for milk used to manufacture cheese, butter, and nonfat dry milk powder, as well as fluid milk. It should use regional prices received by manufacturers for these products and regional manufacturing costs to establish a regional price for milk used in manufacturing.
Using actual prices manufacturers in a market area receive for their milk provides a more accurate value of the product and, therefore, a value of the milk used to produce that product in the marketing area.
Chart 1 attached to my statement shows the difference in what manufacturers are being paid for cheese across the country.
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Number 2, maintain separate utilization classes for milk used to produce nonfat dry milk and butter and for milk used to produce cheese other than cottage cheese. The USDA Basic Formula Price Committee recognized why separate price classes for cheese, butter, and powder should be continued.
Market clearing. At times during every year the supply of milk exceeds the demand. Producer owned cooperatives bear the burden of balancing milk supplies in a market primarily by producing butter and powder. A single manufacturing milk price would hit these producers twice.
First, they would not cover what the cheese market is yielding for their milk.
Second, they would lose money on the butter-powder plant operations that they own which balance the milk supply.
Chart 2 also attached to my statement compares the USDA's BFP replacement option 1, which has separate classes of cheese weighted, versus option 2, which is a single class. It clearly demonstrates the negative impact on producer pay prices a single manufacturing price class approach would make.
Three, replace single point class I and class II pricing with multiple basing point pricing. Fluid milk and related products are still essentially regional in nature, packaged and sold within a reasonable distance of where it is produced. The minimum fluid price processors pay for farm milk should be based on regional supply and demand conditions, not on a single point adjusted for transportation as the current class I system does.
Class I prices should more closely reflect what milk is worth in a given market.
Finally, implement true multiple component pricing for milk in all price classes based on end product value by classified use. It should recognize the value of milk fat, solids not fat or protein, and fluid carrier to consumers. Minimum solids content in fluid products should be established to equalize raw product cost to all processors.
True multiple component pricing would expand the producer's revenue pot by bringing the true value of milk's component into the pool. For example, the BFP's committee, option 1, which recognizes butter fat in cheese has a different value than butter fat in butter, would allow a producer to capture the highest possible value for their milk components.
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Class I processors are selling food, and each of milk's nutrients has a value to these processors because they have a value to consumers. Reasonable minimum solids content level for fluid milk insures that all fluid processors are paying the same for farm milk. Without these minimums there would be inequitable raw product cost to processors.
The value of producer milk depends on the demand for milk in the area in which the producer is located, the mix of uses for milk in that area and the amount of milk that is produced. Milk pricing systems should recognize and incorporate all these factors.
The Federal milk marketing order system currently does not reflect these differences. Going to a multiple basing point system for all uses will recognize the diversity of milk and dairy product production that exists in the dairy industry.
An inclusive survey of manufacturers within a milk marketing region is the most reliable basis for establishing product prices. USDA should be able to mandate that plants participate and audit the reporting plants as necessary. The conversion of this product price to a milk component value is accomplished by establishing a cost of manufacturing, also, through an annual audit of major manufacturing facilities in various regions.
Milk producers should be paid for the value of the milk components that they produce. Processors should pay for the value of the components that they buy.
The Alliance appreciates this opportunity to provide its thoughts, and we will answer questions that you have later.
[The prepared statement of Mr. Tillison appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Walker.
STATEMENT OF RICHARD R. WALKER, CHAIRMAN, WESTERN STATES DAIRY PRODUCERS TRADE ASSOCIATION
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Mr. WALKER. Thank you, Mr. Chairman and members of the committee.
I am Richard Walker. I am a dairy farmer from Corning, CA, and serve as chairman of Western States Dairy Producers Trade Association.
On behalf of Western States, a nine member State associations and the producers they represent, I thank you and the committee for this opportunity to share with you our views on the Federal reform required under the FAIR Act.
Our Western States organization is an association of 9 western dairy producer trade associations who represent dairy producers in the States of California, Idaho, New Mexico, Oregon, Texas, Utah, and Washington. Our members in these States represent over 30 percent of the Nation's total milk production.
Our group came together around the simple principle that producers from different areas can and should seek common ground to better serve their members.
The FAIR Act and the reforms of the Federal milk marketing orders are potentially very important to producers in the West, and we felt it was critical to respond to the opportunity that Congress and USDA has given us to participate in this process.
To its credit, USDA and the Dairy Division have taken this opportunity to rethink and develop lasting improvements to the Federal Milk Marketing Program. Western States as a group and as individual members in their own right have all enjoyed easy access to individuals throughout the Office of the Secretary and in the Agricultural Marketing Service and the Dairy Division, including persons in the Marketing Administrator's Office.
I would like to publicly thank everybody in the Department for their willing cooperation.
Reform is needed to benefit dairy farmers. Throughout the last several years dairy producers in the West, as well as the rest of the Nation, have been under tremendous economic strain. With the exception of a brief climb in prices last year, which followed unprecedented increases in feed and grain prices, producer prices have languished at inadequate levels for years, with hundredweight prices steadily declining in real dollar terms.
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This year promises to be no exception. In response our Western States group has sought to insure that the problems of producers are recognized in this process. Since last May, representatives of our member State associations have met many times to discuss this and other issues. Richard McKee and other officials of the Dairy Division have generously provided their time at our meetings, responded to our questions, and openly and candidly discussed our proposals and concerns.
We have also utilized economists from the land grant colleges, experts in Federal marketing orders, producers, cooperatives, and other industry groups. After months of meetings, discussions, preparations, and communications, Western States unanimously supported a proposal which provides a market driven method to establish a minimum price under the Federal order program.
A copy of our proposal as submitted to the Secretary is attached to this statement.
I am not going to go into detail on the program, but will touch on a few of the major issues.
One of the key issues the industry must address is reform of the basic formula price. The basic formula price approximates nearly all of the money received by western producers in their mailbox prices. Put another way, any additional money from class I differentials and over order charges are absorbed by marketing costs. Thus, the basic formula price essentially determines what western producers earn.
In this reform effort, the Secretary is faced with the decision of whether the basic formula price or prices should reflect the full value of milk or, rather, should it only establish part of the value, leaving producers to obtain the remaining income through hoped for negotiations of additional premiums.
Since the minimum prices represent all that the producers are obtaining, we feel the Secretary should determine the full value of milk and insure that the producers receive that full value. Only if the full value is captured for each class of milk can the pooling system be fair to all producers who are pooled in that market.
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To reach that goal, Western States proposes the use of two basic formula prices, one for manufactured products and a slightly different one for the class I and class II. There is no longer a valid rationale for one basic formula price to establish prices for what really are two separate markets.
Fluid milk needs not respond penny for penny with volatile cheese markets. Historically drops in cheese market prices have resulted in lower class I prices without similar reductions in consumer prices.
As a result, there has been an ever widening gap between what consumers pay for milk products as compared to what producers receive. We illustrate this in our testimony on Figure 1 on page 20. This data show that since 1980 the consumer prices for fluid milk have increased by over 30 percent, while producer prices during that same period actually decreased by 7 percent, and these are non-adjusted numbers for inflation.
For fluid milk and solid dairy products, Western States proposes the use of a product reference price to track the supply and demand for milk. The regulated value reflects current marketing conditions in the regulated dairy commodity markets. This lets the free market set the value of fluid milk. To stabilize the price, the fresh milk base price is the rolling 12-month average of the product value.
Manufacturing product value must also follow current market conditions. For class III products, Western States proposes replacing the BFP with what we call the modified product value formula.
The modified product value is a superior option available to the Secretary because it combines the strength of free market pricing using end product pricing with the true market values of Grade A milk reflected in competitive producer pricing.
Some argue that the Federal milk orders should capture less than the full value of milk and let competition make up the difference. History tells us that competition will not return to producers the full value of milk.
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In 1937, Congress found that producer competition for milk markets reduced prices paid to producers, not raised them. The economic reality has not changed today.
Establishing a low Federal order price and expecting producers to bargain for the full value ignores the reality that milk is very perishable and cannot be held until market conditions recover. Milk must be sold daily regardless of the market conditions.
For these reasons Western States believes that Federal orders should obtain as much of the true value as possible. We believe that our proposal would accomplish this without affecting consumer prices, as evidenced by the growing spread in the consumer price index.
In closing, let me say the Western States Coalition intends to pursue its goal of fair pricing to producers nationwide by working with other producer groups and with USDA to move us closer to a consensus position in forming Federal Orders.
Thank you very much.
[The prepared statement of Mr. Walker appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Johnson wanted to introduce our next witness.
Mr. JOHNSON. Thank you, Mr. Chairman. I appreciate the opportunity to do this, and I am pleased to have a constituent from my district, a representative of Wisconsin dairy farmers, a very proud dairy State, Brad Brunner.
I have been to his farm. I have seen a very modern operation. He is a modern, progressive farmer. We have got about 3,000 farms in my district. As you all know, we lost the cheese exchange, but we are proud to have many farmers like Brad Brunner here.
And I would like to also thank his co-op, Land O'Lakes in helping to arrange his trip to Washington.
Brad.
STATEMENT OF BRAD BRUNNER, DAIRY PRODUCER, CECIL, WISCONSIN
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Mr. BRUNNER. Well, thank you, Congressman Johnson. Thank you, Chairman Pombo, for allowing me to testify here today, and I will briefly get into some of my comments here.
My name is Brad Brunner, and I am a dairy producer from Cecil, WI. I milk approximately 400 cows and market my milk through Land O'Lakes. However, I am not on the board of directors of Land O'Lakes, and so my comments are not necessarily the official comments or views of this cooperative. I am told that they will be submitting written comments to the subcommittee when the time comes.
In my initial comments that I drafted approximately a week and a half ago, Land O'Lakes' position, we were in favor of seeing a basic formula price that was competitive in nature, and since that time, we have seen the base broaden. Just last week Secretary Glickman announced the reporting price across nationwide rather than using the National Cheese Exchange, and, therefore, some of these comments are no longer applicable.
However, I do want to point out at that time, when those numbers were reported in the last issue of Dairy Profit Weekly, which I have right here with me, there was a $1 difference between the numbers that were reported on a national basis versus the information as reported from the National Cheese Exchange or the MERC at this point.
So that to me means approximately $7,000 on a monthly basis. Of course, if you annualized that, this hearing here has a major impact and, of course, subsequent hearings as well.
Two of the issues that still are relevant at this point. First and foremost, to help the entire pricing system function more efficiently, it is imperative that we reform the Federal order system in a way to make it attractive for California to participate. Let's just suppose, for instance, you sit down at the table with your kids and your wife, and you start playing Monopoly, and you want to buy Park Place and Boardwalk. Now, they have the ability to buy the two houses over there for about $500.
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On the other hand, I have to pay $800. You cannot play the same game by two sets of rules. All right? That is what we are doing right now.
I do not know if we will ever achieve a united national dairy industry and one that is capable of competing in a world marketplace if the Nation's No. 1 dairy State, California, operates under this different set of rules. Producers in California receive some of the lowest pay prices in the Nation, and yet a number of the processors receive a make allowance from the CCC. I do not understand it.
This allows either for greater profit margins or less efficiency and clearly puts an already extremely competitive Midwest at a competitive disadvantage, as well as many other areas of the country.
Aside from the comments representing both Land O'Lakes and myself, I have another solution to pricing milk equitably in all areas of the Nation, something that many of you have talked about this morning. The concept is relatively simple compared to all of the other proposals on the table. It does not involve cost of production. I know those are nasty words.
We are all aware that the retail price versus the price producers receive is continuing to widen. Consumers are the ultimate losers as this continues. I propose that the retail versus producer price spread ratio be frozen at current levels or at least somewhere similar, something close to where we are at today.
The dairy section is already very lucrative to retailers and is at the back of the store for a reason. The concept is so simple with the benefits outlined as follows.
Retailers remain profitable.
Producers are assured that the gap will not continue to widen and should see their prices rise at least on an inflationary basis.
It can be made region specific. So whatever the demand is in the region, producers will be paid accordingly. Mr. Tillison requested that. This would allow that.
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As far as full value of milk being realized, that would suffice for Mr. Walker.
USDA's role is reduced. Why couldn't we use the CPI of the dairy production section? Those numbers are already being reported. Maybe we could use those.
Consumers, of course, are the ultimate winners because it is entirely market driven. I understand there is a fair amount of inelasticity in the marketplace. However, using CPI maybe we could adjust for some of the elasticity factors.
The simplicity in all of this is a breath of fresh air to an industry far too heavily overburdened with regulation and bureaucracy.
So in conclusion I am hopeful that the USDA will use this opportunity and make the Federal milk marketing order system operate more equitably for all. Dairy farmers in the Midwest genuinely believe that the system is antiquated and inadequate, and unfortunately we are dealing with a Frankenstein created 60 years ago.
The USDA has a sizable responsibility to implement an equitable, easily understandable plan. That is key. It is essential to those of us on the farm producing milk that they succeed, and I appreciate the subcommittee's interest in monitoring USDA's progress.
And thank you for listening to my view.
[The prepared statement of Mr. Brunner appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Hughes.
STATEMENT OF WILL HUGHES, UPPER MIDWEST DAIRY COALITION
Mr. HUGHES. Thank you, Chairman Pombo and other members of the committee for the opportunity to testify today.
I am Will Hughes. I am representing the Upper Midwest Dairy Coalition. I am employed by the Wisconsin Federation of Cooperatives.
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The Upper Midwest Dairy Coalition is a group of 16 organizations, namely dairy cooperatives, farm organizations, and trade associations, operating in 11 midwestern States, representing about 40,000 dairy farmers.
The 1996 farm bill made it clear that Congress concluded that dairy programs, along with other agricultural commodity programs, badly needed reforms, to improve their performance in a market system and in their market orientation.
The Upper Midwest Coalition has a few brief points about this followup effort as it relates to Federal orders.
First, it is crystal clear that the 1996 farm bill prohibits USDA from considering or basing new class I prices on current class I differentials. Aside from being prohibited, a status quo class I pricing structure will not serve all dairy farmers well, nor meet the dairy industry's needs to be increasingly sensitive to market forces.
Significant changes are needed in this system, and I think if we were to not have the system that we have and started from scratch, we would not come up with the current system.
Second, the basic purpose of Federal orders is to insure an adequate supply of milk for fluid use. That goes back to 1937. Any efforts to substitute Federal orders for price supports, the purpose for which Federal orders are clearly not authorized, will only inhibit and postpone adjustments to market conditions and lead to a less, not more, competitive national dairy industry.
While it is difficult to make this transition, especially in the volatile milk price year that we have had, doing so now will insure a stronger industry in the future.
To sidetrack for a second, to give you an example of why we need to be more sensitive to market forces, recently I was traveling somewhere and saw an ice cream plant, and outside of it several tubs, 600 pound tubs, of anhydrous milk fat with the New Zealand Dairy Board label on it. It does not matter whether that plant is in Florida, New York, or the Midwest or whatever. These are the kinds of competition and market forces that this system that we are talking about has to respond to.
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Third, the Coalition believes USDA is handling the followup process in a very thorough manner, offering lots of public input, and Dairy Division and its staff have reached out to all segments of the dairy industry in all regions. We think the time lines that have been put forward in USDA's steps so far have worked well.
USDA will need to step up the effort to get a specific proposal developed in the time frame allotted, and we need to have their cooperation and working very closely to develop the very specific detail and the analysis that goes along with that in the coming months.
As we talk about impacts of these proposals, we are going to hear talk today about producer blend prices and mailbox prices. We have to make sure that we look at not only the primary impacts of these changes, but also the secondary impacts.
We will look for USDA's help in looking at some of those kinds of impacts.
The reform goals of the Upper Midwest Coalition are for Federal orders to provide an adequate supply for fluid use in the most equitable and simple manner possible. All dairy farmers will benefit from simplifying the complicated and inconsistent Federal order system and bringing equity to all producers, regardless of where they live or how their milk is used.
We are proposing three basic scenarios to do that. One is related to class I price structure. That means class I differentials should be based on specific economic criteria related to the cost of moving the closest, most efficiently located milk to fluid milk consumption areas.
Regarding the basic formula price, the current system should be replaced by using a competitive pay price for Grade A and Grade B milk to provide dairy producers with the fairest measure of milk values based on conditions in the marketplace.
Consolidation should combine orders in the broadest manner possible where overlapping supply and distribution occurs which will provide farmers with more marketing options for their milk and more equitable sharing of class I sales.
Under our proposal, every area's price is determined by the same method using specific economic criteria that allow markets to work without regulatory interference or distortions, and it does not dictate the price for milk. Rather, it insures that the method used to establish Federal order prices is economically justified, equitable to all producers, and simple for everyone to understand.
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Thank you. I would be happy to take your questions.
[The prepared statement of Mr. Hughes appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Jensen.
STATEMENT OF LARRY JENSEN, INTERNATIONAL DAIRY FOODS ASSOCIATION AND NATIONAL CHEESE INSTITUTE
Mr. JENSEN. Mr. Chairman and members of the subcommittee, I am Larry Jensen, senior vice president of Leprino Foods, the leading producer of mozzarella cheese. I am appearing today on behalf of the International Dairy Foods Association and one of its constituent groups, the National Cheese Institute.
My colleague, Gary Corbett of Dean Foods, will follow with additional views of IDFA and comments of particular concern to the fluid milk and soft dairy product segments of our industry.
It is clear from the legislative history of the FAIR Act that the dairy reforms were intended to transition the U.S. Dairy Program away from extensive regulation by the Federal Government and toward greater market orientation. Doing so will help increase U.S. productivity, efficiency, and competitiveness in world markets. It is important to keep this in mind as we evaluate USDA's progress in implementing reforms.
Over the past several months USDA has released a series of five reports which give options for consolidation and reform of the milk order system. Most of these options are not new proposals. In fact, some were considered and rejected during the congressional debate on the 1996 farm bill.
It is important that USDA not move backwards by revisiting rejected proposals or those that are inconsistent with the overall objective of less micro management by the Federal Government.
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IDFA appreciates the considerable time and effort expended by all who have contributed to the various reports. We also appreciate the informal rulemaking process which allows for ongoing communication with USDA from a broad range of sources.
However, at this point there are simply too many options on the table. IDFA will submit written comments to USDA by June 1 to provide input and reactions to many of these options. However, it is extremely difficult to be responsive in a cogent manner when the possibilities are almost boundless.
We suggest that USDA narrow the options to three comprehensive proposals prior to issuing a formal proposed rule along the following broad lines.
One, no basic formula price and pooling only class I differentials.
Two, a revised basic formula price with only two classes of milk.
And, three, a revised basic formula price with multiple classes of milk.
Public comment could then focus on the pros and cons of each of these three options, which would generate more detail and focused input and reaction than is possible with so many options. Doing so will significantly improve the ability of all parties to contribute more meaningful comments to USDA.
One of the most controversial issues under the Federal milk orders has been the determination of the basic formula price. Since the formula is used for changing milk prices, this is not surprising. IDFA is concerned, however, that our proposal to eliminate the basic formula price and pool only class I differentials appears not to be getting serious consideration by USDA.
Our proposal would maintain a class I differential to be pooled for distribution to producers. Only fluid milk, however, would be subject to price regulation by Federal order. All other milk would be deregulated and simply priced in accordance with market forces. Thus, there would be no need for any form of basic formula price.
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One of the reasons IDFA came to adopt this proposal as its preferred option was the difficulty in reaching consensus within the industry on a basic formula price. As this subcommittee knows well, the proper level for regulated milk prices in the role of manufacturing milk and setting those prices has been a source of controversy for decades. One of the attractive features of the IDFA proposal is that it will eliminate the controversy over the correct BFP by eliminating the need for any BFP.
As you know, there has been tremendous shift in traditional milk production areas toward the West. These structural changes make it difficult to establish pricing formulas for manufacturing milk that are fair and equitable to processors, manufacturers, and dairy farmers in these significantly different areas.
Continuing to set a basic formula price to reflect prices paid for manufacturing milk in the upper Midwest where they are among the highest in the country is overly intrusive and minimizes the most efficient allocation of capital resources. Such efficiencies become increasingly important as trade barriers come down and U.S. products must compete in a more global marketplace.
It was in recognition of these tremendous regional differences that our organizations decided that manufacturing prices under the Federal milk orders should be deregulated thereby permitting the marketplace to efficiently account for these regional differences.
However, if this is not done, then Federal orders should use a pricing plan that prices milk for manufacturing purposes based on its value in the West, possibly with an upward adjustment reflecting the cost of shipping manufactured products to the Midwest. By doing so, a minimum regulated price could be maintained while allowing the marketplace to reflect regional differences through competitively bargained premiums.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Jensen appears at the conclusion of the hearing.]
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Mr. POMBO. Thank you. I thank all of the panel for your testimony.
Mr. Tillison, you mentioned that the California pricing system frequently yields class I prices in excess of the surrounding Federal marketing orders. What is the impact of that pricing system on manufactured milk prices?
Mr. TILLISON. Well, the California system had until a recent CDFA decision yielded higher prices for class I products than in surrounding areas. To go back to my statement where I said what happens in the Federal orders impacts California, it was brought to light when our class I prices were adjusted because these high class I prices reportedly our processors said were causing them competitive problems in shipping packaged milk out of State and also attracting packaged milk into our State.
So there is an impact on California whether or not we participate in the Federal orders.
As far as the impact on manufacturing milk is concerned, basically our milk production, like the rest of the country, due to the increased prices has expanded in the last several months. A big component of that increase in California was the higher class I prices.
Mr. POMBO. I am sure that you are familiar with Mr. Jensen's proposal, IDFA's proposal that they have put forward. How do you believe would that impact the price of milk in California?
Mr. TILLISON. Well, frankly, we do not support that or have not even considered it. We question whether it is not time to move from the milk prices established in the Federal orders from being minimum prices to being representative prices. That is why we support the concept of using what the market is actually paying for manufactured products to determine those price values and, as the California system does, use those product value changes to adjust the class I prices as well.
We think we are beyond the point where minimum prices are necessary. It is time producers get representative prices.
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Mr. POMBO. Mr. Brunner, in your testimony you mention that California has an unfair advantage or a competitive advantage. How would you feel about accepting a proposal similar to what Mr. Tillison has proposed and that's impact on your region of the country?
Mr. BRUNNER. Well, with regard to multiple component pricing, as I understand it, and product pricing, end product pricing, it would seem to me that the proposal that I have presented here with regard to retail prices is very similar in nature. In fact, however, Mr. Tillison's proposal is more of a wholesale basis, and mine, on the other hand, would be more of a retail nature, and therefore, hopefully maintaining a spread right now on retail farm gate prices.
As far as the impact around the rest of the Nation, if it is done on a regional basis I believe that it should be successful.
Mr. POMBO. Mr. Hughes, the same question.
Mr. HUGHES. Well, the position in the upper Midwest, is that the best measure of milk value at the farm level is by finding out what dairy plants are paying for milk used in manufacturing Grade A and Grade B in a competitive market environment, and this is an example of where historically we have data to see what dairy plants in the upper Midwest, Minnesota and Wisconsin, pay. But, there is not as good data in other areas of the country.
Now that we have more production in the West and there is manufacturing in other areas of the country, as well, Northeast, Southwest, it is an example where we need to go to the next step in this process, see a little more data as to what would be representative competitive pay prices in these other areas.
Regarding product price formulas, we think that they complicate the system for pricing milk and do not return the true value of raw milk value.
Mr. POMBO. Are you familiar with the proposal that the Western States dairy producers put together?
Mr. HUGHES. Yes, I am.
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Mr. POMBO. Can you respond on that?
Mr. HUGHES. Yes. That proposal uses a competitive pay price adjustment in their price formula so that you end up with similar results to the kinds of proposals that we have developed in the upper Midwest. There are some differences in the detail in some of the adjustments.
The primary difference is that the western producer group proposal starts out with a product price formula and we do not. We end up with an adjustment to the competitive pay price like is done currently under USDA, and we like to start as our primary mover as a competitive pay price.
Mr. POMBO. Mr. Jensen, are you familiar with the proposal that the Western States have put together?
Mr. JENSEN. In a very broad sense. I am probably not as conversant with the details as Mr. Hughes would be, but I have a broad sense of the Western States' proposal.
Mr. POMBO. The processors, in general, how do you feel that they would accept a proposal such as that?
Mr. JENSEN. Well, let's speak to the manufacturing segment of it, to begin with. I think we have had a lot of discussion and debate over, if you do not eliminate the basic formula price, which is our preferred option, where do you go from there. I think in general we would tend to think of a competitively determined price, such as advocated by the Upper Midwest Coalition, is a preferred option.
The problem with that is the circularity. How do you regulate a price that is already regulated? You do not get a truly competitive price when you are surveying regulated prices.
So you quickly get to a product price formula as a means to arrive at it, and to the extent that the Western States' proposal uses a product price formula, there are some similarities between, I guess, our two positions in that regard.
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It really then becomes a matter of at what level, and I think where there probably is a difference in viewpoint is the level of the processing sector represented by the National Cheese Institute. We would argue that that level should be an unobtrusive level. It should be established at a market clearing value, and you should allow the competitive portion of milk price to be a larger element, and that way, we are going to deploy resources. Milk production is going to grow, and we are going to be most efficient in the long run.
That is probably the biggest difference where we would view the future as to manufacturing prices and where that proposal might be.
Mr. POMBO. Thank you.
Mr. Peterson.
Mr. PETERSON. Thank you, Mr. Chairman.
Mr. Hughes, you have suggested that there may be secondary effects to using a competitive pay price. Could you elaborate on what some of these effects might be and how a competitive pay price will affect prices nationally?
Mr. HUGHES. Well, my comments regarding secondary impacts, are looking at the whole package of pricing changes that would come out of a USDA proposal or any of our proposals. You cannot just look at a simple calculation of here is the change in the class I differential, and here is the impact on the blend price. Therefore, we have gained or lost a certain amount of income.
You have to look at how changes in the fluid pricing sector interact with changes in manufacturing, and I think Keith Collins said earlier it is like the 12th chapter. There is an end result of these linked markets in the national system, and that is what you have to look at when you make these kinds of changes.
Regarding competitive pay price proposals, our numbers have shown that with the kinds of adjustments that we would make based on 1995 data, we end up with a basic formula price of about 10 to 15 cents higher. That would elevate the base price slightly for all milk in the country.
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But the secondary impacts from changing the class I price structure may also raise that price surface, and it stems back to your question. Does the price structure that we have generate more milk than is needed, and does that affect manufacturing markets? And the answer is yes.
Mr. PETERSON. Are you getting all the help you need to get all of this information fleshed out so that we are going to know everything we can about this? How is that all going?
Mr. HUGHES. Well, I think we have had good cooperation and results so far. I think to take things to the next step we are going to have to get hold of data that only USDA can help provide, and we will look forward to working with them on that.
Mr. PETERSON. You have asked them to help you with this?
Mr. HUGHES. Well, they are in the process of collecting some of the data.
Mr. PETERSON. How long is that going to take? Do you know?
Mr. HUGHES. Well, specifically they are going to be releasing soon, and probably someone here can speak to it, some of these Grade A pay price information from around different areas of the country that would represent potentially the use of a competitive pay price that extends outside of the upper Midwest in terms of its price basing points.
Mr. PETERSON. Well, I guess we have a vote on.
Mr. POMBO. We do have a vote on on the floor. We are going to recess temporarily. Mr. Peterson will be allowed to finish his questions at that point, and then we will return.
[Recess.]
Mr. POMBO. Well, thank you very much. I apologize to the panel for the delay. We have obviously a business going on on the floor. Unfortunately it is the emergency supplemental bill for the flood relief, and since both Mr. Peterson and my districts were under water this year, it is of passing interest to both of us.
Mr. Dooley, if you have questions at this time I will recognize you.
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Mr. DOOLEY. I struggle when we are looking at how do you go forward and how many manufacturing classes of milk do you have. In terms of keeping this simple, I struggle with the arguments whether you ought to have a fluid milk and then one manufacturing milk because I think, Mr. Tillison, you made the comment that, we ought to go to component pricing, which I concur with wholeheartedly, and you made the point though that you ought to be pricing butter fat that goes into cheese one way and butter fat that goes into powder another way.
Why isn't butter fat butter fat? And why shouldn't we price it accordingly?
Mr. TILLISON. Because steel goes into Cadillacs and steel goes into Chevrolets, and those cars are priced on a different basis, and there are different qualities of products that the marketplace demands.
Mr. DOOLEY. Excuse me, but does the steel producer get a different price for the steel that goes into those cars?
Mr. TILLISON. Maybe that was not such a good example.
[Laughter.]
Mr. TILLISON. No, I think the reality is what producers produce are components that are carried in milk, and those components result in different product yields based on what they are used in, and cheese carries a higher value than butter does for the most part, and we believe that the concept of fluid milk and everything else is going to hurt producer revenue and provide windfalls for people who are in the manufacturing business.
The concept of market clearing and the marketplace in dairy today is not fluid in everything else. In fact, fluid is not the majority product produced anymore. The majority product is manufactured products, primarily cheese, and then also butter and powder.
So we think that the concept of a minimum price for fluid and then everything else should be at market clearing is not economically valid. The marketplace responds in different ways to different product values. We saw that very clearly in 1996 where, in fact, butter powder generated a higher price in California than the value of cheese did, and the marketplace reflected that, and the producer was paid on that basis, and we think that is an appropriate way to pay producers.
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Mr. DOOLEY. So then you would subscribe that we need to at least have a cheese and a butter powder?
Mr. TILLISON. Absolutely.
Mr. DOOLEY. Mr. Jensen, do you agree with that?
Mr. JENSEN. No, we would argue, I guess, that simpler is better in that particular case, that having multiple classes, any time you segregate classes you create a system in terms of regulating prices that overlays economic forces, and you start to make decisions on the basis of regulation sometimes, not just on the basis of the economics.
And plants get built and facilities get located in parts of the country on the basis of regulation, not necessarily always on the basis of where true economic forces would dictate you do it.
Our whole thought behind basically deregulating the manufacturing segment was, as I said in my testimony, built around the fact that we struggled mightily with the whole idea of how do we harmonize all of these regional differences, No. 1, and No. 2, the whole idea that the element of what class I differentials were really doing in the system today was providing price enhancement. That was their primary function in the system today as opposed to necessarily providing movement to the class I market.
So you can retain the price enhancing elements of the class I differential system by effectively retaining a class I differential, but deregulating the rest of the process, milk will be produced. Plants will be built, and efficiencies will be gained in the system based on market forces, market supply and demand.
That was the basis for our thought process. So we would argue for fewer classes rather than more.
Mr. DOOLEY. Mr. Brunner, on your concept of establishing a retail differential, would that be by product?
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Mr. BRUNNER. Most definitely it would be on a by-product basis. Let's assume that we take the value of fluid milk in the stores, and let's say a generic cheese, whether it is cheddar and so forth, and then a class II product, such as ice cream, a generic vanilla ice cream. That is a simple concept.
I am not sure what the products are that CPI covers as with regard to dairy products, but certainly that could be investigated, and the numbers are available.
Mr. DOOLEY. Would we then be locking in what might be a current differential among various retail products that could have an adverse impact in terms of future changes in consumer demand or new product development and have a negative impact?
Mr. BRUNNER. Well, actually, I want to be clear on this. I am not advocating that we lock in a dollar level. I am advocating that we lock in a price spread ratio. So that is why everybody wins, because as the price moves higher the retailer receives more for their product and so does the producer, and in fact, everybody receives more for the product because as that spread widens, there is more room in the middle for the processor, the wholesaler, and so forth, and of course, as the price drops the retailer sees less level, but also the producer sees a lower level, and certainly there is going to be a response.
I cannot milk a cow, for instance--if I get paid $12 for that milk, I cannot milk her at 40 pounds anymore. Now maybe I can only milk her at 30 pounds because I am not getting as much revenue for the milk. So simple economics say I beef her.
Mr. POMBO. Mr. Stenholm.
Mr. STENHOLM. No questions.
Mr. POMBO. Mr. Johnson.
Mr. JOHNSON. Thanks, Mr. Chairman.
I would like to ask my dairy producer there, Brad. First of all, I know you brought some props along, and I understand you need them now at home, and you should be there.
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How is this, and what are they related to your cost of production?
Mr. BRUNNER. All right. Well, Congressman Johnson, what I would like to show the members and the people here today, we have got two claws here that go on the bottom of some milking units that attach to the cow's udders. These two claws, along with these rubber gaskets that I have in my hand here, the value of all of this, at least my expense last month, was $176. There are no moving parts in this. This is simple rubber gaskets that go on here and simple pieces of rubber that fit in the line, in the milking line.
So the point is, and the point was made before, in 1946 we had a certain level of prices and it has increased roughly 3 times over, and I understand that we have gained an awful lot of efficiencies in the dairy industry.
I also understand that that price ratio between the retail and wholesale prices or farm gate, mailbox prices have widened dramatically, and therefore, I am just asking for my piece of the pie. That is all it is.
Mr. JOHNSON. How do you see these suggested changes? I know you have looked at it through the Internet and everything in terms of these suggested proposed changes in milk pricing. How do you think they might affect your costs?
Mr. BRUNNER. Affect my cost or my income?
Mr. JOHNSON. Well, both probably.
Mr. BRUNNER. I guess if I have a tendency to favor some of the information I have heard here versus another, certainly I think on a national basis you need to have a competitive pay price rather than a minimum price.
Take a look at, for instance, what is happening with Mid-Am and possibly AMPI and a couple of other cooperatives. Those folks get together. They control a quarter of the milk supply in the United States. What kind of competition do you think is going to be held in the Southwest where there is only Mid-Am and AMPI right now? And we want to install a competitive pay price?
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I dare say that there will not be much competition in that area. Therefore, they purchase quite a lot of milk at quite a low price, and it has a major bearing on what happens in the rest of the United States.
Mr. JOHNSON. You have seen fellow farmers nearby, small family farms in Wisconsin go out of business in recent years. Will this new milk pricing change that at all or stop the continued consolidation or, in fact, outright sale and closure of family farms?
Mr. BRUNNER. In the last year in Wisconsin we have lost over 1,000 farms. We have lost over 70,000 cows. Now, I understand there are a number of individuals who are reluctant to change, and I cannot change that, but there are those of us that have changed because we are progressive and we intend to be in this business for a while. There are even some of those who have changed that, based on the finances and the high leverage that is involved, that they are finding it very difficult to manage a business in the upper Midwest.
And I understand that we have a number of plants in the upper Midwest, and so therefore, competition is very great for our milk supply, and we do receive a fairly high price for our milk, relatively speaking. I am not saying it is high enough. I am just saying relatively speaking it is higher.
There will continue to be an exodus of producers in the upper Midwest for a certain length of time. I think we will continue to see that slow down as time goes on and people make the changes that they need to make to become efficient, and certainly I believe that I can compete on a level playing field across the entire Nation, and I have nothing, absolutely nothing, against any other producer in the Nation. On a level playing field I can compete, and that is all I am asking, just a fair shake and an equitable level, equitable playing field.
Mr. JOHNSON. I guess a question for you, and, Mr. Walker, you are also a dairy farmer in California, just a quick question. We are going through this roller coaster ride between now and April 1999 when we see what the new milk pricing arrangement will be.
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How are you going to make it through these? I imagine it is going to be difficult for both California and Wisconsin farmers.
Mr. WALKER. Yes, it is very difficult. In California, dairies are just consuming assets, to tell you the truth. The price we are receiving for our milk is quite a bit lower than what our costs are, and especially with the high feed costs. In California, the forage costs have really gotten astronomical here in the last 4 or 5 months. We have had it as much as 60, 70 percent increase in hay costs since last November, and the milk price has gone down.
And it is just like everyone knows. When you get a milk check, and it does not equal what the bills are, it has got to come from somewhere. So you have to go back to the bank, and you have got to borrow on loans that you have already paid off or you have to sell something. It is just that simple.
Mr. JOHNSON. I concur 100 percent with what Mr. Walker said. I have been selling off assets as I have more and more of my operation custom harvested. I have my manure custom hauled. I have my fields custom planted. I am about making milk. I do not own many equipment. I have two tractors and one of them I do not own. I am leasing it.
I am down to bare bones right now trying to make my operations as efficient as possible, and I understand efficiency is crucial to this operation and to the industry, and in the next 2 years, sure, I will make it, but the key to making all of this work, not just agriculture, but our entire Nation here, is it is imperative that agriculture thrive rather than survive.
As agriculture survives, we continue to see our small towns wither. We continue to see less economic prosperity based on our agricultural backbone, and I would just beg of you people when you consider your decisions, think about what it is going to do to all of the small operations out there, all of the townspeople that it is impacting.
We do not need to have all of this complexity in the dairy industry. Throw it all out the window, folks. Let's start from ground zero with something we can all understand and then work from there to change it.
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But if we are still trying to work off of the status quo, let me tell you the status quo will be an ultimate failure for every dairy producer in the Nation. We need to change it from where it is.
Let's start with a breath of fresh air and modify it. Sure, I know there are probably changes that some people would like to see to my proposal, but if we start from there and we can understand at least what we are dealing with, we can make intelligent decisions.
Now it is virtually impossible.
Mr. JOHNSON. Thank you very much, Mr. Chairman.
Mr. POMBO. Thank you.
I thank the panel for your testimony. I think over the past 2 years we did try to make things simpler, and that was the effort that was being made and to try to make dairy more market oriented, even though we have and do operate in a highly regulated industry, but to try to make it market oriented, to make the decisions that dairymen make based upon market forces and not based upon a Government program, and that was the effort that was being made. I think that is what all of us tried to do.
As far as myself personally, to find out how tough things are in the dairy industry, it is not very difficult. I mean I just wait for my dad to call me, and that is taken care of. [Laughter.]
Mr. POMBO. But I appreciate the panel's testimony a great deal and will tell you that I know that Mr. Peterson and others did have further questions for the panel. They will be submitted to you in written form. I would appreciate it if you could answer those as quickly as you possibly could, but thank you very much.
I would like to call up the third panel. Mr. Edward Coughlin, Mr. Roger Eldridge, Mr. Gary Corbett, Mr. Paul Halnon, Mr. Bob Wellington, Mr. Elvin Hollon, who is accompanied by Mr. Jack Parks.
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Again, I will remind the witnesses that your entire testimony will be included in the official record, and if you could summarize your oral testimony to the 5-minute time limit, it would be greatly appreciated.
Mr. Coughlin, you may begin.
STATEMENT OF EDWARD T. COUGHLIN, ACTING CHIEF EXECUTIVE OFFICER, NATIONAL MILK PRODUCERS FEDERATION
Mr. COUGHLIN. Thank you, Mr. Chairman. It is a pleasure to be here this morning.
I represent the National Milk Producers Federation, an organization that consists of 31 dairy cooperatives and that market about 70 percent of the milk in the United States.
When you look at the 1995 farm bill or 1996 farm bill, that fundamentally changed the course of the dairy industry, totally eliminated the Government support programs down the road. So we are on a new course that is market oriented.
The elimination of the Price Support Program, I would submit to you, was accompanied by a commitment on the part of the Congress for full funding of the DEIP Program, and I am going to talk to you a little bit about that. I think that is a commitment that has not been kept, not as a result of the actions by the Congress, but as a result of the actions by USDA.
And I think the other part of that was the consolidation of the Federal milk marketing orders. Those are three separate things that happened and will have a fundamental effect for the long course for the dairy industry.
In terms of Federal milk marketing order reform, we represent dairy cooperatives throughout the country, and dairy cooperatives throughout the country are not united on what ought to happen with respect to Federal milk marketing order reforms. The Federation has taken no role in the Federal milk marketing order reform things because our members are split. Each of the members is basically pursuing their own course.
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That is not to say we are not trying to achieve some consensus. We have recently put together a group to try to achieve that consensus. Our leadership remains committed to trying to achieve a unified policy on Federal milk order reforms.
With respect to the DEIP Program, USDA is required to fully utilize the DEIP Program to the maximum extent permitted under the Uruguay Round agreement. In addition, the Congress made a specific change that I would say to you was to authorize the DEIP expenditures to be used to assist in developing world markets for dairy products, and I think that is critically important because that is where we are going to grow the market in the future.
DEIP has been a very valuable program. It has evolved since 1985, when it started off slowing, into some years that it was used quite extensively.
The Federation is very concerned that USDA has not made aggressive use of the DEIP Program throughout this marketing year. When we look at what has happened, as of yesterday only about 36 percent of the total quantity available to be moved under the DEIP Program has actually been moved.
In terms of some individual products, it looks like cheese is fairly high. About 70 percent of the cheese allocation has been moved. Forty-six percent of the nonfat dry milk allocation; 17 percent of the dry whole milk allocation; and just 12 percent of the butter fat allocation.
Mr. Johnson, you asked a question earlier of Mr. Collins, and you asked what was the penalty on USDA. There is no penalty on USDA. The penalty in this of not fulfilling this obligation really comes back to the dairy industry, particular dairy farmers.
The dairy farmers are the ones that are feeling the impact on their price, and so there is a penalty, and the penalty is immediate, right now, but long term we are not doing the activities that we ought to do to get market development work going, and so the penalty is not only now. It is long term in nature.
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Now, turning to some of the other things, I would have to give USDA credit. Recently they have moved a lot of product under the DEIP. In the last couple of weeks, a lot has been moved. You heard Mr. Collins say earlier there was not much moved for the first 6 months of the year, but recently they have moved some. So we are pleased to see the recent movements.
I think we would urge USDA to quickly make and announce the allocations for the next marketing year. The marketing year begins July 1 and runs through June 30. So we would urge that USDA do that as quickly as possible.
We think there are some other opportunities using what is called Green Box Programs, which do not affect what you can move overseas, and these Green Box Programs are in an areas where USDA might have an opportunity to move some dairy products under the Food for Progress Program.
There have not been many uses of dairy products under those programs, but we think that there are opportunities, and some opportunities have been identified by the U.S. Dairy Export Council, which was talked about a little bit earlier here. It is an organization that the industry has set up. Both producers and processors are working with that organization to try to help expand the exports of U.S. dairy products.
So we think there are opportunities under some Green Box Programs.
Another area that we would talk about, in the farm bill in section 191, I think it was, of the FAIR Act, it authorized the Secretary of Agriculture to establish a pilot program to determine whether commodity options can provide producers with reasonable protection against financial risk posed by fluctuating commodity prices, and I would submit to you we have had widely fluctuating commodity prices, and I think it is time for USDA to go ahead and act on a program that was submitted to them and let a pilot options program be administered by USDA and get that off the ground as soon as possible.
My time has run out. I will stop.
[The prepared statement of Mr. Coughlin appears at the conclusion of the hearing.]
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Mr. POMBO. Well, thank you.
Mr. Eldridge.
STATEMENT OF ROGER D. ELDRIDGE, VICE PRESIDENT, MID-AMERICA DAIRYMEN, INC.
Mr. ELDRIDGE. Thank you, Mr. Chairman.
I represent Mid-America Dairymen of Springfield, MO. We are a milk marketing cooperative with about 17,000 members on about 13,000 farms. Last year we marketed about 20.4 billion pounds.
First let me state our strong support for maintaining a Federal order marketing system. The purpose of the Agricultural Marketing Act of 1937 was to bring order to the marketing process for milk. This act grew out of the needs of producers for helping achieving and maintaining some degree of bargaining power over the prices they received for milk, and also the act attempts to assure a milk supply.
The purpose then is just as true today. We have had some concerns from time to time during this process of discussion of the reformation. Some appear to favor dismantling this self-funded system that has brought some measure of market stability to the dairy industry not only for producers, but for processors and, indeed, for consumers.
We oppose any move to eliminate the program. We do recognize and do agree that it needs reform.
We, like just about everyone else in the industry, do have an opinion on what the order area map should look like when the process is completed. We have attached a copy of the one we prefer. I am glad to hear that hopefully next week there will be a second map issued by the Department.
The suggested changes that we have have been submitted to USDA with our comments. A couple of the major differences would be involving the area of southern Missouri and northwest Arkansas, including that with the so-called Southeastern order; also the northern one-half of Kentucky we feel should be included with that Southeastern order, and the Appalachian order area should be included.
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Southern Missouri is clearly a reserve supply of milk for the Southeast, and milk produced in that area does regularly go to plants in that Southeast order area. Likewise northern Arkansas has tremendous overlap in class I sales with that market.
The Southeast order should include the Carolinas, east Tennessee, and the counties of Virginia not currently regulated by the order area 1004. There is significant overlap of procurement and sales, and that is the justification for inclusion.
We mentioned the situation in Kentucky where if you look at it we feel very strongly that it does not make any sense when you look at the fact that a couple of plants located right on that fringe would have a very difficult time, we think, in attracting a milk supply should the earlier proposed system remain.
We do support four classes of milk: class I fluid; class II soft products we think should remain unchanged and be uniform in all orders; class III should be all current class III products, except butter, and then class IV, we think, should include nonfat and butter.
We see butter and particularly nonfat as being in a separate class because they are market clearing commodities. Class III and IV prices should be derived from the product price formulas.
We think in these formulas that consideration should be given to yield, conversion costs, and seasonal availability of milk for their use.
Mid-Am. supports the decoupling or breaking of the link between class I and II prices from class III and IV prices. Class I and II are widely accepted as inelastic in demand and command higher prices than the milk used in the class III and IV. Class I and II, the fluid and soft product should not be subject to the same price volatility that we have seen. When we see that, when this happens, when the milk supply, particularly in some markets, the tight markets, for example, is certainly endangered, and the ability or the chance of consumers in those markets having a fresh local supply available for fluid purposes does get placed in jeopardy.
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I think a prime example of that is in the Southeast. It exists there. We have attached a chart on that situation.
No factors exist, we believe, which justify a 30 percent drop in farm prices in an area that has a growing population base, shrinking production base, and where the utilization is in the 80 percent-plus range. Yet we sat that last year, and in all likelihood we will see that this year.
We supported a temporary floor as a method to bridge the gap to get to this decoupling phase. A lot of work was done on that, a lot of letters written. Of course, nothing came out of that.
We do believe that an area of concern, as has been mentioned by Mr. Coughlin and others, is the lack of full implementation of DEIP, and I would just echo his comments in that regard.
We also would comment very briefly on the timetable and progress of the order reform process. We encourage and urge every effort in meeting all of the timetables for the issuance of the reports and the maps related to this process, but we have concern that if the timetables are not met, then the ordering system itself could be placed in jeopardy, and we oppose any efforts that might impede or slow that process.
Mr. Chairman, I know my time is up. I thank you, again, for the opportunity to be here and present our views.
[The prepared statement of Mr. Eldridge appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Corbett.
STATEMENT OF GARY CORBETT, INTERNATIONAL DAIRY FOODS ASSOCIATION, THE MILK INDUSTRY FOUNDATION, AND THE INTERNATIONAL ICE CREAM ASSOCIATION
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Mr. CORBETT. Thank you, Mr. Chairman and members of the subcommittee.
I am Gary Corbett of the Dean Foods Company. Dean Foods is the largest fluid milk processor nationwide.
I appreciate the opportunity to appear before you today to present the views of IDFA and its constituent organizations, the Milk Industry Foundation and the International Ice Cream Association.
USDA has released a wide range of options within its five reports, but they have yet to identify the purposes or criteria that will guide their decisions on Federal order reforms. For instance, what is the purpose of class I differentials? Is it to enhance milk prices to farmers? Bring forth an adequate supply of milk for local market needs? Get sufficient milk to fluid bottling plants or some combination of these?
The answer includes all of these to some degree. Class I differentials are currently paid on milk that is used for beverage milks only, but the proceeds are distributed across all producers in a milk marketing order. Because it is shared more or less equally by all producers in the order, its primary function is to enhance the total amount of milk produced and attracted to the order.
Fluid milk bottlers agree that if all milk payments are pooled, then some portion of the class I differential payment should go directly to whoever actually shipped milks to the fluid milk bottling plants.
If the sole purpose of class I differentials is to enhance prices to farmers, then our preferred option of pooling only class I differentials would work towards that goal. Each product processor or manufacturer in a market would pay a competitive price for their milk based on local market dynamics and then pay the class I differential to be shared among all farmers.
In this case the class I differential would be purely for price enhancement purposes, and the function of getting milk to the bottling plants would be fulfilled by competitive pay prices in the marketplace.
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So while USDA sets forth six proposals on class I differentials, the purpose for class I differentials is not clearly articulated, nor are there any criteria for measuring these various proposals.
Another area in need of criteria in USDA's proposals is on multiple classes of milk. In our view the dairy industry would be better served with only one class of milk, class I. Pooling class I differentials, but not pricing manufacturing milk, keeps the price enhancement elements of classified pricing, but unburdens the industry greatly.
Among the many benefits, it would allow companies that are buying milk for their milk processing operations to establish long-term contracts with their dairy farmer suppliers. Currently this is practically impossible because of the required pricing provisions of the Federal orders.
However, long-term contracts for supply are the norm for many other businesses. In fact, Dean Foods is the largest frozen vegetable processor in the United States, and so we have the experience in buying lots of vegetables. The prices we pay are not set by Government. Instead, we pay based on competitive factors and contract forward for these purchases.
Both the buyer and seller benefit by knowing what to expect in the coming months. The growers know what to plant and harvest based on their cost, the quantities contracted for and the price they will receive. The processors know what their costs will be and whether they can sell the finished products at competitive prices to their customers.
The dairy industry could similarly benefit from a more market competitive based pricing system that would allow for forward contracting between buyers and sellers to better manage price risk and volatility. There needs to be a clear economic rationale first for the need for multiple classes, and then based on that need, if there is one, for the proper definition and delineation of those classes.
We have also developed a checklist of considerations that are included in our written testimony which we believe are important in evaluating any USDA proposal.
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Just a brief comment on consolidating existing orders and how it impacts what is done with class I prices. One of the problems USDA will encounter in consolidating orders is reasonably aligning prices paid to dairy farmers in overlapping milk procurement areas. Wide differences in blend prices in areas where handlers under different orders are competing for a milk supply can and are likely to be a major problem for many markets.
Milk production has increased so significantly in the West that that area has become a major alternative milk supply like the upper Midwest. Because of this, we believe that class I pricing must reflect this west to east movement of milk. My written statement contains more details on multiple basing points.
Finally, I wish to reiterate the request that a narrow set of reform proposals be identified by USDA. It is time for the Department to provide some guidance on the criteria it intends to employ and the direction it is likely to take in this historic process of consolidation and reform of Federal milk market orders.
We hope the subcommittee will join us in urging the Department to generate a narrow range of integrated reform proposals.
Once again, I appreciate the opportunity to present these views.
[The prepared statement of Mr. Corbett appears at the conclusion of the hearing.]
Mr. POMBO. Mr. Halnon.
STATEMENT OF PAUL W. HALNON, CAROLINA-VIRGINIA MILK PRODUCERS ASSOCIATION
Mr. HALNON. Mr. Chairman and members, I represent seven organizations, primarily cooperatives in the Southeast that market milk throughout the Southeast, and on their behalf I appreciate the opportunity to appear before you.
From the outset of congressional deliberations of the 1996 farm bill, it has been our position that the Federal order system generally has worked quite well and was not in need of sweeping reforms.
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The final legislation as enacted by Congress, while mandating consolidation of orders, essentially accepted this position in that it rejected most of the reforms that would have drastically changed the focus of milk order regulation.
The process of consolidating the orders from 32 to 10 as mandated by Congress is a complex and time consuming process requiring the Department to resolve the many differences in order provisions that were necessary to accommodate the varying milk marketing practices that existed. The initial map of the proposed consolidated areas was presented to the industry late last year.
Given the mandate, we believe it was a reasonable proposal in most respects. Individual organizations in the Southeast have suggested some modifications of the boundaries, and we expect that there will be some changes made in the final product.
One of the provisions of the farm bill required the Department to abandon the formal rulemaking process of the Administrative Procedures Act and instead use the informal rulemaking procedure throughout the reform process. Proponents of this proposal testified before this committee that the informal procedure should be used because it would speed up the reform process.
Whether it does or not remains to be seen, but we are concerned that the lack of a formal, structured approach that provides assurance that all affected parties will be heard and the wide latitude that it gives USDA in developing order changes could result in affected parties being substantially impacted without their being given an opportunity to be heard and without a full disclosure of the facts.
There are several important issues still be resolved in this reform process. These include (1) the level and relations of class I prices; (2) the development of a new basic formula price to replace the current price that is generally recognized to be outdated; and (3) the classification and pricing of milk manufactured in storable dairy products.
The review and evaluation of these proposals in the above areas has been assigned to several committees of the Dairy Division and their initial reports have been submitted to the industry for comment. We believe that the committees have carried out their assignment in an acceptable manner and have surfaced the important issues for consideration. However, much work remains.
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In view of the fact that the committees' reports are tentative and since we are in the time frame in which comments are being submitted to the Department, we do not believe it would be necessary or appropriate to bring our concerns and specific comments to your attention.
However, there are a few issues that we would like to mention. USDA has presented six alternatives for modification of the class I price differentials. While the pricing committee has selected one of these alternatives as one that it prefers, USDA has indicated that all 6 alternatives are still under active consideration.
Our concern is that at least two of these alternatives are very similar to proposals that Congress considered and soundly rejected in its consideration of the farm bill. In view of the fact that you found such pricing alternatives to be unacceptable, we do not believe that it should be necessary to revisit them in this regulatory proceeding.
This matter is of utmost importance to us in the South because two of those alternatives would lead to drastically low prices throughout the Southeast.
The issue of pricing milk into manufactured storable dairy products, primarily cheese and nonfat dry milk, is one that will be difficult to resolve. This pricing issue is complicated by the fact that there has been no apparent progress towards resolution of the pricing problems in California even though the Congress addressed that problem in the farm bill.
It is recognized that the mandated consolidation process will require many substantive changes in orders. We are concerned, however, that in many instances the committee's initial recommendations go much further than necessary to accommodate the consolidation of orders and carry out Congress' mandate.
These changes have been proposed in an effort to standardize milk orders. We have suggested that USDA limit changes at this time to those that are necessary to resolve conflicts in the merger process, and if additional changes are required or desired, they should be considered at additional rulemaking proceedings at a later date.
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Mr. Chairman, I appreciate the opportunity to be here.
[The prepared statement of Mr. Halnon appears at the conclusion of the hearing.]
Mr. POMBO. Thank you.
Mr. Wellington.
STATEMENT OF ROBERT D. WELLINGTON, SENIOR VICE PRESIDENT, AGRI-MARK DAIRY COOPERATIVE
Mr. WELLINGTON. Thank you, Mr. Chairman.
I am here representing farmers throughout New England and New York. In fact, we are proud to be one of the instigators of that notorious dairy compact that you hear so much about.
We are very glad you are holding these hearings because we do have serious concerns about the process as it is proceeding.
First of all, let me say that we are not threatened by this reform process. In fact, the cooperatives throughout the Northeast gathered together a year before the farm bill and decided that we were going to merge our orders, and we were looking for ways to best do that, but we look at this as a great opportunity.
We also have great confidence in the ability and the integrity of the Dairy Division of the Agricultural Marketing Service. They have very competent employees, and we think if left to their job, they will do it quite well.
We are concerned that there have been some other forces involved that are going to go beyond the economic arguments, beyond what should be a national approach which is best for all farmers.
The area of most concern to our area right now is class I differentials. In my statement I have a couple of tables, but it was circulated as one sheet, but I pulled out two of those tables, and I took one from Ted Turner and I colorized them to give them a little better perspective of what is happening.
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Table 1 looks at class I differentials and mailbox prices. When you look at the class I differentials and you compare them to Wisconsin, you will see that they are much higher than most areas of the country, and that is what many Wisconsin farmers complain about, the uneven playing field.
And if you would look at that column alone, that, indeed, would say that, but in many ways it is comparing apples and oranges. I like the comparison of I have a friend who works in New York City. He does similar type work that I do, but he earns more salary than I do, and his wife and my wife are unfortunately friends at times, and they talk about it, and she says to me, ''Well, how come Frank earns more money than you do?''
And I try to explain to her that, well, when you take out the factors of what he has to do to do his job in New York City, he pays State income tax. He pays a city income tax. He pays sales taxes. He pays a number of things just to do his job, not the cost of living.
I happen to live in New Hampshire. Live free or die. We have no income tax. We have no sales tax. We do not have very many services either, but that is OK. But my net salary that I receive is actually greater than his. My wife does not quite understand that because, of course, as we all know, it is never quite enough.
But when we look at mailbox prices, which is what USDA puts out that takes out the cost of servicing class I markets, we end up with this last column on the table, and it shows that in economic reality, most of the country receives a lower mailbox price.
Why? Because there is higher cost in serving the class I markets. In the Northeast market, milk has to travel 200 to 300 miles during many parts of the year to service class I markets. That cost is over $1 per hundredweight. There is cost of balancing those markets that we do not have cheese plants at every corner.
There are lost opportunities, such as protein premiums that class I bottlers say are not worth anything to them. So our farmers do not have an opportunity to enhance their price like they do in other areas of the country. That is why these mailbox prices are less. That is why my farmers in New England receive 37 cents a hundredweight less over the last 25 months.
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That is about between $4,000 and $5,000 a year for a family farm earning between usually $15,000 and $30,000 in net income. That is a big chunk of money.
That is why we end up with problems with the options that I show on the back of that page. The table 4 options, if you look at them, you see that 1(a) is the only option that leaves us somewhere near whole. If we look at the other options, particularly ones like there is a 3(a) option with flat differentials, which costs northeast dairy farmers $155 million a year. This is based on USDA numbers.
Nationally it would cost farmers $430 million. We are talking about 15 to $20,000 a year for an average farmer in that area. We put some calculations out, and that would drive most of the farmers in the area below the poverty level on income.
We do not think that is what President Clinton had in mind when he said, ''work fare'' that farmers should work 7 days a week and receive a poverty level of income. So we have very serious concerns about that.
We also do not think we can get it back on a competitive basis because we have a lot of independent producers, and quite frankly, there are more producers per handler shipping today than there were in 1937 when they first passed the act, and the first of the Federal orders is to level out this playing field and get fair terms of trade between farmers and processors.
The last thing I would like to add is that Senator Jim Jeffords from Vermont, who served on this committee quite a number of years ago, has asked me if I could put on the record a letter that was sent out and signed by 40 United States Senators in regard to this process.
In addition, I have a letter that was circulated and signed by 86 of your colleagues on it. So I would like to put that in the record if possible.
Thank you.
[The prepared statement of Mr. Wellington appears at the conclusion of the hearing.]
Mr. POMBO. It will be included in the record.
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Mr. Hollon.
STATEMENT OF ELVIN HOLLON, SOUTHERN REGION ASSOCIATED MILK PRODUCERS, INC.
Mr. HOLLON. Good afternoon, gentlemen.
I am representing the views of the Associated Milk Producers, Inc., Southern Region, and also Mr. Jack Parks, one of our dairy farmer member-owners is here.
AMPI represents about 3,000 producers in 11 southwestern States.
AMPI supports the Federal order system, first and foremost. If you take even a cursory glance through the statistics that they put out, there are about 83,000 dairy farms that are subject to Federal regulation and about 560 milk buying locations.
Even if you do not account for the fact that a lot of those locations are owned by a few number of firms, the logistics say that the farmers' stake in the marketplace is not on a level playing field without Federal orders. So we want to see them stay in place.
Second, though, one of our concerns is the concern dealing with price volatility. In the last 9 months, the basic formula price peaked at $15.37, and we expect it to be as low as $10.50 next month. That is a range from peak to valley of 32 percent.
Now, any business is going to struggle with that as a price volatility. My household would struggle with that as a price volatility, and while I do not know any of you personally, I suspect your households would struggle with that, too, and we know Bob's wife would struggle with that.
As an indication of the severity of this, in the last 3 months we have recorded 174 farm sellouts in our territory. To put that in perspective, in 1996 that number was 88, and in 1995 that was 61. That represents approximately 5 percent of the number of farms in that area.
We have heard several choices today about alternatives for the basic formula price, and you gentlemen have asked quite a bit of questions about that. Our preference for replacement for the BFP is a combination of a competitive price series and a product formula updater. That combination or that computational process is much the same as we have right now.
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We think that is good because it involves competition as the primary price setter. It gets factors of supply and demand actively involved in that price setting, but it also requires that we have a reliable competitive price series.
USDA is researching that right now. There were several comments about that earlier in the morning, and we expect in the next couple of weeks to know if they can determine if there is a reliable competitive price series available for use. If not, then we will have to look at the report at some of the other alternatives.
Imbedded though in that is a philosophy that USDA has put out in all of their submissions to the industry, and that says that the new basic formula price has to track relatively close to the old basic formula price. It says that the Federal order program is not going to be a tool for farm income enhancement. We think that they are probably reflecting Congress' views on that, and again, it has been in all of their submissions. So our comments take that as a background.
If you decide and give us some direction that that is not a background, then we have some ideas about enhancing farm income, but we think that that is the path that we have been set on.
We, too, have a little struggle with the number of alternatives and understand some reasons why, but there have been four reports issued by USDA. One had six alternatives within it. The other had four. So it gets kind of difficult to go through them all.
We support the concept that a basic formula price established a basic manufacturing price; that there would be multiple classification levels. The four like Mr. Eldridge suggested we think is a reasonable idea.
We agree that differentials ought to reflect some values between markets, and I would like to point out in response to several questions this morning that the Federal order classification system only reflects what market forces are in the economy, not the other way around.
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We very much oppose an administratively set BFP. If that were to happen, that would absolutely positively insure that the setting of milk prices would become 100 percent political. That would absolutely positively assure that milk prices would not move automatically, and if you think that this process is slow, that would just be absolutely impossible.
We want to see a computational method that is derived through some sound economics, but that functions that way and not with an administratively set level.
We also oppose regional manufacturing prices. Several of you have spoken this morning about unity, about common positions. Let me assure you if we had regional manufacturing prices and regional make allowances, it would make setting dairy policy of the last couple of years just be amazing the amount of controversy that we would see.
We regard to volatility, we do have an idea. It is embodied in several proposals that have been made today, that class I prices be set at some type of moving average of the basic formula price. It would reduce volatility. It would take some of that 32 percent peak to valley effect out of the computations by the way that Federal orders work, and over a period of time, it would not involve Government in terms of setting minimum prices or setting maximum prices. We think that that is something that can be effective.
The last point we would like to make is that we would like some more consideration for cost of production being involved in the price. We are not looking for a micro managed attempt. In fact, the approach that we would like to see researched some more was a part of one of the reports issued by the Federal order University Study Committee.
If they keep it between the ditches approach and even in the time period that they studied it, it did not trigger an effect in that 4 or 5-year period, but we think it merits some more study.
We would appreciate any questions you might have.
[The prepared statement of Mr. Hollon appears at the conclusion of the hearing.]
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Mr. POMBO. Thank you.
This panel brings back memories of how much fun we had last year. [Laughter.]
Mr. POMBO. This is not easy to do, but one of the things that we tried to do in making this program work was to represent the regional differences that exist, regional advantages that there are, regional disadvantages that there are and try to somehow fit that within a national system, and the only way that we could come about doing this was to go to a more market oriented system where markets demanded price and production.
That is not an easy transition to make regardless of which part of the country you happen to be from, which region you happen to be from. That is always very difficult to come to that consensus.
Mr. Coughlin, what has your organization done, and you mentioned this briefly in your testimony, in terms of trying to bring together the different regions of the country so that we can have some kind of a consensus as to what direction we are going to go?
Mr. COUGHLIN. Well, our annual meeting occurs in December of each year. We put a group together at our annual meeting, tried to come up with a consensus position on Federal milk marketing orders, did not succeed.
We currently have a group of 10 of our leading cooperative leaders. We have engaged the person who used to work for USDA until January of this year. His job is to spend the next 6 weeks or so, until June 27. We have a committee meeting to try to see if our members will agree to a single position.
Thus far they have not. Am I optimistic? I guess I would like to be optimistic, but knowing how people's feet are in concrete, I guess I am hearing two polarities. There are the polarities you might say that occur from the Southeast that say if you change or reform the orders as is being proposed by the upper Midwest, we do not want any order. We do not need any order system of that type.
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I hear the opposite coming from the upper Midwest that unless you change the order system the way we think it ought to be changed, we do not want any order system.
So it is a very difficult one. We have not resolved it. I think you jeopardize the continuation of the order program. I think there is probably pretty broad, general support. At least on the face of it they want to keep the order program, and the order program has been very valuable to cooperatives and can continue to be valuable, but we have not reached a position.
We are still trying, but we probably have not moved very much either since the farm bill was enacted a little over a year ago.
Mr. POMBO. Do you think that they understand that if we do not come to some kind of a consensus opinion or at least an agreement that we can all live with that it not only threatens the dairy industry in their particular regions, but it also threatens the American dairy industry because of foreign competition?
Mr. COUGHLIN. I think it threatens more cooperatives. I mean, the Federal order system does many good things. It sets payment dates for producers. It does provide a method of sharing these returns from different classes of utilization, returns at different levels. Cooperatives generally have the lowest valued return. So it enhances prices to cooperatives in that respect.
I think you will continue to have a U.S. dairy industry. The U.S. dairy industry will be competitive. When you begin to talk about no U.S. dairy industry, then you begin to talk about relaxation of import controls and things like that. I think that is a separate subject. We still have some of those. We want to continue to protect those, but there will be a U.S. dairy industry with or without a Federal order.
But in the people I represent, I do not think the U.S. dairy industry will be as easy to operate for cooperatives as it is without a system, nor do I think it will be as easy to operate for any producers.
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Mr. POMBO. I know my time has expired. I do have further questions, but, Mr. Stenholm, if you have any questions at this point, I will yield to you.
Mr. STENHOLM. Thank you, Mr. Chairman.
First, it is a personal privilege to personally introduce Mr. Parks who is accompanying Mr. Hollon today. Mr. Chairman, I do this because he is the only VIP you have heard from today, a voter in the 17th District of Texas. [Laughter.]
Jack Parks is one of, I believe, some 70 descendants of C.M. Parks that entered the dairy business in Erath County, Dublin, and then Lingleville, TX at the turn of the century. He has been very involved in this industry. He served as AMPI director for, I believe, some 20 years, and is currently serving his 9th year as a director of CoBANK. He has also been very active in Commercial Bank in his home area, and brings a considerable amount of history, of institutional knowledge, and personal understanding of the problems of the dairy industry. I am going to ask him a question or two along those lines.
Before I do that, Mr. Corbett, do you ever sell milk below your cost of production?
Mr. CORBETT. No, we do not, Congressman.
Mr. STENHOLM. Never?
Mr. CORBETT. Never.
Mr. STENHOLM. That was not the answer I anticipated. I believe that in many instances, those in your line of the dairy business do have times in which they have lost liters. You sell milk.
Mr. CORBETT. The retailing side of the business would often do that. We are not in retailing at all.
Mr. STENHOLM. You are not in retailing. Thank you for correcting that.
But from your side of it, you never sell it below. Why not?
Mr. CORBETT. Approximately, and I am only talking about Dean Foods now; I am not talking about other members of Milk Industry Foundation, but approximately 65 to 70 percent of our wholesale business is governed by formula contracts, and so that we are contractually obligated month to month to move the price to the retailer by the amount that the wholesale price or raw milk price changed, and it has evolved over a number of years, and that is the system that we utilize, and it has worked for us.
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Mr. STENHOLM. It has worked for you.
We have got to vote now. I need to accelerate my line of questioning.
Mr. Parks, describe the current state of dairying in Lingleville, TX.
Mr. PARKS. Right now it is in sad shape. Let me give you an example. I am at a feed store there in Stevensville, and we have about 50 producers that buy feed from us, all of their dairy ration, and in the last 2 years about nine of those folks has gotten about $110,000 behind in their feed bills on average across those nine.
I happened to get a call last night from the manager of this feed store wanting to know if he wanted to sell them anymore feed because they got their milk checks the day before yesterday, and they did not come pay. They had been behind. We never force them to catch up, but we will not let them get in deeper.
So we have got to determine whether we want to let them go on, and I do not think we can, but if we drop another $1.50 in milk production, there is no way these people are ever going to make it. There is just no way.
And also I am on the local bank board, Steamer Bank and Trust, and we have some producers there who are in big trouble. Our system today is not working. I have not got any magic answers, but our system is not working, and environmental things that these dairymen are going to have to do, there is no way in the world they can do them.
Mr. STENHOLM. Regarding the question of differentials, do you believe that producers in regions with higher class I differentials have an unfair advantage compared to those in regions where they are lower?
Mr. PARKS. No. Let me give you an example. I sat on a corporate board of AMPI for 12 years, and half of that board is from Wisconsin and Minnesota, and they are good friends of mine, but we always compare milk checks.
In the last few years they have beat us in the South $1.50 to $2 per hundredweight. Now, I cannot tell you how they do it, but one thing is hauling. I know this one friend of mine, he only pays $30 a month no matter how much milk they haul. If you live in Texas, like mine, for instance, it goes to San Antonio, and I pay about 94 cents a hundredweight.
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But they can really outdo us. So I do not think they have got an advantage now. I am not sure that we do not have a disadvantage.
Mr. STENHOLM. Mr. Wellington, isn't that basically the gist of what you were saying in your testimony to us also?
Mr. WELLINGTON. Yes, it is. Besides the hauling costs, there are balancing costs, plus a class I processor is not going to pay extra kind of premiums for protein. So it is a whole factor, but hauling is the biggest factor. I would agree with Mr. Parks.
Mr. STENHOLM. Would any other panelist have a comment regarding that generalized statement?
It seems that has always been a sticking point. I have always been of the opinion that it is the mailbox price that really matters. From your perspective, Mr. Corbett, you say the system is working pretty well, but it does not seem to always work well for the producer; and this seems to be widespread.
We have heard this from the previous panel, from the California perspective.
Mr. HOLLON. I would point out just from a data standpoint that if USDA releases its competitive price survey in terms of trying to look for a new price series, that that information over nine States may well be available, what some of those components of that mailbox are.
I do not know how they are going to release the data, but I know in order to get it, they will have to collect it that way. So you may have some detail that may provide some information there.
Mr. HALNON. Mr. Stenholm, I did want to point out that in the Southeast our situation is much the same, is that the mailbox prices when compared to prices in areas in which the class I differentials are substantially lower, our mailbox prices are, in fact, either lower or about the same.
And, unfortunately, when people look at pricing in the Southeast, they look at the class I price and presume that producers get that price, and that is not the case, largely due to hauling and the cost of importing supplemental milk, which in the Southeast is very substantial, and that cost is borne by the producers.
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My time has expired. I have some other questions, but I will defer back to you, Mr. Chairman.
Mr. POMBO. And I appreciate that.
Just a followup question, Mr. Parks. Have you ever sold milk below the cost of production?
Mr. PARKS. Well, let's back up. I probably have not, but I am a little unique, my operation. I milk 600 cows, and I graze them.
Now, if I bought everything and put them in dry lot, I could not today, but I have never done it, but I am getting awful darn close. It goes down $1.50 and I will probably join that crowd.
Mr. STENHOLM. Well, let's hope we do not get there.
Because we are required over on the floor, I do have further questions of the panel, but I will submit those questions in writing to the panel.
I will say to Mr. Parks that I have a number of constituents that are in your exact same position when you talk about your feed costs and the ability of those who provide feed for the dairymen is greatly challenged right now. I know those guys are in as bad a shape as the dairymen because of what has happened on the cost of milk right now.
In California, as you heard in earlier testimony, we have had a substantial increase in feed cost, and that has impacted our dairy industry greatly. Without the corresponding increase in milk prices, they are in a big bind.
I think in your region of the country and in my region of the country and from what we have heard in testimony, it is fairly widespread. It is something that we do need to look at.
I appreciate the testimony of the panel. There will be further questions that will be submitted in writing to each of you. I again apologize for the hearing, that we were broken up the way that we were, but hopefully it was an educational hearing and an enlightening hearing for all of you.
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Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman.
Just one comment, and not for anybody to answer but to think about. Mr. Coughlin, stated in response to a question that you believed that a loss of the milk market order system might be damaging to cooperatives, but that we probably would still have a dairy industry. That prompts me to make this statement.
It has been very disturbing to me over the years to hear constantly and consistently from dairy farmers that they do not believe that their cooperatives are serving them well in this area. I have heard this, and my response is always very clear.
Why are you telling me this? You are a member of your cooperative. You serve on the board. Why are you telling a Member of Congress this? Why aren't you dealing with the problem?
I am wondering as you deal with some of these questions that have eluded the consensus the chairman reached, do you ever go out and find members of your cooperatives that have not been thoroughly educated to the management of the cooperative to serve on some of the committees and panels to try to find a consensus, or do you always use those who have been educated to the cooperative principles as judged by management and the current directorship?
I do not know the answer to that, but I find it fascinating because so many dairy farmers come to me, and I think to other members, and suggest that their cooperatives are not serving them well. I know it is not by intent, because I know too many of you who have been leaders in the cooperative movement, and that is where the future for dairying is.
Mr. Parks.
Mr. PARKS. I have a quick comment to that. The ones that gripe so much are the ones that never come to a meeting. They do not get involved.
Mr. POMBO. Well, thank you very much. I appreciate all of your testimony.
And the hearing is adjourned.
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[Whereupon, at 1:49 p.m., the hearing was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
STATEMENT OF LON S. HATAMIYA, ADMINISTRATOR, AGRICULTURAL MARKETING SERVICE, U.S. DEPARTMENT OF AGRICULTURE
Mr. Chairman and members of the committee I appreciate the opportunity to appear before your committee to discuss the Agricultural Marketing Service's progress in implementing the Federal Milk Marketing Order reforms as mandated by the Federal Agricultural Improvement and Reform Act of 1996. I am accompanied by Dr. Keith Collins, USDA Chief Economist, and Dr. Ken Clayton, AMS Deputy Administrator for Marketing Programs. My testimony will provide a chronology of the Federal Milk Order Reform process as mandated by the 1996 farm bill.
PURPOSE OF THE FEDERAL MILK ORDER PROGRAM
Federal milk orders are authorized by the Agricultural Marketing Agreement Act of 1937. They are intended to establish orderly marketing conditions for the sale of milk by dairy farmers to milk dealers or handlers. In so doing, milk orders undergird the bargaining position of dairy farmers seeking to market their seasonal, highly perishable milk. Under the program, minimum prices that handlers must pay for milk are established at levels that reflect supply and demand conditions in markets and assure consumers of adequate supplies of pure and wholesome milk. As a self-help tool, milk orders are proposed by farmers located in the area that would be covered by the proposed order and adopted if approved by two-thirds of the producers voting in a referendum; they can likewise be terminated through a producer referendum.
Let me also note the things that Federal milk marketing orders are not intended to do. Milk orders do not control how much farmers can produce nor do they restrict the amount they can sell. Milk orders do not guarantee farmers a market for their milk, guarantee a fixed price into the future, nor set retail prices.
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FEDERAL AGRICULTURE IMPROVEMENT AND REFORM ACT OF 1996
The Federal Agriculture Improvement and Reform Act of 1996 requires the Secretary to reform the Federal milk order program and consolidate the current 32 orders into between 10 to 14 by April 4, 1999. The Secretary was also directed to designate the State of California as a Federal milk order if California dairy producers petition for and approve such an order. Finally, the 1996 farm bill specifies that USDA use informal rulemaking to implement these reforms.
In addition to these mandates, the 1996 farm bill also provided that the Secretary may address related issues such as the use of utilization rates and multiple basing points for the pricing of fluid milk and the use of uniform multiple component pricing when developing one or more basic prices for manufacturing milk.
Besides designating a date for completion of the consolidation by April 4, 1999, the 1996 farm bill further required that the Secretary submit a report to Congress on the progress of the Federal order reform process. This report was submitted to the committee on April 1, 1997.
FEDERAL ORDER REFORM PROGRESS
USDA's plan of action for meeting the mandate of the 1996 farm bill consists of three phases: developmental, rulemaking, and implementation.
The developmental phase began on April 4, 1996, and will continue until the proposed rule is issued and published in the Federal Register in late 1997. The use of a developmental phase allows USDA to interact freely with the public to develop viable proposals that accomplish the 1996 farm bill mandates. As a result, USDA is meeting with interested parties to discuss reform progress, assisting in developing ideas or providing data and analysis on various possibilities, issuing program announcements, and requesting public input on all aspects of the Federal milk order program.
Although all of the issues regarding Federal milk order reform are interrelated, several committees were established to divide the work into more manageable tasks. In addition to utilizing USDA personnel, partnerships have been established with two university consortia (Cornell and Texas A&M) to provide expert analyses on the issues relating to price structure and basic formula price options.
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The second phase of the plan is the rulemaking phase. The rulemaking phase will begin with the issuance and publication of a proposed rule. Once issued, it is projected that the public will have 60 days to provide written comments on the proposal to USDA. After reviewing the submitted comments, USDA plans to issue a final rule in the late summer of 1998.
The third and final phase of the plan is the implementation phase. The implementation phase will begin after the final rule is published in the Federal Register in late summer of 1998. This phase will consist of informational meetings conducted by Market Administrator personnel. The objective of the informational meetings is to educate producers and handlers about the newly consolidated orders and explain the projected effects on producers and handlers in the new marketing order areas. After informational meetings have been held, referenda will be conducted. Upon approval of the consolidated orders by the required number of producers in each marketing area, a final order implementing the new orders will be issued and published in the Federal Register. A target date of January 1, 1999, has been established by the Department for making the new orders effective.
ACTIONS COMPLETED
USDA has maintained continual communications with the public regarding the milk order reform process. To begin, on May 2, 1996, the AMS issued a memorandum to interested parties announcing the planned procedures for implementing the 1996 farm bill relating to Federal milk order reform. In this memorandum, all interested parties were requested to submit ideas by July 1, 1996, on reforming Federal milk orders, specifically as to the consolidation and pricing structure of orders.
On June 29, 1996, USDA held a public forum in Madison, Wisconsin to address price discovery techniques for the value of milk used in manufactured dairy products. Senators, Congressmen, university professors, representatives of processor and producer organizations, and dairy farmers made presentations at the forum.
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On October 24, 1996, AMS issued a memorandum to interested parties requesting input regarding all aspects of Federal milk order reform and specifically as to its effect on small businesses. USDA projects that the consolidation of Federal orders may have an economic effect on handlers and producers affected by the program, and USDA wants to ensure that, while accomplishing their intended purpose, the newly consolidated Federal orders will not unduly inhibit the ability of small businesses to compete.
On December 3, 1996, AMS issued a memorandum to interested parties announcing the release of the preliminary report on Federal milk order consolidation. To initiate a dialogue on the consolidation of orders, the report suggests the consolidation of the current 32 Federal milk orders into ten orders. The memorandum requested comments from all interested parties on the suggested consolidated orders and on any other aspect of the Federal milk marketing order program by February 10, 1997.
On March 7, 1997, AMS issued a memorandum to interested parties announcing the release of three reports that address the class I price structure, the classification of milk, and the identical provisions contained in a Federal milk order. The price structure report, consisting of a summary report and a technical report, discusses several options for modifying the class I price structure. The classification report suggests the reclassification of certain dairy products, including the removal of class III-A pricing for nonfat dry milk. The identical provisions report suggests simplifying, modifying, and eliminating unnecessary differences in Federal milk order provisions. Comments on the contents of these reports, as well as on any other aspect of the program, was requested from interested parties by June 1, 1997.
Most recently, AMS, on April 18, 1997, issued a memorandum to interested parties announcing the release of the preliminary report on Alternatives to the Basic Formula Price. The report contains suggestions, ideas, and initial findings to provide a focal point for developing a proposed alternative BFP to be included in the implementation of the order consolidation. The report identifies four options for further discussion and debate, and requests comments from interested parties by June 1, 1997.
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All announcements made by USDA have been mailed to over 20,000 interested parties, to each state department of agriculture secretary or commissioner, and to the ten regional Small Business Administration offices. In addition, most dairy producers under the orders were notified through regular market service bulletins published by market administrators on a monthly basis. As a result of these announcements and the forum, over 1,000 comments have been received by USDA. USDA personnel are carefully reviewing all comments, which are available for public inspection at USDA. To assist the public in accessing the comments, USDA has contracted to have the comments scanned and published on a CD. The use of this technology allows interested parties throughout the United States to have access to the information received by USDA.
We have also made all publications and requests for information available on the Internet. A separate page under the Dairy Division section of the AMS Homepage (http://www.usda.gov/ams/dairy.htm) was established to provide information about the reform process. To assist in transmitting correspondence to USDA, a special electronic mail account--Milk--Order--Reform@usda.gov--was opened to receive comments on Federal milk order reforms.
We have met continually with interested parties to gather information and ideas on the consolidation of Federal milk orders. From May 1996 through March-1997, USDA personnel have addressed over 180 groups comprised of more than 14,000 individuals on various issues related to Federal milk order reform. Additional meetings are already scheduled throughout the spring and summer of 1997.
We have also conducted in-person briefings for both the Senate and House Agriculture Committees on the progress of Federal milk order reforms. Since May 1996, six such briefings have been conducted for the committees. The briefings have advised the committees of the plan of action for implementing the 1996 farm bill mandates, explained the preliminary report on the consolidation of Federal milk orders, and explained the contents of the reports addressing class I price structure, classification of milk, and identical provisions.
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NATIONAL CHEESE EXCHANGE
On May 6, 1997, Secretary Glickman announced that a new cheese price series would be used under the Federal Milk Marketing Order Program to calculate the Basic Formula Price beginning June 5, 1997. The new cheese price series has been developed by USDA's National Agricultural Statistics Service, based on a weekly survey of cheese manufacturing plants throughout the country. NASS will begin reporting the new cheese price series on May 9, 1997.
Cheese prices reported on the National Cheese Exchange had been used in the calculation of the BFP. Because of concerns raised about the use of the NCE price in calculating the BFP, the Secretary sought public comments on whether the NCE price should continue to be used and what alternative prices could replace the NCE price. USDA received nearly 800 comments during the comment period, which closed on March 31, 1997. With the April 25, 1997, closing of the NCE it became imperative that a replacement cheese price be found.
The replacement of the BFP is a longer term effort which will be accomplished through the Federal milk order reform process.
Conclusion
Mr. Chairman, we want to assure you that we are working diligently to draft proposals for meaningful reform of the Federal milk marketing order program. The Federal milk order program should continue to serve the best interests of producers in order to assure an adequate supply of milk at a price that is fair and equitable for producers, processors, and consumers. We look forward to a continued dialogue with Members of Congress and with the public. This concludes my testimony. My associates and I will be pleased to respond to any questions you may have.
STATEMENT OF JACK LAURIE, PRESIDENT, THE AMERICAN FARM BUREAU FEDERATION
Thank you Mr. Chairman. My name is Jack Laurie. I am a dairy farmer from Michigan, President of the Michigan Farm Bureau and a member of the Board of Directors of the American Farm Bureau Federation. I am pleased to present these comments to you on behalf of the thousands of dairy producer members of Farm Bureau.
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The Federal Agricultural Improvement and Reform Act of 1996 included several provisions relative to dairy. I would like to share several of our observations relative to their implementation with you today.
The dairy industry is undergoing significant structural change in most areas of the country and is likely to continue to do so for several years. Since the farm bill was passed we have also seen substantial price volatility in both farm milk prices and feed prices. This month we have again experienced a steep price drop and will see further drops next month. This is putting additional financial stress on many producers and resulted in calls by some producers and organizations for congressional action. We recognize the stress, but rather than seek a quick fix legislatively that could have long-term negative impacts, we have chosen to work with USDA and encourage use of existing tools that can work with the market to strengthen producers' prices. Last fall, USDA responded to our request and the measures that they took, such as advance purchases for the school lunch program, were effective in raising farm gate prices. We encourage similar actions to be taken again to address the current situation. Such actions will benefit both producers and the public. Purchases made at current price levels will provide the needed products for feeding programs for the smallest amount of tax dollars and at the same time will stimulate market demand which will boost farm prices. We continue to prefer to emphasize actions such as this which encourage the markets to work, as the best long-term way to increase producer prices.
ORDER REFORM
USDA Process: The FAIR Act required USDA to use an informal rule-making process to reduce the number of Federal milk marketing orders from the current 32 to between 10 and 14, with one of these orders available for California if it chooses to become a part of the system. It is our observation that the department has been working diligently to meet the requirements of the reform process. Agricultural Marketing Service personnel working with the reform process have been extremely cooperative in working with all interested parties on the reform process. They have taken every opportunity to meet with industry to discuss the proposals and have provided easy access to desired information.
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A significant problem in the process is that in several cases proposals from AMS have taken a long period of time to receive clearance from the department. This has delayed their release to the public. Given that informal rule-making is being used in this process, it would seem that a less stringent review process might be used within the department to facilitate the release of information. The process would function best if such information were shared with industry as quickly as possible. Along this same line, we have received indications that the next series of AMS committee reports may not be released until after the proposed rule is published late this year. We strongly encourage USDA to make these reports available to the public in a more timely manner and would ask that you do likewise.
AFBF Actions: AFBF has been actively involved in the reform process. We support change, but want to assure that the producers' voice is heard in the reform process. Last year we established an Order Reform Working Group to advise our board of directors on order reform and to facilitate Farm Bureau input to USDA. Our Working Group is comprised of 24 dairy producers and five state Farm Bureau staff members from across the Nation. They have met through conference calls and in face-to-face meetings with USDA officials and university and industry personnel to review both USDA and industry proposals and recommend needed changes to the orders. While the group represents all regions of the country and the concerns that are present in them, they have succeeded in finding many areas of agreement on needed reform. We are now in the process of working with other producer groups and organizations in an effort to identify areas of agreement that can be communicated to USDA on behalf of all the Nation's dairy producers. We will be meeting next week to move this effort forward.
In general we find that the order reform process is moving forward in an appropriate manner. We are working to assure that active producers are heard in the process. The FAIR Act included an aggressive timetable in which to accomplish the reform. We encourage you to allow the process which you have defined to work. We see no need for any additional action on the part of Congress in this area. Any additional requirement which you might place on the department would only serve to delay the process.
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ELIMINATION OF PRICE SUPPORT/ESTABLISHMENT OF LOAN PROGRAM
Section 141 of the Dairy Title of the FAIR Act put the milk price support program on a glide path to elimination as of December 31, 1999. This process is underway with the first reduction now in place. While farm prices have not been at support price levels during this decade, the reduction and eventual elimination of the price support program does make producers and the industry vulnerable to even greater price volatility than we have seen during the past year.
A tool that was provided to help address some of the potential problems associated with price volatility was the recourse loan program, authorized in Section 142 of the act. While the price level associated with the loan is below recent market values, we encourage you to be certain that the program is operational by January 1, 2000, in case it is needed. It would provide a tool for processors to use to help stabilize prices if extreme volatility were to occur.
SEASONAL BASE PLAN
One item that was not included in the FAIR Act of 1996 was the reauthorization of seasonal base plans. They have been used in several orders to help balance local supply and demand. They have provided a way to send price signals to producers relative to market demands. Many producers in these orders have modified the management of their operations to work with this system. They changed their normal calving pattern in order to provide more milk in the fall when local markets needed it. Elimination of this authority has placed these producers at an economic disadvantage. These plans are not needed by all markets, but we would encourage you to reauthorize these provisions so that they can be used in those areas where it is appropriate.
INTERNATIONAL TRADE
International trade is vitally important to the future of the dairy industry. If we are to grow as an industry, we need additional markets. Exports are the obvious place where growth can occur. The FAIR Act included several provisions dealing with exports. In general they appear to be working, but it is wise to provide oversight for them.
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The Act did encourage the use of Dairy Promotion funds to support the development of export markets. This has been effectively done through funding of the U.S. Dairy Export Council. This organization is aggressively and effectively promoting U.S. dairy products internationally. The growth in exports of value- added products during 1996, when prices were at an all-time high, demonstrates the effectiveness of their efforts.
The FAIR Act authorized full funding for the Dairy Export Incentive Program, but the maximum amount allowed is reduced annually by the General Agreement on Tariffs and Trade. DEIP provides an important tool for the industry as we seek to increase our presence in, world markets. The GATT did reduce, but is far from eliminating our foreign competitors export subsidies for dairy products. We strongly encourage Congress to appropriate the maximum funding allowed by GATT, and to monitor its use. The U.S. dairy industry is increasingly competitive in world markets, but the need still exists for use of the DEIP funds to be competitive in many developing markets.
Another tool for development of export markets is the establishment of an Export Trading Company. We encourage you to monitor this development as well.
A final area relative to trade in the FAIR Act was a required study by USDA of the impact of the
Uruguay Round on the dairy industry. We await the results of this study with interest. Hopefully it will help identify ways in which we can be even more effective in opening world markets to dairy producers.
CONCLUSION
Once again, I appreciate the opportunity to share our thoughts and observations on the implementation of the Dairy Title of the FAIR Act of 1996 with you. In general, we believe that implementation is proceeding as planned. We encourage your continued oversight of the process, but would discourage any legislative action relative to it.
STATEMENT OF JAMES TILLISON ON BEHALF OF THE ALLIANCE OF WESTERN MILK PRODUCERS
The Alliance of Western Milk Producers is a trade association that represents five major operating cooperatives in California. These organizations market milk and manufacture dairy products for more than 1200 producer-owners producing 60 percent of the state's milk.
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The Alliance appreciates being given the opportunity to provide a California perspective on the Dairy Division of the USDA's Agricultural Marketing Service daunting task of revising and revitalizing the Federal milk marketing order system.
Prior to being with the Alliance in California for the last 6 years, I served as executive director of the Wisconsin and United States Cheese Makers Associations. In that capacity, I participated in numerous local and national Federal milk marketing order hearings. This, I think, gives me a unique perspective into both systems, though I would not be foolish enough to claim to be an expert in either.
California producers must be involved. During the 1996 farm bill debate, the Alliance worked successfully to maintain California's independent state milk pricing system and marketing order. We also worked to ensure that should California dairymen and women choose to become part of the Federal milk marketing order system, their $800 million investment in quota would be protected.
Regardless of which decision California milk producers ultimately make--keep our state system, or become part of the Federal system--the changes the USDA makes to the Federal milk marketing orders and prices will significantly affect what our producers are paid for their milk.
An excellent example of this is the adjustment recently made to California class 1 milk prices. Because the California class 1 milk pricing system--the higher of the cheese or butter/powder price was used to adjust our class 1 price formula--is so very different from that used in the Federal system, the California class 1 price exceeded surrounding Federal order class 1 prices by $2 to $4 last winter. As a result, the California Department of Food and Agriculture had to call a hearing to address the misalignment between California and Federal order class 1 prices. Our fluid processors said the price difference put them at a significant competitive disadvantage in serving out-of-state markets and within California with packaged milk from out-of-state.
This is one example of why the Alliance intends to continue to be very much involved in the USDA reform process.
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Milk marketing orders are still needed. The first question to address is, are milk marketing orders still needed? Since California has the most recent experience with an unregulated environment, the Alliance would answer with a resounding Yes!
Perhaps Dr. Andrew Novakovic said it best during a meeting of this subcommittee in 1995. When asked if Federal milk marketing orders were needed, he responded by saying Federal orders add some structure to the otherwise chaotic free marketplace. Federal orders establish minimum prices for milk in various uses based primarily on supply and demand for milk. And, they level the playing field between producer and processor through the sharing of these minimum prices via pooling.
The Alliance's basic philosophy. Since its inception, the Alliance has had an active interest in milk pricing systems. That interest was brought into focus during the 1995—96 farm bill debate. What follows are the milk pricing principles that the Alliance's members believe should be given full careful consideration by the USDA as it proceeds with revising Federal orders.
The Alliance of Western Milk Producers believes that while markets for manufactured dairy products tend to be national in nature, markets for fluid milk products and farm milk are regional. Regional supply and demand factors and regional price factors and market conditions should be the primary influences on establishing milk prices.
The Alliance has recommended that the USDA utilize the following concepts in developing a milk pricing system:
1. Develop a national product-based pricing system for milk used to produce cheese, butter and nonfat dry milk powder. It should use regional prices received by manufacturers for these products and regional costs of manufacturing to establish a regional price for milk used in manufacturing.
Single-point pricing of milk nationally, whether for fluid or manufacturing use, is an outmoded concept. There have been significant shifts in both population and milk production which render this type of system invalid.
Using actual prices manufacturers in a market area receive for their product provides a more accurate value of the product and, therefore, the value of the milk produced in that marketing area. The actual marketplace is a better price discovery system than a single-point, spot-market price adjusted for book transportation costs.
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Chart 1, entitled NASS 40 lb. Block Cheddar Cheese Price Survey, is attached to this statement. This chart was generated using the weighted-average price data published in the May 9 cheddar cheese price survey by USDA's National Agricultural Statistic Service, NASS. This chart clearly shows that cheese manufacturers in different parts of the country do, in fact, receive significantly different prices for the cheese they produce.
The value of milk used to produce cheese or butter and nonfat powder should be based on what manufacturers of those commodities in a region are paid for every pound of bulk product sold. A cost of manufacturing and yield factors are necessary to convert those product prices to milk prices. USDA should be given the authority to audit the information reported, as necessary.
2.Maintain separate utilization classes for milk used to produce nonfat dry milk and butter, and for milk used to produce cheese, other than cottage cheese.
Classified pricing and the pooling of milk revenues generated by those classes have served dairy farmers, processors and consumers well. It allows producers to capture the most money possible for their milk as a whole. Without it, especially considering the consolidation, concentration and vertical integration of milk processing, milk producers would receive much less for their milk.
The USDA's Basic Formula Price Committee recognized why separate price classes for cheese and butter and powder should be continued--market clearing. At times during every year, the supply of milk exceeds the demand. For example, when schools close for the summer in a few weeks, the demand for fluid milk will drop dramatically, but the supply of milk that had been filling that demand won't. And then, in 3 short months, when schools are back in session, the demand will reappear.
Summer months are usually quite good sales months for cheese, thanks to barbequing and vacations. However, butter sales are at their lowest as are nonfat powder sales. A single manufacturing milk class would give cheese manufacturers a windfall profit while costing butter/powder manufacturers dearly. Since producer-owned cooperatives bear the burden of balancing milk supplies in a market, primarily by producing and storing butter and powder, a single manufacturing milk class would hit these producers twice--first, they would not recover what the cheese market was yielding for their milk and, second, they would lose money on their butter/powder plant operations.
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Having a separate marketing clearing price--whether it is butter/powder, or as the case has been for the last several months, cheese--is preferable to a system that yields low prices for producers and windfall profits for processors.
The BFP Committee Report contains several options. Option 1 is a product-based pricing system that would maintain separate classes for milk used to produce cheese and butter/powder. Option 2 would have one price class for milk used to make cheese and butter and powder. Chart 2, attached, compares a weighted combination of class 3 (cheese, four parts) and class 4 (butter/powder, one part) Option 1 prices, to the single class approach in Option 2. It clearly demonstrates the impact on producer pay prices a single manufacturing class price approach would make.
Replace single-point-based class 1 and 2 pricing with multiple basing point pricing.
While the sizes of the distribution areas are growing, fluid milk and related products are essentially regional in nature. Most fluid milk is packaged and sold within a reasonable distance of where it is produced. The minimum price fluid processors pay for farm milk should be based on regional supply and demand conditions, not on a single point adjusted for transportation like the current BFP.
Class 1 (and class 2) pricing needs to recognize that there are other (and equal) demands for milk--the marketplace does. For example, in Wisconsin, where the demand for milk by cheese plants is very high, service charges over and above class 1 prices reportedly average more than $1.50 per hundredweight. That means that the effective class 1 differential in the Chicago order is actually $2.90 or more, not $1.40.
For classified pricing and pooling to be effective, class 1 prices should more closely reflect what milk is worth in a market. One option is a regional base milk price plus a differential. Another would be a region price based on historic prices that is adjusted for changes in dairy commodity values. California has used this type of system for nearly 20 years and we believe it would be ideally suited for a multiple basing point pricing approach in the Federal system.
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4.Implement true multiple component pricing of milk in all price classes based on end-product value by classified use. It should recognize the values of milkfat, solids-not-fat/protein and fluid carrier to consumers. Minimum solids content in fluid products should be established to equalize raw product cost among all processors.
The multiple component pricing system utilized in most Federal orders is basically just a redistribution of money the various uses of milk generates into the pool. True multiple component pricing would expand the producers' revenue pot by bringing the true value of these components into the pool.
The Alliance is intrigued by the BFP Committee's Option 1. This recognizes that butterfat in cheese has a different value than butterfat in butter. This approach appears to make a great deal of sense and allows producers to capture the highest possible value for their milk components.
Under a true multiple component system, manufacturers of cheese, butter and nonfat dry milk powder, as well as some class 2 products, would pay into the pool based on the pounds of a product the milk yields.
Class 1 processors are selling food and each of milk's nutrients have a value to these processors because they have a value to customers. Paying for milk based on nutrient content would be enhanced by FDA establishing reasonable minimum nonfat solids content levels for fluid milk. This insures that all fluid processors are paying the same for farm milk. Without these minimums, there would be inequitable raw product cost among processors.
Summary. The value of producer milk depends on the demand for milk in the area in which the producer is located, the mix of uses for milk in that area and the amount of milk that is produced. A milk pricing system must recognize and incorporate all of these factors.
The Federal milk marketing order system currently does not adequately reflect these differences. Going to a multiple basing point pricing system for all uses of milk will recognize the diversity of milk and dairy product production that exists in the dairy industry of the twenty-first century.
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The consolidation and concentration of the manufacturing segment of the industry allows the producer milk price to be based on the prices for which commodity dairy products are actually being sold. An inclusive survey of manufacturers within a milk marketing region is the most reliable basis for establishing product prices.
The conversion of this product price to a milk component value is accomplished by establishing a cost of manufacture through an annual audit of major manufacturing facilities. In addition, the market administrators must evaluate overall market area supply and demand conditions in establishing and adjusting these make allowances.
Milk processors should pay for the value of the milk components they buy. Dairy farmers should be paid for the value of the components in their milk.
Such a system can work in a multiple market pricing system just as it has worked in California. However, it is unrealistic to expect that it will be right the first time through. The Federal order change process must be permanently streamlined so that both at the national and market area level it can be responsive to the fine tuning that will be needed to make the new system work.
The Alliance appreciates this opportunity to provide its thoughts on how the Federal order milk pricing system should be revised so there can truly be a national milk pricing system.
TESTIMONY OF RICHARD R. WALKER, CHAIRMAN, WESTERN STATES DAIRY PRODUCERS TRADE ASSOCIATION
Mr. Chairman, and members of the committee, I am Richard Walker. I am a dairy farmer from Corning, California, and serve as Chairman of the Western States Dairy Producers Trade Association. On behalf of Western States, its nine member state associations, and the producers they represent, I thank you and the committee for this opportunity to share with you our views on the Federal order reform required under the FAIR Act.
Our Western States organization is an association of nine western dairy producer trade associations who represent dairy producers in the states of California, Idaho, New Mexico, Oregon, Texas, Utah, and Washington. Our members in these states represent over 30 percent of the Nation's total milk production.
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Our group came together around the simple principle that producers from different areas can, and should, seek common ground to better serve their members. The FAIR Act and the reforms of Federal milk marketing orders are potentially very important to producers in the West, and we felt it was crucial to respond to the opportunity that Congress and USDA have given us to participate in this process.
To its credit, USDA and the Dairy Division have taken this opportunity to rethink and develop lasting improvements to the Federal milk marketing program. Western States as a group, and its individual members in their own right, have all enjoyed easy access to individuals throughout the office of the Secretary and in the Agricultural Marketing Service and the Dairy Division including persons in the market administrators' offices. I would like to publicly thank everybody in the department for their willing cooperation.
Reform is needed to benefit dairy farmers. Throughout the last several years, dairy producers in the West, as well as the rest of the Nation, have been under tremendous economic stress. With the exception of a brief climb in prices last year which followed unprecedented increases in feed and grain prices, producer prices have languished at inadequate levels for years, with cwt. prices steadily declining in real dollar terms. This year promises to be no exception. In response, our Western States group has sought to ensure that the problems of producers are recognized in this process.
Since last May, representatives of our member state associations have met many times to discuss this and other issues. Richard McKee and other officials of the Dairy Division have generously provided their time at our meetings, responded to our questions, and openly and candidly discussed our proposals and concerns. We have also utilized economists from the land grant colleges, experts in Federal market orders, producers, cooperatives, and other industry groups. After months of meetings, discussions, preparation, and communication, Western States unanimously supported a proposal which provides a market-driven method to establish the minimum prices under the Federal order program. A copy of our proposal, as submitted to the Secretary, is attached to this statement. I am not going to go into detail, but will touch on a few major issues.
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One of the key issues the industry must address is reform of the Basic Formula Price. The Basic Formula Price approximates nearly all of the money received by Western producers in their mailbox prices. Put another way, any additional money from class I differentials and over order charges are absorbed by marketing costs. Thus, the Basic Formula Price essentially determines what Western producers earn.
In this reform effort, the Secretary is faced with the decision of whether the Basic Formula Price, or prices, should reflect the full value of milk or, rather, should it only establish part of the value, leaving producers to obtain the remaining income through hoped-for negotiation of additional premiums. Since the minimum prices represent all that the producers are obtaining, we feel the Secretary should determine the full value of milk, and ensure that producers receive that full value. Only if the full value is captured for each class of milk can the pooling system be fair to all producers who are pooled on that market.
To reach that goal, Western States proposes the use of two basic formula prices--one for manufactured products and a slightly different one for class I and class II. There is no longer a valid rationale for one basic formula price to establish prices for what really are two separate markets. Fluid milk need not respond penny-for-penny with volatile cheese markets. Historically, drops in cheese market prices have resulted in lower class I prices without similar reductions in consumer prices. As a result, there has been an ever-widening gap between what consumers pay for milk products as compared to what producers receive. This is illustrated by Figure 1 on page 20 of our attached proposal. Since 1980, consumer prices for fluid milk have increased by over 30 percent while producer prices during the same period actually decreased by about 7 percent before any adjustment for inflation.
For fluid milk and soft dairy products, Western States proposes the use of a product reference price to track supply and demand for milk. The regulated value reflects current market conditions in the unregulated dairy commodity markets. This lets the free market set the value of fluid milk. To stabilize the price, the Fresh Milk Base Price is the rolling twelve-month average of the product value.
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Manufacturing product value must also follow current market conditions. For class III products, Western States proposes replacing the BFP with what we call the Modified Product Value formula. The MPV is the superior option available to the Secretary because it combines the strengths of free market pricing using end product pricing with the true market values of grade A milk reflected in competitive producer pricing.
Some argue that the Federal milk orders should capture less than the full value of milk and let competition make up the difference. History tells us that competition will not return to producers the full value of milk. In 1937, Congress found that producer competition for milk markets reduced prices paid to producers, not raised them. The economic reality has not changed today. Establishing a low Federal order price and expecting producers to bargain for the full value ignores the reality that milk is a very perishable item and cannot be held until market conditions recover. Milk must be sold daily regardless of market conditions.
For these reasons Western States believes that Federal orders should obtain as much of the true value as possible. We believe that our proposal would accomplish this without affecting consumer prices, as evidenced by the growing spread in the Consumer Price Index.
In closing let me say that our Western States coalition intends to pursue its goal of fair pricing to producers nationwide by working with other producer groups, and with USDA, to move us closer to a consensus position in reforming Federal orders.
STATEMENT OF BRAD BRUNNER, DAIRY PRODUCER, CECIL, WI
My name is Brad Brunner. I am a dairy producer from Cecil, Wisconsin which is near Green Bay, home of the World Champion Green Bay Packers and the defunct and infamous National Cheese Exchange. I milk 400+ cows and market my milk through Land O'Lakes. I am not on the Board of Land O'Lakes, so my comments do not necessarily reflect the official views of the cooperative. However, I have been in close communication with them to ensure that the information contained in this statement is accurate. I was told that Land O'Lakes will submit written comments to the subcommittee. I want to thank my Congressman Jay Johnson and his staff for inviting me to testify today to bring you an actual producers perspective on the Basic Formula Price and the reform of the Federal milk marketing orders.
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From this producer's point of view, the current Basic Formula Price is painfully inadequate. The current BFP seriously understates the actual value of milk used for manufacturing cheese and other dairy products. This is true for two reasons
1. The current survey used to establish the BFP is too narrow. Currently, USDA only determines the value of Grade B milk from a number of manufacturing plants located in Minnesota and Wisconsin. That base is exceedingly small, dwindling quickly and incapable of providing an accurate picture of the actual value of manufacturing milk. The reality is that only a minute percentage of the milk produced in Minnesota and Wisconsin is Grade B milk. The vast majority of milk actually going into our cheese vats is higher a value Grade A milk.
2. The USDA only evaluates and reports prices of manufactured milk in the Midwest. But if anything is clear from the changes that have occurred in milk production over the past 20 years, it's that Eau Claire, WI, is no longer the center of the dairy universe. In fact, just last year we lost almost 70,000 cows and over 1,000 dairy farmers in Wisconsin alone. It is quite evident that dairy product manufacturing is a major use for milk produced in many regions, including California, the Southwest, Idaho, the Pacific Northwest, and the Northeast. It is clear to me that no attempt to measure the value of manufacturing milk can succeed if it ignores these manufacturing areas.
One of the ideas that makes sense to me is to establish the BFP by taking a survey of the actual cost of milk used for manufacturing--that includes Grade A and B. Then, in addition, USDA will need to expand the scope of its survey to include other regions where manufacturing milk is produced and used. This competitive A-B proposal is one that a lot of Midwest dairy organizations, including Land O'Lakes, support.
To help the entire pricing system function more efficiently, it is imperative that we reform the Federal milk marketing system in a way that makes it attractive for California to join the system. I don't know how we can ever achieve a united, national dairy industry, one that is capable of competing in a world market place, when the No. 1 dairy state operates under a different set of rules and milk prices. Producers in California receive some of the lowest paying prices in the Nation, yet a number of the processors receive a make allowance from the government. This allows for greater profit margins or less efficiency and clearly puts an already extremely competitive Midwest at a competitive disadvantage.
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Aside from the comments representing both Land O'Lakes and myself, I have another solution to pricing milk equitably in all areas of the Nation. The concept is relatively simple compared to all other proposals on the table. We are all aware that the difference between retail price versus the price producers receive is continuing to grow. Consumers are the ultimate losers as this continues. I propose that the retail versus producer price spread ratio be frozen at current levels. The dairy section is already very lucrative for retailers and is at the back of the store for a reason. The concept is so simple with benefits as outlined below:
(1) Retailers remain profitable. (2) Producers are assured the gap will not continue to widen and should see their prices rise on an inflationary basis. (3) It can be made region specific so the regional producers will be paid accordingly to whatever the demand is there. No more inter-regional blending of class 1 milk, fragmentation of the dairy industry, and so on. (4) USDA's role is reduced. Their major role would be to collect and report regional retail prices for three classes of product and use a simple weighted average. (5) Consumers are the ultimate winners. (6) It is entirely market driven. As prices go down due to lack of demand, less milk will be produced. As demand improves, prices rise and both the retailer and producer benefit due to the spread relationship.
The simplicity in all of this would be a breath of fresh air to an industry far too heavily overburdened with regulation and bureaucracy.
In conclusion, I am hopeful that USDA will use this opportunity to make the Federal milk marketing order system operate more equitably for all. Dairy farmers in the Midwest genuinely believe that the system is antiquated and inadequate. The USDA has a sizable responsibility to implement an equitable, easily understandable plan. It's essential to those of us on the farm, producing milk, that they succeed. I appreciate the subcommittee's interest in monitoring USDA's progress and thank you for listening to my views.
STATEMENT OF WILL HUGHES, REPRESENTATIVE, UPPER MIDWEST DAIRY COALITION
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Chairman Pombo and other members of the committee, thank you for the opportunity to testify today on the subject of Federal milk marketing order reform. I am Will Hughes, representing the Upper Midwest Dairy Coalition. The Upper Midwest Dairy Coalition is a group of 16 organizations representing 40,000 dairy farm producers, their cooperatives and farm organizations, processor associations and state agriculture departments. Its membership covers the states of Wisconsin, Minnesota, Iowa, Illinois, Indiana, Michigan, North Dakota, South Dakota, Nebraska, Kansas and Colorado.
The 1996 farm bill made it clear that Congress concluded that dairy programs, as with all other commodity programs, badly needed reforms to improve their market orientation and performance. Reform of Federal milk marketing orders is part of this mandate set forth in the three-year process that USDA is currently undertaking.
The Upper Midwest Dairy Coalition has a few brief points about the farm bill follow-up effort. First, it is crystal clear that the 1996 farm bill prohibits USDA from considering or basing new class I prices on current class I differentials. Aside from being prohibited, a status quo class I pricing structure will not serve all dairy farmers well nor meet the need for the dairy industry to be increasingly sensitive to market forces.
Second, the basic purpose of Federal orders is to ensure an adequate supply of milk to meet the needs for fluid use. Any efforts to substitute Federal orders for price supports, a purpose for which Federal orders are clearly not authorized, will only inhibit and postpone adjustments to market conditions and lead to a less, not more, competitive national dairy industry. While it is difficult to make the adjustment to a more market-oriented regulatory environment, particularly during a year of especially volatile milk prices, doing so now will ensure a stronger dairy industry in the future, if effective reforms are carried out.
Third, the Coalition believes USDA is handling the follow-up process in a very thorough and public input oriented manner. The Dairy Division and its staff, as well as others in the USDA, have been eager and willing to provide information and to work with all segments and all regions of the dairy industry during the informal rule-making process established in the farm bill. The Coalition believes USDA's steps thus far and timelines are working well. However, progress needs to continue unfettered by any holdups in order to complete the remaining steps of the reform process within the allotted time-frame.
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The reform goals of the Upper Midwest Dairy Coalition are for Federal orders to provide an adequate supply for fluid use in an equitable and simple manner. All dairy producers will benefit from simplifying the complicated and inconsistent Federal order system and bringing equity to all producers regardless of where they live or what portion of milk goes to fluid use, cheese, butter or dry milk powder. Satisfying the equity goals will best ensure that all dairy farmers are better off with Federal orders than without them. Satisfying the simplification goal will help ensure that farmers, consumers and lawmakers better understand and support the Federal order program.
The Upper Midwest Dairy Coalition is proposing Federal order reforms which include:
Class I Price Structure. Basing differentials on specific economic criteria related to the cost of moving the most efficiently located milk to fluid consumption areas.
Basic Formula Price Replacement. Replacing the Basic Formula Price with a competitive pay price for Grade A and Grade B milk to provide dairy producers with the fairest measure of milk values based on the market place.
Order Consolidation. Combining orders in the broadest possible areas of overlapping supply and distribution providing producers with more marketing options for their milk and more equitable sharing of fluid milk sales.
Under the Coalition's proposal, both simplicity and equity is achieved while meeting the specific economic and legal requirements of the Agricultural Marketing Agreement Act of 1937. Every area's price is determined by the same method using specific economic criteria. Finally, the proposal allows markets to work without regulatory interference or distortions. Ultimately, it doesn't dictate the price for milk. Rather, it ensures that the method to establish prices is economically justified, equitable to dairy producers, and simple for everyone to understand.
STATEMENT OF LARRY JENSEN, LEPRINO FOODS CO.
Mr. Chairman and members of the subcommittee, I am Larry Jensen, Senior Vice President for Supply, Distribution and Business Development of Leprino Foods Company of Denver, Colorado. Leprino is the largest producer of mozzarella cheese in the United States with seven manufacturing facilities geographically dispersed across the country. I am also a member of the Board of Directors of the International Dairy Foods Association and the National Cheese Institute, where I serve as Vice Chairman. Within NCI, I chair the NCI Legislative and Economic Policy Committee.
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The National Cheese Institute is a national trade association of processors, manufacturers and marketers whose products represent 80 percent of the cheese consumed in the United States. The NCI is also a part of the International Dairy Foods Association, an umbrella trade association whose three constituent organizations--the Milk Industry Foundation and the International Ice Cream Association along with the National Cheese Institute--collectively represent processors, manufacturers, and marketers of 85 percent of the dairy products consumed in the United States.
I appreciate the opportunity to appear before you today to present the views of IDFA and NCI on the progress of the U.S. Department of Agriculture in implementing the dairy reforms mandated by the Federal Agriculture Improvement and Reform Act of 1996. My colleague, Mr. Gary Corbett of Dean Foods Company will follow with additional views of IDFA and comments of particular concern to the fluid milk and soft dairy products segments of the dairy foods industry.
I. The direction of the dairy reforms must be towards less regulation, not more.
It is clear from the legislative history of the FAIR Act, including committee deliberations, floor debates and votes, that the dairy reforms were intended to transition the U.S. dairy program away from extensive regulation by the Federal Government and towards greater market orientation. The phase-out and elimination of the dairy price support program by December 31, 1999 was central to that reform. The required consolidation and reform of Federal Milk Marketing Orders pursuant to section 143 of the Act was another element of that reform. The general movement of the U.S. dairy program towards less regulation by government and greater market orientation is expected to help increase U.S. productivity, efficiency and competitiveness in world markets. This overarching theme must be kept in mind as we evaluate USDA's progress in implementing the reforms. It is important that the milk order reform process move forward--towards greater market orientation--and not backwards--towards a more complicated system of milk price regulation.
USDA has, pursuant to its authority to proceed under informal rulemaking procedures, solicited input from a wide variety of sources, including industry and academia. Over the past several months, USDA has released a series of five reports which identify various options for consolidation and reform of the milk order system. Most of these options are not new proposals. Some concepts included in the USDA reports were actually considered and rejected during the Congressional debate on the 1996 farm bill. It is important that USDA not move backwards by revisiting rejected proposals or those that are inconsistent with the overall objective of less micro-management by the Federal Government. USDA should embrace this opportunity to consolidate and reform milk orders in a manner which makes them less intrusive in the marketplace and generally lets the market work. Unfortunately, a number of the options identified thus far by the USDA reports are not encouraging in this regard.
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II. USDA should present a narrower range of comprehensive options for public comment. As you know, USDA is soliciting public comment on reform proposals identified in five reports, each containing multiple options on various aspects of the Federal milk order system. The Order Consolidation report proposes geographic boundaries for 10 new orders to replace the existing 32 orders. The class I price structure report proposes 6 different approaches to establishing class I differentials. The Classification report identifies one 3-class system, 5 alternatives, and numerous subsidiary changes (such as reclassifying certain specific products). The BFP report proposes 4 different alternatives to the current basic formula price. And the Identical Provisions report proposes an unquantified number of changes to various order provisions that would have different impacts among the 32 existing orders.
IDFA appreciates the considerable time and effort expended by all who contributed to the various USDA and University Study Committee reports. We also appreciate the informal rulemaking process authorized by section 143 of the FAIR Act, which allows for ongoing communication with USDA from a broad range of sources. However, it is extremely difficult to provide meaningful and focussed comment on the options proposed thus far. The difficulty arises from both the number of options in each separate report and the multiplier effect that results from their relationships with each other.
For the most part, one cannot separate the different aspects of Federal order reform and provide meaningful comment on one part in isolation from the others. Each topical area of Federal order reform tends to influence the operation of other areas. When the array of possibilities are multiplied out, the proposals USDA has put on the table reaches into the thousands. There are at least 1,440 possible combinations not counting the Identical Provisions report.
We have reviewed the five reports issued, and even hosted full-day discussions with some of the key players behind the options to help us understand them, so that we would be in a position to provide useful comments to USDA. IDFA is, in fact, in the process of preparing written comments to provide USDA and hopes to submit them by June 1. However, it is extremely difficult to be responsive in a meaningful, cogent manner when the possibilities are almost boundless. There are, quite simply, too many options on the table.
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It would be extremely helpful if, prior to issuing a formal proposed rule, USDA would narrow the options to three comprehensive proposals. Without trying to dictate the particulars of those three proposals, we suggest that a useful approach would be to issue three options along the following broad lines:
(1) no basic formula price; pooling only class I differentials,
(2) a revised basic formula price with multiple classes of milk, and
(3) a revised basic formula price with only two classes of milk.
Public comment could then focus on the pros and cons of each of the three options, and generate a more cogent discussion than is currently the case.
It is our understanding that, except for another proposed order boundary map, USDA does not intend to issue any more proposals prior to publication of a formal proposed rule. The Department has announced a timetable that includes issuing a proposed rule at the end of 1997. The statutory deadline for announcing a proposed rule, however, is not until April 4, 1998 (See section 143 (b)(2)(A) of the FAIR Act). It is the view of IDFA and its constituent organizations that there is ample opportunity for the Department to propose its three leading integrated options during this deliberative phase, receive public comment on such options, and still announce a formal proposed rule by the statutory deadline of April 4, 1998. In light of the short period of time (announced by USDA as only 60 days) available for public comment once a proposed rule is published, it is even more important for this informal, deliberative phase of the process to provide meaningful input to the decision makers.
We urge this subcommittee to support our request to the Department that, prior to issuing a proposed rule, it identify three integrated alternative proposals for milk order reform. We strongly believe that this additional step will significantly improve the ability of parties, including IDFA, to contribute meaningful, focussed comments to USDA.
III. IDFA's proposal to pool class I differentials and deregulate manufacturing milk prices is not being given serious consideration by USDA.
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One of the most controversial issues under Federal milk orders for many years has been the determination of the basic formula price. Since the formula is used for changing milk prices, this is not surprising. IDFA is concerned, however, that our proposal to eliminate the basic formula price and pool class I differentials only appears not to be getting serious consideration by USDA. Our proposal would maintain a class I differential, to be pooled for distribution to producers. Only fluid (class I) milk, however, would be subject to price regulation by Federal order; all other milk would be deregulated and simply priced in accordance with market forces. Thus, there would be no need for any form of basic formula price.
One of the reasons IDFA came to adopt this proposal as its preferred option was the difficulty of reaching consensus within the industry on a basic formula price. As this subcommittee knows well, the proper level for regulated milk prices and the role of manufacturing milk in setting those prices have been a source of controversy for decades. For many years, the Minnesota/Wisconsin price series was under frequent attack. Dissatisfaction with the M/W price series led eventually to establishment of the current basic formula price in 1995. Yet that change still did not extinguish criticism of the BFP.
The current BFP also came under attack, typically during periods of declining prices. The influence of the cheese price mover in the BFP fueled such intense hostility toward the National Cheese Exchange, that cheese traders shifted their cash market trading as of May 1, 1997 to the Chicago Mercantile Exchange. Pushed by political pressures, USDA recently abandoned use of cheese cash market prices in the BFP and is replacing them with brand new cheese survey prices. It is doubtful, however, that such a move will completely insulate the BFP from future controversy during periods of declining prices. One of the attractive features of the IDFA proposal is that it will eliminate controversy over the ''correct'' BFP, by eliminating the need for any BFP.
We are greatly concerned, however, by signs that the USDA is not taking the IDFA option seriously. For example, in the most recent report on alternatives to the BFP, the USDA Dairy Division states, in a sweeping but unsubstantiated statement, ''New legislative authority would be needed for this proposal, since the 1937 Act requires the Secretary to establish minimum prices for milk.'' BFP Report at p. 39. The report makes no attempt to explain how its authors arrived at that conclusion. IDFA's legal counsel is of the view that the IDFA proposal may be legally implemented under the 1937 Act, and points to section 608c(2) of that Act which provides clear support for regulating only one use of milk (fluid). There are many advantages to the IDFA proposal of pooling only class I differentials, and we would simply ask the Department to give our proposal much more serious and thoughtful consideration than it appears to have received to date.
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IV. If there is to be a basic formula price, it must be regionally neutral.
There has been a tremendous shift in traditional milk production areas toward the west. Just 37 years ago, in 1960, the states of Washington, Oregon and California produced about nine percent of the total milk produced in the United States. Those States now produce over 21 percent. Milk production in the other western states has increased significantly as well, going from a little less than 4 percent in 1960 to a little under 10 percent now.
At the same time, the share of the Nation's milk supply which is produced in the upper Midwest has dropped from slightly over 28 percent in 1960 to about 24 percent now. In fact, if you draw a line along the western boundaries of the states of Minnesota, Iowa, Missouri, Arkansas, and Louisiana dividing the United States into an eastern and a western section, you would find that 20 percent was produced in the West in 1960, but now nearly 39 percent is produced in the West. The comparable shares in the East are 80 percent in 1960 and a little over 60 percent now.
These structural changes make it extremely difficult to establish pricing formulas for manufacturing milk that are fair and equitable to processors, manufacturers and dairy farmers in these significantly different areas. The declining production in the upper Midwest has resulted in surplus processing capacity which has intensified competition for raw milk and driven prices to dairy farmers quite high relative to other parts of the country.
On the other hand, the rapid growth of milk production in the West has often resulted in milk supplies exceeding available capacity and resulted in somewhat lower prices. This growth in Western milk production is also a function of lower overall production costs due to generally higher production efficiencies and economies of scale. Continuing to set a basic formula price to reflect the prices paid for manufacturing milk in the upper Midwest, where they are among the highest in the country, will tend to increase milk production even more rapidly as a result of the added pricing incentives. Flooring the minimum regulated price at the Midwest levels is overly intrusive, denying the most efficient allocation of capital resources. Such efficiencies become increasingly important as trade barriers come down and U.S. products must compete in a more global marketplace.
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Complicating matters a bit more is the fact that the California state order has a substantially different pricing structure than that employed by the Federal Government in Federal milk marketing orders. The California order reflects the lower values of the west. During the consideration of the 1990 farm bill an effort was made to force the state of California to raise its milk prices. These provisions were ultimately determined to be unworkable and were repealed in the FAIR Act.
It was in recognition of these tremendous regional differences that our organizations decided that manufacturing prices under Federal milk orders should be deregulated consistently with the elimination of milk support prices and thereby permitting the marketplace to efficiently account for these regional differences.
However if this is not done, then Federal orders should utilize a pricing plan that prices milk for manufacturing purposes based on its value in the West, possibly with an upward adjustment reflecting the cost of shipping cheese to the Midwest. Western based prices are more consistent with the notion of the market clearing value of minimum regulated prices. By doing so, a minimum regulated price could be maintained while allowing the marketplace to reflect regional differences through competitively bargained premiums. The logic of the West to East price surface is also based on commercial practice and the lower cost structure in the West. USDA's recently released price survey tends to corroborate this. To reiterate, we believe our first choice of pooling only class I differentials is by far preferable to other approaches because it allows the market to allocate resources. The Federal Government can never be as efficient in allocating shares of markets as the economy.
Mr. Chairman, we applaud your interest in keeping this process on track with the reform that was envisioned by the FAIR Act and look forward to working with you and your colleagues as well as with USDA to insure that dairy reforms yield a healthier dairy industry.
STATEMENT OF EDWARD T. COUGHLIN, ACTING CHIEF EXECUTIVE OFFICER OF THE NATIONAL MILK PRODUCERS FEDERATION
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The Federation is a trade association representing approximately 70 percent of American dairy producers and the 31 cooperative milk marketing associations that they own and operate throughout the United States. I appreciate the opportunity to testify today before the House Subcommittee on Livestock, Dairy and Poultry on the status of dairy reforms required by last year's farm bill.
The 1996 farm bill fundamentally and comprehensively changed the future of the U.S. dairy industry. The trend toward market orientation was accelerated by at least three key themes in the legislation:
Eliminating the dairy price support program after 1999.
Consolidating Federal milk orders
Reaffirming a commitment to build export markets for dairy products.
Each major change affects milk producers by redefining their market environment. Without the price support program, milk producers will be exposed to more price risk. As Federal orders are consolidated, milk will move longer distances to supply market demand. Under the Uruguay Round agreement, U.S. producers continue to face competition from imports and must aggressively seek new markets abroad to balance trade flows.
The dairy industry has made significant changes to adjust in order to help milk producers meet new challenges in the emerging markets. One example is formation of the U.S. Dairy Export Council, established in 1996 to assist U.S. dairy product suppliers increase their exports.
Other efforts are joint activities with government to help with the transition. I would like to comment on some of those programs.
Federal Milk Order Reform. The 1996 farm bill requires a substantial overhaul of the Federal order system. Substantial differences exist among NMPF member cooperatives about Federal order reforms. As a result, the Federation has not taken a position on order reform.
Discussions are continuing among NMPF members and Federation leaders remain committed to developing a policy on Federal order reforms.
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We will keep this committee and USDA fully informed of any progress.
Dairy Export Incentive Program (DEIP). Under the 1996 farm bill, USDA is required to fully utilize the DEIP program to the maximum permitted under the Uruguay Round GATT agreement. In addition, the bill authorized DEIP expenditures to assist in developing world markets for U.S. dairy products.
The program has evolved since 1985 into a valuable market development tool. World dairy markets are still distorted by European subsidies, and the DEIP enables U.S. exporters to compete. In the future, world markets can be profitable outlets for U.S. dairy products if EU subsidies are constrained and reduced further during the next round of trade talks. Until then, the DEIP will be vitally important for the U.S. dairy industry to develop global markets.
The Federation is concerned that USDA has not been aggressively operating the DEIP. With less than 2 months left to use allocations for the current GATT year (July 1996 to June 1997), only about a third of the program allocation has been utilized. The tally of bids awarded under the program vary from product to product, but allocations for important commodities are far short of authorized levels, with only slightly more than 40 percent of the nonfat dry milk allocations awarded.
We believe it is critical that USDA make maximum use of DEIP in order to strengthen the U.S. negotiating position in the upcoming round of multilateral trade negotiations. Failure to fully utilize our export assistance program for dairy, particularly in response to EU export subsidies, could undermine U.S. arguments for further reductions in export subsidies used by other nations.
Building Export Markets Through ''Green Box'' Efforts Subsidy programs are only one tool for foreign market development activities and we will be urging the Department of Agriculture to take advantage of all opportunities to expand export sales activities.
One opportunity involves a so-called ''green box'' program, the Food for Progress program. Under the program, USDA provides commodities on a grant or credit basis to foreign countries that implement democratic and economic policy reforms. Because Food for Progress focuses on private sector agricultural development in countries that are more advanced than the very poor nations that are recipients under title II of the Food for Peace program, the food assistance may be provided not only through foreign governments, private voluntary organizations, and cooperatives, but through agricultural associations and private entities as well.
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In recent years, Food for Progress has been used primarily to provide much of the food aid moving from the United States to the republics of the former Soviet Union. Funds for this program are not earmarked in appropriations bill. Instead the Secretary of Agriculture may either use CCC commodities or funds to provide commodity grants, or P.L. 480 title I funds to provide concessional loans. Agreements may be made with foreign governments or non-governmental organizations and businesses in the recipient country.
Dairy products have rarely been used in the program but clear opportunities exist to link use of these products for in-country promotion activities administered by the U.S. Dairy Export Council. These opportunities are most apparent in Southeast Asia.
One such project, targeting dairy market development in a Southeast Asian nation, has been presented to USDEC. The proposed project is a way to provide a solid demonstration of U.S. capability to meet regional dairy needs and can lead to developing a commercial market without using subsidies. The project will also increase in-country familiarity and acceptance by regional buyers of U.S. dairy products, leading to better market opportunities in the future.
We urge USDA to support these ''green box'' programs.
Dairy Indemnity Program. The Dairy Indemnity Program provides payment to dairy producers for milk that cannot be marketed because it contains pesticide residue, toxic substance or chemicals from radiation. DIP also provides payment to manufacturers for product containing pesticide residue removed from the marketplace. Last year the farm bill failed to extend authorization of the DIP. Aflatoxin contamination was found in several states, but indemnity funding for dairy producers is depleted and in need of reauthorization and adequate Federal funding.
Aflatoxin contamination occurs under specific weather conditions and therefore is difficult to accurately fund the DIP from one year to the next. Claims filed for fiscal year 1996 funds were paid in full through the DIP but $450,000 is needed this year for payment to all producers. Depending on when producers filed their individual claims, some producers were paid in full, others received partial payment, while others experiencing the same aflatoxin related problem received no indemnity payment.
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The Federation has been an avid supporter of the Dairy Indemnity Program since its original authorization. We believe it enhances public safety without financially penalizing producers and manufacturers for product contamination beyond their control. In light of failure of the farm bill to extend DIP authorization, the Federation strongly urges Congress to take prompt action to correct this apparent oversight. Continued authorization and funding will maintain wholesome and unadulterated dairy products for consumers and prompt, equitable reimbursements for dairy producers.
Options Pilot Program The reduction of dairy price supports over the past decade has led to increasing price instability. Milk producers and their cooperatives are struggling to cope with fluctuating prices. The higher than average milk prices in mid—1996 and the subsequent sudden and dramatic crash of milk prices late in 1996 illustrates the need for improved risk management mechanisms for dairy producers.
Unfortunately, milk producers are now facing these price risks without the extensive history of exposure to price risk management tools that other farmers have. Crop producers have had access for decades to futures markets covering their crops and have been able to enroll in crop insurance. Milk producers do not receive direct payments from the Federal Government, are not covered by crop insurance programs, and have had access to milk futures markets only in the last 2 years.
To accelerate the adoption of price risk management tools, Section 191 of the FAIR Act authorize the Secretary to establish pilot programs to determine whether commodity options can provide producers with reasonable protection against the financial risks posed by fluctuating commodity prices.
In October 1996, USDA received a proposal to establish an Options Pilot Program for milk producers. The Federation encourages USDA to implement this program.
The OPP would be set up in a select number of counties in major dairy producing States, covering up to 5 percent of milk production. Participating milk producers would be given information about how to use commodity options for insurance against unfavorable price movements, and would receive firsthand experience trading these options. The results of the pilot program would allow the dairy industry to better understand the workings of futures markets and would indicate whether these markets are practical for risk management. Technical assistance and education materials would be provided by the Extension Service and Coffee, Sugar & Cocoa Exchange, Inc.
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The Secretary is authorized to fund and to operate the OPP through the Commodity Credit Corporation and, to the extent practicable, to operate the program in a budget neutral manner. To date, USDA has not established a program for dairy, despite urging by Members of Congress. The OPP, combined with an extensive educational effort, could be an effective way to assist milk producers to manage risks in the face of volatile milk prices. USDA should establish this program now.
We appreciate the opportunity to bring the views of NMPF members to the committee. We look forward to working Congress and the Administration to build a better future for dairy producers.
STATEMENT OF GARY CORBETT, DEAN FOODS COMPANY,
Mr. Chairman and members of the subcommittee, I am Gary Corbett, vice president for governmental and dairy industry relations of the Dean Foods Company, of Rockford, IL. Dean Foods is a diversified food processor and distributor with operating plants located throughout the country, and nationwide, Dean ranks as the leading fluid milk processor. I also serve as Chairman of the Milk Orders Committee of the Milk Industry Foundation and International Ice Cream Association, two of the three constituent organizations of the International Dairy Foods Association. The Milk Industry Foundation is a national trade association whose members process 85 percent of the fluid milk and fluid milk products consumed in the United States. The International Ice Cream Association's members include manufacturers and marketers of 85 percent of the ice cream and ice cream-related products consumed in the United States.
I appreciate the opportunity to appear before you today to present the views of IDFA and its constituent organizations MIF and IICA on the Department of Agriculture's progress in implementing the dairy reforms mandated by the Federal Agriculture Improvement and Reform Act of 1996.
I. USDA should clearly identify the criteria which are guiding its implementation of the mandated reforms pursuant to section 143 of the FAIR Act.
As my colleague Larry Jensen has pointed out, USDA has released a wide range of different options within its five released reports. Although we understand that USDA is still in its so-called ''deliberative'' phase and thus remains open to consideration of additional proposals and further debate, USDA has yet to identify the purposes, fundamental criteria or principles that will guide its decisions on order consolidation and reforms. Some of the reports issued identify the criteria employed to develop certain proposals, however, the purposes and/or criteria are neither provided consistently for all proposals nor are there any unifying purposes or criteria which establish a consistency across the subjects treated in different reports.
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II. Class I Differentials. For instance, what is the purpose of class I differentials? Is it to enhance milk prices to farmers, bring forth an adequate supply of milk for local market needs, get sufficient milk to fluid bottling plants, or some combination of these?
The way class I differentials currently work, the answer includes all of these to some degree, but it is a less than perfect delivery system to actually accomplish each of these goals. Class I differentials currently are paid on milk that is used for beverage milks only, but the proceeds are distributed across all producers in a milk marketing order. Because it is shared more or less equally by all producers in the order, its primary function is to enhance the total amount of milk produced and attracted to the Order. However, only 43 percent of all milk pooled under Federal milk orders is used in class I. In fact there are about 9 Federal orders which have less than 40 percent of the milk under the order used in class I. Sixty percent or more of that milk is used for manufacturing purposes. The orders were primarily developed to ensure an adequate supply of milk for fluid milk packagers. However, current pricing and pooling provisions have little to do with getting milk to bottling plants. This is an issue that needs to be addressed by USDA. Why are fluid milk consumers paying higher prices for raw milk than consumers of other products? USDA needs to address this issue directly. What is the purpose of requiring higher prices to be paid for milk by fluid milk packagers?
We submit there are two reasons. One is pure price enhancement to dairy farmers. Second, functionally class I differentials should be for the purpose of getting milk delivered to packaging plants. This second function is not being met by the orders currently and so far USDA hasn't shown much interest in making sure that function is performed. USDA should articulate their reasons or purposes for class I differentials.
Currently, the greater the class I use of milk in a marketing area, the greater the price enhancement to producers. More money paid to producers results in more milk produced, providing a greater supply of milk for that market. However, even though the class I user (the fluid milk bottler) is paying all of the class I differential, he gets no assured direct benefit, other than a greater pool of milk in his area. Because class I differentials are distributed to all producers in the pool regardless of whether they actually supplied fluid milk plants, there is no direct incentive for a producer to deliver to a class I bottling plant.
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Member companies of the Milk Industry Foundation who are in the fluid milk bottling business agree that if all milk payments are pooled, some portion of the class I differential payment should go directly, as an incentive, to whoever actually ships milk to the fluid milk bottling plants. If we were to agree, however, that the sole purpose of class I differentials is to enhance prices to farmers, then our preferred option of pooling only class I differentials would work toward that goal. Each product processor or manufacturer in a market would simply pay a competitive price for their milk based on local market dynamics, and then pay the class I differential to be shared among all the farmers. In this case it would be purely for price enhancement purposes.
So while USDA sets forth six proposals on class I differentials, the purpose for class I differentials is not clearly articulated nor are any criteria for measuring these various proposals.
Since higher class I prices must either be paid for enhancing prices to dairy farmers or more functionally for getting milk to bottling plants, we believe it is extremely important that class I prices be linked directly to manufacturing milk prices. USDA, in their report on class I differentials, implies class I prices can be set independently of supply/demand conditions for manufacturing milk. If this were done, regional pricing issues would become even larger than they currently are. Higher class I differentials would reward producers in areas where more milk is used in class I as opposed to areas where larger amounts are used for manufacturing. This was one of the major issues debated during the 1996 FAIR Act. Clearly, class I and manufacturing milk prices must bear a direct relationship to each other and to the supply/demand conditions which relate to milk for all its uses.
III. Multiple Classifications of Milk. Another example of an area of proposals without an appropriately articulated set of principles are USDA's proposals on multiple classes of milk. In fact, USDA never even addresses why they believe there need to be multiple classes of milk set by Federal regulation, if indeed multiple classes are needed at all.
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In our view, the dairy industry--producers and processors--would be better served with only two classes of milk, class I and all other. There are many benefits with this more simplified approach. I will comment on two that are very practical and easy to understand.
Eliminating specific classified pricing on all milk purchased (other than the class I differentials which would still be paid into a pool and shared with all producers in a market) would allow companies that are buying milk for their milk processing or any other dairy product processing operations to establish long term contracts with their dairy farmer suppliers. Currently this is practically impossible because of the pricing provisions of Federal Orders. However, long term contracts for supply are the norm for many other businesses. In fact, Dean Foods Company is also in the frozen vegetable business, so we have experience in buying lots of vegetables. The prices we pay are not set by government. Instead, we pay based on competitive factors, and contract forward for purchase. Both the buyer and seller benefit by knowing what to expect in the coming months: the growers know what to plant and harvest based on their costs, the quantities contracted for, and the price they will receive; the processors know what their costs will be and whether they can sell the finished products at competitive prices to their customers. The dairy industry could similarly benefit from a more market competitive based pricing system that would allow for forward contracting between buyers and sellers.
There has been a large hue and cry about the recent volatility of milk prices. First, let me say that milk prices are less volatile than most other agriculture commodities, albeit they are more volatile now than they were a few years ago when support prices were high and in fact setting market prices. Forward contracting as I have just described is one way of addressing this issue, but currently Federal Order required pricing stands in the way.
Setting forth multiple classes without clearly articulated reasons also frustrates companies who want to market milk in various forms. For instance, if my company wanted to develop a new product that does not fit any of the current product descriptions, our first question would be ''what will our costs be.?'' With an unstructured and ill-defined multiple class pricing system based on specific product uses, it is virtually impossible to answer that question until after a new product is developed. This uncertainty provides a major impediment to creativity in entering the consumer marketplace with a dynamic and competitive assortment of products.
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Changes in technology and in shifting consumer tastes are spurring on the development of new dairy products. Federal milk orders should not hinder new product development, or impose irrational requirements on new products. Some of the proposed changes in the classification of particular dairy products, as well as some existing classifications, bear little relation to the economic realities of what these products compete with in the marketplace. Currently, most of the Federal Orders contain four classes. Class I for packaged fluid milk; class II for cottage cheese, yogurt, ice cream, and several other products. Class II milk costs 30 cents per hundredweight more than milk for other manufacturing uses. Why? That is not answered. Cottage cheese sales have been declining at a rate of about five percent per year, so why would the government want to set a higher price for milk used in cottage cheese?
One of the options identified by USDA is to add Ricotta to this higher priced group. They also suggest putting eggnog in class I. This to us doesn't sound like Federal Order Reform--it sounds like more Federal Order regulation.
There needs to be a clear economic rationale first for the need for multiple classes, and then, based on that need, if there is one, for the proper definition and delineation of those classes. At this point, it is still unclear what USDA's view is with respect to the fundamental issue of multiple classes of milk.
IV. IDFA Criteria for Measuring Federal Order Reform. Prior to USDA's release of reform proposals, member companies of IDFA and its constituent organizations developed a checklist of considerations that should be reflected in the Federal order reform process, and developed criteria to evaluate proposed changes. In developing these criteria, IDFA kept in mind the fundamental objectives of Federal milk orders as well as the reform objective of greater market orientation. Specifically, IDFA identified the following eight criteria for evaluating the Federal milk marketing order reform process:
(1) Does the process result in simplified and reduced regulations?
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(2) Does the process result in regulations and prices which are less intrusive in milk marketing?
(3) Do proposed changes allow markets to play a greater role in pricing milk and dairy products?
(4) Are proposed changes to the regulations consistent with international trade agreement provisions?
(5) Do proposed changes assure U.S. consumers an adequate supply of milk at economically justified market competitive and reasonable prices?
(6) Do proposed changes reflect market based economic models?
(7) Are proposed regulations consistent with general marketing conditions which would exist without the regulations?
(8) Do Federal milk marketing order regulations provide for orderly marketing?
One of the problems USDA will encounter in consolidating orders is reasonably aligning prices paid to dairy farmers in the overlapping milk procurement areas of the newly consolidated orders. Wide differences in blend prices in areas where handlers under different orders are competing for a milk supply can and are likely to be a major problem for many markets. Milk production has increased so significantly in the West, that that area has become a major alternative milk supply like the Upper Midwest. Therefore class I pricing in several areas needs to reflect this West to East movement of milk instead of the current North to South Federal Order pricing system.
We believe basing points in New Mexico, Idaho, the upper Midwest and possibly New York make sense. However, new basing points could change competitive relationships which have developed as a result of the current, but outdated, upper Midwest pricing points. To moderate this problem we suggest major changes in class I differentials be phased in over a reasonable time period to be less of an impact on capital investments made in good faith based on the current system.
We've identified several of these potential problems in the first proposed consolidation. However, it is impossible to really address the issues in comments to USDA without more definitive pricing proposals.
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V. USDA should identify a set of three comprehensive proposals for Federal order reform this fall for further public comment, prior to issuance of a proposed rule.
Finally, I wish to reiterate IDFA's request that a narrower set of reform proposals--we suggest three options--be identified by USDA for further public comment this fall. We appreciate the Department's willingness to accept public comments throughout the entire deliberative phase of the reform process. However, public comment on a wide assortment of hypothetical options is less valuable and less efficient than public comment on a narrower set of realistic options being seriously considered by the Department. An interesting assortment of ideas and proposals have evolved in the course of this process to date. Now it is time for the Department to provide some guidance on the criteria it intends to employ and the direction it is likely to take in this historic process of consolidation and reform of Federal milk orders. We hope the subcommittee will join us in urging the Department to generate a narrower range of integrated reform proposals.
TESTIMONY OF ELVIN HOLLON, SOUTHERN REGION, ASSOCIATED MILK PRODUCERS, INC.
Associated Milk Producers, Inc.-Southern Region is composed of approximately 3,000 member owners located in 11 States across the Southwestern and Southeastern portions of the country. Its members produce over six billion pounds of milk annually. AMPI members reside in the districts of four of the subcommittee members. AMPI also has members located in states represented by four other subcommittee members. Thank you for listening to our viewpoints.
AMPI Supports the Federal Order System. Associated Milk Producers, Inc.-Southern Region supports the continued existence of the Federal Order system. Absent the Federal Order system there is no way that dairy farmers can get a fair distribution of market proceeds. Data from Federal Milk Order Statistical Summaries indicates that 83,000 dairy farms are regulated by Federal Orders. There are about 560 regulated milk buying locations. Even without accounting for the fact that many of these locations are owned and operated by only a few firms it is obvious that dairy farmers do not have equal power in the market place. Dairy farmers have no way of knowing how their milk is used by the buyer. Some uses generate significantly higher returns than others. Additionally, consumers benefit from Federal Orders because they help to assure that adequate supplies of fluid milk are produced for the retail market.
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Impact of Volatility. Dairy farmers are severely impacted by existing pricing conditions. The extreme variation in price over the past 12 months have decimated farm balance sheets and stressed operating statements. The BFP reached $15.37 in September 1996. Our internal price projections expect the BFP to fall to as low as $10.50 for May 1997 milk production. This variation in income - approximately 32 percent from peak to valley would be difficult for any business to absorb. This variation is felt in by every single dairy farm family in the country. As an indicator of the severity of the situation the Southern Region of AMPI has recorded 174 farms sellouts in the period December 30,1996 to February 28,1997. Over this same period in 1996 the number was 88 and in 1995 it was 61. The 174 farms represents about 5 percent of our membership total.
BFP Alternatives and Price Levels. Several of the BFP proposals under review by the industry as a part of the Federal Order reform process could result in income enhancement for dairy farmers. This means that the computational process that they use to arrive at a replacement price for the BFP, when performed over a historical time period, would result in a price that was greater than the old BFP.
However, USDA has indicated in the introductory portion of the BFP report that one of the three broad goals used to guide the replacement search process is that it . . . should not deviate greatly from the general level of the current BFP . . .. (A Preliminary Report On Alternatives to the Basic Formula Price, April 1997, Dairy Division, page 2)
We assume that USDA is reflecting the views of Congress in addition to its own. If that is not true then AMPI would have several alternative proposals available for review. However, our comments today reflect the position taken in the Federal Order reform materials that have been released to the industry - that income enhancement via the reform process is limited at best and that gains in one region of the country would likely be offset by reductions elsewhere.
Choice of BFP Alternatives. Our preference for a BFP replacement is a continued combination of a competitive price series and a product formula update - much like the current process. We view benefits of this approach as:
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it retains competition between milk buyers as the major factor in the price determination process;
for CY 96 the update accounted for less than 6 percent of the total value of the BFP - the competitive price series the balance (CY 1996);
a competitive price series automatically recognizes both supply and demand factors; by using both a price series and a product formula you prevent any one segment of the market from ''cornering the market'';
However a reliable competitive price series is needed to make this approach work. We recognize the problems encountered by USDA in its efforts to construct a competitive price series. If their current work produces a reliable price series then our preference is to use it. If such a series cannot be determined then we would look to other alternatives as identified in the BFP report.
We support the concept of a BFP which would be used simultaneously establish the value of milk used in manufacturing and act as a price mover for higher valued fluid use products. Furthermore we support a solution that computes separately a price for butter and nonfat dry milk products and for cheese products. We agree that differentials reflecting transportation costs between reserve supply and consumption areas should be applied to the BFP to arrive at a final fluid use product price.
Oppose an Administratively Determined BFP. We very much oppose an administratively set BFP. An administratively set BFP would insure two things - the actual process of setting milk prices will become political as opposed to computational. Secondly, the process of changing prices would no longer function automatically and would begin to lose relationship with supply and demand forces.
Also an administratively determined sever the automatic relationship defined by the current BFP pricing process between alternative uses for milk supplies. Over time this would cause disorderly marketing. As prices for various milk usages diverge milk supplies from manufacturing use regions would attempt to supplant supplies in deficit areas in order to improve the manufacturing regions price.
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Support the Concept of A Moving Average of the BFP in Order to Determine class I prices. We endorse the proposal that the Federal Order system utilize a moving average price of whatever BFP method found acceptable in order to set the class I and class II price. Much of the distress currently in place now in the supply sector of the industry is due to the extreme short term volatility of the manufacturing sector and its spillover effect to the class I sector. Using an averaging method will alleviate much of this price pressure without raising or lowering average prices over a reasonable period of time. We support a three or six month interval for computation purposes. We are presently working with one of the Market Administrator offices to test several options in order to present data to USDA.
Request Consideration for the Cost of Production to be Recognized in Determining the BFP. We endorse additional study into a proposal advanced by the University Study Committee led by researchers at Texas A & M into inclusion of the cost of production factors into the BFP. We feel it is a reasonable approach that would keep milk prices somewhat related to feed costs. Their limited study showed that the triggering methodology proposed would only be necessary in a few months out of the period they reviewed. Its construction adopted a keep it between the lines approach as opposed to a micro - managed effort. Perhaps with some input from the sub-committee this proposal could be further developed.
In summary we would request the following:
(1) Continued Congressional support for the Federal Order system.
(2) Congressional help to clarify the position of income enhancement in the Federal Order reform process.
(3) If a suitable competitive price series can be derived by USDA that it be used in establishing the BFP.
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(4) That in no way should Congress endorse administratively set pricing for the BFP.
(5) That Congress be willing to consider some type of moving average calculation to establish the class I price in order to reduce the volatility in dairy farmer income.
(6) That Congress consider a broad based approach to allow the Cost of Production be recognized in setting the BFP.
"The Official Committee record contains additional material here."