SPEAKERS       CONTENTS       INSERTS    Tables

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63–851

2000
DAIRY CONSUMERS AND PRODUCERS PROTECTION ACT AND RESCINDING CONSENT OF CONGRESS TO THE NORTHEAST INTERSTATE DAIRY COMPACT

HEARING

BEFORE THE

SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW

OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

ON
H.R. 1604 and H.R. 744

JUNE 17, 1999
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Serial No. 93

Printed for the use of the Committee on the Judiciary

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
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JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida

JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York

THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
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Subcommittee on Commercial and Administrative Law
GEORGE W. GEKAS, Pennsylvania, Chairman
ED BRYANT, Tennessee
LINDSEY O. GRAHAM, South Carolina
STEVE CHABOT, Ohio
ASA HUTCHINSON, Arkansas
SPENCER BACHUS, Alabama
MARY BONO, California
JOE SCARBOROUGH, Florida

JERROLD NADLER, New York
TAMMY BALDWIN, Wisconsin
MELVIN L. WATT, North Carolina
ANTHONY D. WEINER, New York
WILLIAM D. DELAHUNT, Massachusetts

RAYMOND V. SMIETANKA, Chief Counsel
SUSAN JENSEN-CONKLIN, Counsel
JAMES W. HARPER, Counsel

C O N T E N T S

HEARING DATE
    June 17, 1999
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TEXT OF BILLS

    H.R. 1604
    H.R. 744

OPENING STATEMENT

    Gekas, Hon. George W., a Representative in Congress From the State of Pennsylvania, and chairman, Subcommittee on Commercial and Administrative Law

WITNESSES

    Bok, Wayne, President, Associated Milk Products, Inc., representing the Upper Midwest Dairy Coalition, Geddes, SD

    Charlton, Scott, Vice President, Manufacturing, Publix Supermarkets, Inc., representing the Food Marketing Institute, Lakeland, FL

    Corbett, Gary A., Vice President, Governmental and Dairy Industry Relations, Dean Foods Company, Franklin Park, IL

    Covert, Geoffrey, Senior Vice President and President, Manufacturing, The Kroger Co., Cincinnati, OH

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    Dunn, Robert M., Jr., Department of Economics, George Washington University, Washington, DC

    Engles, Gregg, Chairman and Executive Officer, Suiza Foods Corporation, Dallas, TX

    Feingold, Hon. Russell D., a U.S. Senator From the State of Wisconsin

    Frydenlund, John, Director, Center for International Food and Agriculture Policy, Citizens Against Government Waste, Washington, DC

    Graves, Leon C., Commissioner, Vermont Department of Agriculture, Food and Markets

    Green, James, Vice President and General Manager, Maola Milk & Ice Cream Company, New Bern, NC

    Jaeger, Arthur S., Assistant Director, Consumer Federation of America, Washington, DC

    Kopp, Jay, Middletown, PA

    Krug, David, representing Family Dairies USA, Owen, WI

    Landrieu, Hon. Mary L., a U.S. Senator From the State of Louisiana
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    Lawrence, Kathy, Executive Director, Just Food, New York, NY

    Parker, Charles, General Manager and Chief Operating Officer, Gold Star Dairy, Little Rock, AR

    Rosenbaum, Steven J., Partner, Covington and Burling, Washington, DC

    Schmidle, Mae S., Chair, Northeast Interstate Dairy Compact Commission, Newtown, CT

    Schumer, Hon. Charles E., a U.S. Senator From the State of New York

    Simmons, Albert, representing the National Family Farm Coalition, Flemingsburg, KY

    Smith, Daniel, former Executive Director, Northeast Dairy Compact Commission, Montpelier, VT

    Thomas, William A., Professor and Dairy Economist, University of Georgia, Athens, GA

    Thompson, Tommy G., Governor, State of Wisconsin

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
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    Boehlert, Hon. Sherwood, a Representative in Congress From the State of New York: Prepared statement

    Bok, Wayne, President, Associated Milk Products, Inc., representing the Upper Midwest Dairy Coalition, Geddes, SD: Prepared statement

    Bunting, John, Dairy Farmer, Treadwell, NY: Prepared statement

    Charlton, Scott, Vice President, Manufacturing, Publix Supermarkets, Inc., representing the Food Marketing Institute, Lakeland, FL: Prepared statement

    Corbett, Gary A., Vice President, Governmental and Dairy Industry Relations, Dean Foods Company, Franklin Park, IL: Prepared statement

    Covert, Geoffrey, Senior Vice President and President, Manufacturing, The Kroger Co., Cincinnati, OH: Prepared statement

    Dunn, Robert M., Jr., Department of Economics, George Washington University, Washington, DC: Prepared statement

    Engles, Gregg, Chairman and Executive Officer, Suiza Foods Corporation, Dallas, TX: Prepared statement

    Etheridge, Hon. Bob, a Representative in Congress From the State of North Carolina: Prepared statement
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    Feingold, Hon. Russell D., a U.S. Senator From the State of Wisconsin: Prepared statement

    Frydenlund, John, Director, Center for International Food and Agriculture Policy, Citizens Against Government Waste, Washington, DC: Prepared statement

    Gekas, Hon. George W., a Representative in Congress From the State of Pennsylvania, and chairman, Subcommittee on Commercial and Administrative Law: Prepared statement

    Graves, Leon C., Commissioner, Vermont Department of Agriculture, Food and Markets: Prepared statement

    Green, James, Vice President and General Manager, Maola Milk & Ice Cream Company, New Bern, NC: Prepared statement

    Hoffmann, Hon. Nancy Larraine, a State Senator From the 48th District of New York: Prepared statement

    Jaeger, Arthur S., Assistant Director, Consumer Federation of America, Washington, DC: Prepared statement

    Kind, Hon. Ron, a Representative in Congress From the State of Wisconsin: Prepared statement

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    Kopp, Jay, Middletown, PA: Prepared statement

    Krug, David, representing Family Dairies USA, Owen, WI: Prepared statement

    Landrieu, Hon. Mary L., a U.S. Senator From the State of Louisiana: Prepared statement

    Lawrence, Kathy, Executive Director, Just Food, New York, NY: Prepared statement

    McHugh, Hon. John, a Representative in Congress From the State of New York: Prepared statement

    Neuborne, Burt, John Norton Pomeroy Professor of Law, New York University School of Law: Prepared statement

    Obey, Hon. David R., a Representative in Congress From the State of Wisconsin: Prepared statement

    Parker, Charles, General Manager and Chief Operating Officer, Gold Star Dairy, Little Rock, AR: Prepared statement

    Rosenbaum, Steven J., Partner, Covington and Burling, Washington, DC: Prepared statement
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    Smith, Daniel, former Executive Director, Northeast Dairy Compact Commission, Montpelier, VT: Prepared statement

    Sanders, Hon. Bernard, a Representative in Congress From the State of Vermont: Prepared statement

    Sensenbrenner, Hon. F. James, Jr., a Representative in Congress From the State of Wisconsin: Prepared statement

    Schmidle, Mae S., Chair, Northeast Interstate Dairy Compact Commission, Newtown, CT: Prepared statement

    Schumer, Hon. Charles E., a U.S. Senator From the State of New York: Prepared statement

    Simmons, Albert, representing the National Family Farm Coalition, Flemingsburg, KY: Prepared statement

    Sweeney, Hon. John E., a Representative in Congress From the State of New York: Prepared statement

    Thomas, William A., Professor and Dairy Economist, University of Georgia, Athens, GA: Prepared statement

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    Thompson, Tommy G., Governor, State of Wisconsin: Prepared statement

    Van Alstyne, William, William R. and Thomas E. Perkins Professor of Law, Duke University: Prepared statement

APPENDIX
    Material submitted for the record

DAIRY CONSUMERS AND PRODUCERS PROTECTION ACT AND RESCINDING CONSENT OF CONGRESS TO THE NORTHEAST INTERSTATE DAIRY COMPACT

THURSDAY, JUNE 17, 1999

House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.

    The subcommittee met, pursuant to notice, at 10 a.m., in Room 2141, Rayburn House Office Building, Hon. George W. Gekas [chairman of the subcommittee] presiding.

    Present: Representatives George W. Gekas, Ed Bryant, Steve Chabot, Jerrold Nadler, Tammy Baldwin, Melvin L. Watt, Anthony D. Weiner, and William D. Delahunt.

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    Also present: Representatives F. James Sensenbrenner, Asa Hutchinson, Howard Coble, Charles T. Canady, and Bob Goodlatte.

    Staff present: Raymond V. Smietanka, Chief Counsel; Susan Jensen-Conklin, Counsel; James W. Harper, Counsel; Sarah Zaffina, Staff Assistant; Joseph Gibson, Full Committee Chief Counsel; Diana Schacht, Full Committee Deputy Staff Director and Chief Counsel, and David Lachmann, Minority Professional Staff Member.

OPENING STATEMENT OF CHAIRMAN GEKAS

    Mr. GEKAS [presiding]. The hour of 10 o'clock having arrived, the committee will come to order.

    The rules of the House prescribe that there must be at least two members of a subcommittee present before a hearing quorum would be established. Pending the arrival of another member of the subcommittee, we will, of course, have to recess, but what we have done is—to listen to the bells—what we have done is to keep faith with the prospect that we began a long time ago of beginning each hearing on time. So, at least I feel good about that, as the chairman, and we will still have to wait the arrival of a second member of the subcommittee.

    The gentleman from Wisconsin, Mr. Sensenbrenner, who is, of course, a member of the Judiciary Committee is vitally interested in this subject matter and will be auditing and participating in this hearing, but he is not a member of the subcommittee, and I can't anoint him as such for the purposes of starting the hearing formally. So, pending that, we will recess until the appearance of another member of the subcommittee.
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    [Recess.]

    Mr. GEKAS. We note the attendance of the gentleman from North Carolina, Mr. Watt, who, as a member of the subcommittee, now helps constitute the quorum for this hearing.

    As we indicated before, Mr. Sensenbrenner and others on the full Judiciary Committee, including Mr. Hutchinson of Arkansas, are key players in the drama of the compact on dairy. As everyone in this room undoubtedly knows, the Constitution, itself, mandates that when two or more States wish to enter into an agreement or a compact that they can do so, but it will only become effective if approved by the Congress of the United States.

    In the past, the Judiciary Committee has entertained dozens, perhaps, hundreds of compacts over the history of our Nation, but this particular one takes on unique features in the subject matter of the compact, number one, and, number two, on the number of States that would be joined in a particular compact. The Northeast grouping wishing to expand and others wishing to join in causes several problems for the subcommittee from the standpoint of putting together reasonable legislation to accomplish the purpose. We, of course, have to have the approval of the several States, through their legislatures, to approve the compact in the first place, and then act on it. That is where we are today.

    The hearing that we will be entertaining today will to be to flush out the various opinions on what already might have been accomplished by the legislatures in some of the testimony and rational that was implored by the several legislatures as well as the individuals who will be producing their own testimony and their own version of why there should be a compact or why there should not.
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    We are joined by the gentleman from New York, Mr. Nadler, and the lady from Wisconsin, Ms. Baldwin, and we will, because of the length of the proposed hearing today, try to restrict the opening remarks to that of the Chair, which are now complete, and that of the ranking member, Mr. Nadler, and then we will proceed with the hearing.

    [The prepared statement of Mr. Gekas follows:]

PREPARED STATEMENT OF HON. GEORGE W. GEKAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA

    The health of our farming industry is a constant concern. Just this week, the New York Times ran a story headlined, ''Grim Outlook for U.S. Farmers,'' which noted that farmers will need $6 billion to $8 billion to survive another year of low prices.

    As many of you may know, I have actively championed the cause of farmers in the context of my pending bankruptcy legislation, which would ensure that Chapter 12, a specialized form of bankruptcy relief, is made available to family farmers on a permanent basis.

    We're hopeful that today's hearing will enlighten us about an important segment of the farming industry, namely, the dairy farmers and their specialized needs. And, in particular, we will focus on how interstate compacts may or may not address those needs.

    In this regard, I would like to express my personal commendation to both of my colleagues—the gentleman from Wisconsin (Jim Sensenbrenner) and the gentleman from Arkansas (Asa Hutchinson)—for their leadership on this matter as evidenced by the legislation they have introduced. While they obviously have a slight difference of opinion as to how we should address these issues, they nevertheless are to be commended for their deep commitment to dairy farmers. In recognition of this fact, I have asked each to participate in this hearing along with our fellow Subcommittee members.
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    We are also very much honored to have with us today some of the leading luminaries, federal and state leaders, business persons, and academics as well as those who must personally deal with these issues on a daily basis literally in the fields of our nation.

    Some of my colleagues may already have formed their opinions on the special issues presented by dairy compacts while others may not have yet reached any conclusions. I encourage you all to keep an open mind and to make maximum use of our witnesses' expertise today.

    At this time, I also want to thank all those Members of the House who have asked to testify at today's hearing. Because of the length of the witness list, together with the activities scheduled on the floor today, the Subcommittee was not physically able to accommodate everyone who wished to testify. We recognize the desire of House Members to be heard, and we certainly will not foreclose that. For today, we will receive statements of any who wish for entry into the record. In addition, we will consult with Members subsequently towards the scheduling of an additional day at which Members would testify.

    Mr. GEKAS. Does Mr. Nadler wish some time?

    Mr. NADLER. Yes, thank you, Mr. Chairman. Mr. Chairman, these are very important hearings on a very important subject to many, many people, and I wish they weren't happening today. I do not think they should be happening today, frankly, with the gun control bill on the floor of the House, the juvenile justice bill on the floor of the House, a bill which comes from our committee, many of us will have to spend most of the day on the House floor. I, for example, will not be able to be at much of this committee meeting, because I must be on the floor dealing with a bill that comes out of our committee. I think it is very wrong that this committee hearing was not postponed when it became clear that the juvenile justice bill, and the gun control segments of it—which is a Judiciary Committee bill—would be on the floor today necessitating the presence on the floor of many of the members of this subcommittee, and I think the fact that many of us will have to be on the floor instead of here is an injustice to the people who are interested in the topic before us. I would hope that in the future we would have the discretion that important hearings not be scheduled on the same day, at the same time as a bill from our committee. A bill from another committee—the Armed Services Committee, the Foreign Relations, whatever—is an unavoidable circumstance of the way business is done in the House that you have to be in two places at once, that you have to be in the committee and on the floor—there is no way to avoid that—but to schedule a hearing of this importance on the same day that a committee bill from our committee is on the floor puts us in a very impossible position, and I apologize to everyone, but as the ranking member, I am not going to be here for much of the hearing because I have to be on the floor dealing with this important bill. I hope in the future we will not be put in the same situation.
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    I also ask unanimous consent to submit, for the record, a statement by Mr. Etheridge of North Carolina who is the lead democratic sponsor of H.R. 1604.

    Mr. GEKAS. Without objection, it will be so entered into the record.

    [The prepared statement of Mr. Etheridge follows:]

PREPARED STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA

    Mr. Chairman, I want to thank you for holding this important hearing this morning on legislation that is vitally important to dairy farmers and consumers across this country. H.R. 1604, which would ratify the Southern Dairy Compact and to reauthorize the Northeast Compact, seeks to protect the dairy farmers and consumers of this country from the unfair marketing practices of a handful of states and corporate milk processors. The broad regional, bicameral and bipartisan support for this bill is indicative of the vital need for dairy compacts to stabilize milk prices received by dairy farmers and the prices paid by consumers for milk at the store.

    First, let me say what a pleasure it has been as the lead Democratic sponsor to work in bringing this important legislation to this point. This is the beginning of a tough battle in Congress this year over national dairy policy. If the competing ice cream parties of a week ago are any indication, this battle will be fought hard on all sides. However, from the amount of support pro-compact forces have generated thus far, I am convinced that we will succeed..
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    Mr. Chairman, as I am sure you are aware, federal dairy pricing policy is complicated. However, as a farmer and former small business owner I do understand one thing, if you got more cash going out than you have coming in, something is wrong and that's no way to operate a business. Well folks, dairy farmers throughout this country won't be in business long if we don't do something to protect them from the unfair marketing practices of a few multi-national corporate milk processors. Because, while the executives of these conglomerates are playing the stock market with their profits from dumping surplus milk into other regions of the country, our producers are auctioning off their cows and equipment. I for one am sick of seeing a few corporations control the food supply in this country, because in the end its consumers and small farmers that are going to be hurt.

    The Dairy Compact will establish a floor price for farmers for their fluid milk. The Compact will stabilize the market for dairy farmers who have been devastated by low prices, and it will ensure a stable and fresh supply of locally produced milk for consumers who have not benefited from these lower producer prices. Now folks, this is the dirty little secret that big dairy processors don't want you to know. While dairy farmers have been devastated by low prices, consumers have not benefited. In fact, since 1980 retail prices for milk have risen by 35 percent, while farm prices have suffered. These companies are doing nothing more than trying to put our farmers out of business, corner the market and charge our consumers whatever they want for milk. I for one and am not going to stand by and let it happen without a fight. Our farmers deserve to survive, and our consumers deserve the stability of a ready supply of locally produced milk.

    Now on the surface, this may appear simply to be an issue of keeping our dairy farmers in business. And that is a very important goal to all of us. But folks, every citizen stands to lose if our dairy producers go bankrupt. If dairy farmers are forced out of business and competition continues to decline, out of state milk processors will be able to charge whatever they want for a gallon of milk. And folks, that's plain wrong. Milk is too important to the nutritional needs of all citizens, especially the young and the elderly, to allow its price to be controlled by a few people. As the former superintendent of North Carolina schools, I know how important nutrition is to our children's ability to learn, and milk is key to good nutrition.
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    Passing this legislation is vital to the future of our dairy farmers and to the wallets of consumers. I am tired of being told to let the free market reign by folks who are getting rich at the expense of our farmers. Our farmers work just as hard as farmers anywhere but are penalized by disadvantages built-in to the market. The food supply in this country is already concentrated in too few hands, which is driving small farms out of business. If we allow our dairy farms to go bankrupt we will pay the price at the grocery store, in lost jobs and damage to rural economies. I am proud to support the dairy farmers and consumers in my state, and I encourage this committee to move quickly in bringing this important legislation to the floor.

    [The bill, H.R. 1604, follows:]

106TH CONGRESS
    1ST SESSION
  H. R. 1604

To reauthorize, and modify the conditions for, the consent of Congress to the Northeast Interstate Dairy Compact and to grant the consent of Congress to the Southern Dairy Compact.
     
IN THE HOUSE OF REPRESENTATIVES
APRIL 28, 1999
Mr. HUTCHINSON (for himself, Mr. ETHERIDGE, Mr. MCHUGH, Mr. BALDACCI, Mr. SWEENEY, Mr. BLUNT, Mr. BOEHLERT, Mr. BURR of North Carolina, Mr. BACHUS, Mr. CALLAHAN, Mr. EVERETT, Mr. CRAMER, Mr. RILEY, Mr. BERRY, Mr. DICKEY, Mr. SNYDER, Ms. DELAURO, Mr. GEJDENSON, Mrs. JOHNSON of Connecticut, Mr. LARSON, Mr. MALONEY of Connecticut, Mr. CASTLE, Ms. BROWN of Florida, Mr. BOYD, Mr. CANADY of Florida, Mr. FOLEY, Mrs. MEEK of Florida, Mrs. THURMAN, Mr. BARR of Georgia, Mr. BISHOP, Mr. CHAMBLISS, Mr. COLLINS, Mr. DEAL of Georgia, Mr. ISAKSON, Mr. KINGSTON, Mr. LEWIS of Georgia, Ms. MCKINNEY, Mr. NORWOOD, Mr. FLETCHER, Mr. LEWIS of Kentucky, Mr. LUCAS of Kentucky, Mr. WHITFIELD, Mr. BAKER, Mr. COOKSEY, Mr. JEFFERSON, Mr. JOHN, Mr. MCCRERY, Mr. TAUZIN, Mr. CAPUANO, Mr. MCGOVERN, Mr. NEAL of Massachusetts, Mr. OLVER, Mr. BARTLETT of Maryland, Mr. EHRLICH, Mr. GILCHREST, Mr. HOYER, Mrs. MORELLA, Mr. WYNN, Mr. ALLEN, Ms. DANNER, Mrs. EMERSON, Mr. HULSHOF, Ms. MCCARTHY of Missouri, Mr. SKELTON, Mr. TALENT, Mr. PICKERING, Mr. SHOWS, Mr. TAYLOR of Mississippi, Mr. THOMPSON of Mississippi, Mr. WICKER, Mr. BALLENGER, Mrs. CLAYTON, Mr. COBLE, Mr. HAYES, Mr. JONES of North Carolina, Mr. MCINTYRE, Mrs. MYRICK, Mr. PRICE of North Carolina, Mr. TAYLOR of North Carolina, Mr. WATT of North Carolina, Mr. BASS, Mr. ANDREWS, Mr. FRANKS of New Jersey, Mr. HOLT, Mr. LOBIONDO, Mrs. ROUKEMA, Mr. SAXTON, Mr. ACKERMAN, Mr. CROWLEY, Mr. ENGEL, Mr. FORBES, Mr. FOSSELLA, Mr. GILMAN, Mr. HINCHEY, Mr. HOUGHTON, Mrs. KELLY, Mr. KING, Mr. LAFALCE, Mr. LAZIO, Mrs. LOWEY, Mr. MCNULTY, Mr. MEEKS of New York, Mr. OWENS, Mr. QUINN, Mr. RANGEL, Mr. REYNOLDS, Ms. SLAUGHTER, Mr. TOWNS, Mr. WALSH, Mr. LATOURETTE, Mr. COBURN, Mr. DOYLE, Mr. ENGLISH, Mr. GOODLING, Mr. GREENWOOD, Mr. HOEFFEL, Mr. HOLDEN, Mr. KANJORSKI, Mr. KLINK, Mr. MASCARA, Mr. PETERSON of Pennsylvania, Mr. PITTS, Mr. SHERWOOD, Mr. SHUSTER, Mr. KENNEDY of Rhode Island, Mr. WEYGAND, Mr. CLYBURN, Mr. SPRATT, Mr. SPENCE, Mr. BRYANT, Mr. GORDON, Mr. HILLEARY, Mr. JENKINS, Mr. TANNER, Mr. BENTSEN, Mr. GREEN of Texas, Mr. HALL of Texas, Ms. JACKSON-LEE of Texas, Mr. LAMPSON, Mr. RODRIGUEZ, Mr. SANDLIN, Mr. STENHOLM, Mr. TURNER, Mr. BATEMAN, Mr. BOUCHER, Mr. GOODE, Mr. PICKETT, Mr. SISISKY, Mr. WOLF, Mr. BLILEY, Mr. SCOTT, Mr. SANDERS, Mr. MOLLOHAN, Mr. RAHALL, and Mr. WISE) introduced the following bill; which was referred to the Committee on the Judiciary
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A BILL
To reauthorize, and modify the conditions for, the consent of Congress to the Northeast Interstate Dairy Compact and to grant the consent of Congress to the Southern Dairy Compact.

    Resolved by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
    This Act may be cited as the ''Dairy Consumers and Producers Protection Act''.
TITLE I—NORTHEAST INTERSTATE DAIRY COMPACT
SEC. 101. NORTHEAST INTERSTATE DAIRY COMPACT.
    Section 147 of the Agricultural Market Transition Act (7 U.S.C. 7256) is amended—
    (1) in the matter preceding paragraph (1), by striking ''Massachusetts, New Hampshire,'' and inserting ''Maryland, Massachusetts, New Hampshire, New Jersey, New York,'';
    (2) by striking paragraphs (1), (3), and (7);
    (3) in paragraph (4), by striking ''Delaware, New Jersey, New York, Pennsylvania, Maryland, and Virginia'' and inserting ''Delaware, Ohio, and Pennsylvania'';
    (4) in paragraph (5), by striking ''the projected rate of increase'' and all that follows through ''Secretary'' and inserting ''the operation of the Compact price regulation during the fiscal year, as determined by the Secretary (in consultation with the Commission) using notice and comment procedures provided in section 553 of title 5, United States Code''; and
    (5) by redesignating paragraphs (2), (4), (5), and (6) as paragraphs (1), (2), (3), and (4), respectively.
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TITLE II—SOUTHERN DAIRY COMPACT
SEC. 201. CONGRESSIONAL CONSENT TO SOUTHERN DAIRY COMPACT.
    (a) IN GENERAL.—Congress consents to the Southern Dairy Compact entered into among the States of Alabama, Arkansas, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia, subject to the following conditions:
    (1) LIMITATION OF MANUFACTURING PRICE REGULATION.—The Southern Dairy Compact Commission may not regulate Class II, Class III, or Class III–A milk used for manufacturing purposes or any other milk, other than Class I, or fluid milk, as defined by a Federal milk marketing order issued under section 8c of the Agricultural Adjustment Act (7 U.S.C. 608c), reenacted with amendments by the Agricultural Marketing Act of 1937 (referred to in this title as ''Federal milk marketing order'') unless Congress has first consented to and approved such authority by a law enacted after the date of enactment of this joint resolution.
    (2) ADDITIONAL STATES.—Florida, Georgia, Kansas, Missouri, Oklahoma, and Texas are the only additional States that may join the Southern Dairy Compact, individually or otherwise.
    (3) COMPENSATION OF COMMODITY CREDIT CORPORATION.—Before the end of each fiscal year in which a Compact price regulation is in effect, the Southern Dairy Compact Commission shall compensate the Commodity Credit Corporation for the cost of any purchases of milk and milk products by the Corporation that result from the operation of the Compact price regulation during the fiscal year, as determined by the Secretary (in consultation with the Commission) using notice and comment procedures provided in section 553 of title 5, United States Code.
    (4) MILK MARKETING ORDER ADMINISTRATOR.—At the request of the Southern Dairy Compact Commission, the Administrator of the applicable Federal milk marketing order shall provide technical assistance to the Compact Commission and be compensated for that assistance.
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    (b) COMPACT.—The Southern Dairy Compact is substantially as follows:

''ARTICLE I. STATEMENT OF PURPOSE, FINDINGS AND DECLARATION OF POLICY
''§1. STATEMENT OF PURPOSE, FINDINGS AND DECLARATION OF POLICY
    ''The purpose of this compact is to recognize the interstate character of the southern dairy industry and the prerogative of the states under the United States Constitution to form an interstate commission for the southern region. The mission of the commission is to take such steps as are necessary to assure the continued viability of dairy farming in the south, and to assure consumers of an adequate, local supply of pure and wholesome milk.
    ''The participating states find and declare that the dairy industry is an essential agricultural activity of the south. Dairy farms, and associated suppliers, marketers, processors and retailers are an integral component of the region's economy. Their ability to provide a stable, local supply of pure, wholesome milk is a matter of great importance to the health and welfare of the region.
    ''The participating states further find that dairy farms are essential and they are an integral part of the region's rural communities. The farms preserve land for agricultural purposes and provide needed economic stimuli for rural communities.
    ''In establishing their constitutional regulatory authority over the region's fluid milk market by this compact, the participating states declare their purpose that this compact neither displace the federal order system nor encourage the merging of federal orders. Specific provisions of the compact itself set forth this basic principle.
    ''Designed as a flexible mechanism able to adjust to changes in a regulated marketplace, the compact also contains a contingency provision should the federal order system be discontinued. In that event, the interstate commission is authorized to regulate the marketplace in replacement of the order system. This contingent authority does not anticipate such a change, however, and should not be so construed. It is only provided should developments in the market other than establishment of this compact result in discontinuance of the order system.
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    ''By entering into this compact, the participating states affirm that their ability to regulate the price which southern dairy farmers receive for their product is essential to the public interest. Assurance of a fair and equitable price for dairy farmers ensures their ability to provide milk to the market and the vitality of the southern dairy industry, with all the associated benefits.
    ''Recent, dramatic price fluctuations, with a pronounced downward trend, threaten the viability and stability of the southern dairy region. Historically, individual state regulatory action had been an effective emergency remedy available to farmers confronting a distressed market. The federal order system, implemented by the Agricultural Marketing Agreement Act of 1937, establishes only minimum prices paid to producers for raw milk, without preempting the power of states to regulate milk prices above the minimum levels so established.
    ''In today's regional dairy marketplace, cooperative, rather than individual state action is needed to more effectively address the market disarray. Under our constitutional system, properly authorized states acting cooperatively may exercise more power to regulate interstate commerce than they may assert individually without such authority. For this reason, the participating states invoke their authority to act in common agreement, with the consent of Congress, under the compact clause of the Constitution.

''ARTICLE II. DEFINITIONS AND RULES OF CONSTRUCTION
''§2. DEFINITIONS
    ''For the purposes of this compact, and of any supplemental or concurring legislation enacted pursuant thereto, except as may be otherwise required by the context:
    ''(1) 'Class I milk' means milk disposed of in fluid form or as a fluid milk product, subject to further definition in accordance with the principles expressed in subdivision (b) of section three.
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    ''(2) 'Commission' means the Southern Dairy Compact Commission established by this compact.
    ''(3) 'Commission marketing order' means regulations adopted by the commission pursuant to sections nine and ten of this compact in place of a terminated federal marketing order or state dairy regulation. Such order may apply throughout the region or in any part or parts thereof as defined in the regulations of the commission. Such order may establish minimum prices for any or all classes of milk.
    ''(4) 'Compact' means this interstate compact.
    ''(5) 'Compact over-order price' means a minimum price required to be paid to producers for Class I milk established by the commission in regulations adopted pursuant to sections nine and ten of this compact, which is above the price established in federal marketing orders or by state farm price regulations in the regulated area. Such price may apply throughout the region or in any part or parts thereof as defined in the regulations of the commission.

    ''(6) 'Milk' means the lacteral secretion of cows and includes all skim, butterfat, or other constituents obtained from separation or any other process. The term is used in its broadest sense and may be further defined by the commission for regulatory purposes.
    ''(7) 'Partially regulated plant' means a milk plant not located in a regulated area but having Class I distribution within such area. Commission regulations may exempt plants having such distribution or receipts in amounts less than the limits defined therein.
    ''(8) 'Participating state' means a state which has become a party to this compact by the enactment of concurring legislation.
    ''(9) 'Pool plant' means any milk plant located in a regulated area.
    ''(10) 'Region' means the territorial limits of the states which are parties to this compact.
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    ''(11) 'Regulated area' means any area within the region governed by and defined in regulations establishing a compact over-order price or commission marketing order.

    ''(12) 'State dairy regulation' means any state regulation of dairy prices, and associated assessments, whether by statute, marketing order or otherwise.
''§3. RULES OF CONSTRUCTION
    ''(a) This compact shall not be construed to displace existing federal milk marketing orders or state dairy regulation in the region but to supplement them. In the event some or all federal orders in the region are discontinued, the compact shall be construed to provide the commission the option to replace them with one or more commission marketing orders pursuant to this compact.
    ''(b) The compact shall be construed liberally in order to achieve the purposes and intent enunciated in section one. It is the intent of this compact to establish a basic structure by which the commission may achieve those purposes through the application, adaptation and development of the regulatory techniques historically associated with milk marketing and to afford the commission broad flexibility to devise regulatory mechanisms to achieve the purposes of this compact. In accordance with this intent, the technical terms which are associated with market order regulation and which have acquired commonly understood general meanings are not defined herein but the commission may further define the terms used in this compact and develop additional concepts and define additional terms as it may find appropriate to achieve its purposes.

''ARTICLE III. COMMISSION ESTABLISHED
''§4. COMMISSION ESTABLISHED
    ''There is hereby created a commission to administer the compact, composed of delegations from each state in the region. The commission shall be known as the Southern Dairy Compact Commission. A delegation shall include not less than three nor more than five persons. Each delegation shall include at least one dairy farmer who is engaged in the production of milk at the time of appointment or reappointment, and one consumer representative. Delegation members shall be residents and voters of, and subject to such confirmation process as is provided for in the appointing state. Delegation members shall serve no more than three consecutive terms with no single term of more than four years, and be subject to removal for cause. In all other respects, delegation members shall serve in accordance with the laws of the state represented. The compensation, if any, of the members of a state delegation shall be determined and paid by each state, but their expenses shall be paid by the commission.
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''§5. VOTING REQUIREMENTS
    ''All actions taken by the commission, except for the establishment or termination of an over-order price or commission marketing order, and the adoption, amendment or rescission of the commission's by-laws, shall be by majority vote of the delegations present. Each state delegation shall be entitled to one vote in the conduct of the commission's affairs. Establishment or termination of an over-order price or commission marketing order shall require at least a two-thirds vote of the delegations present. The establishment of a regulated area which covers all or part of a participating state shall require also the affirmative vote of that state's delegation. A majority of the delegations from the participating states shall constitute a quorum for the conduct of the commission's business.
''§6. ADMINISTRATION AND MANAGEMENT
    ''(a) The commission shall elect annually from among the members of the participating state delegations a chairperson, a vice-chairperson, and a treasurer. The commission shall appoint an executive director and fix his or her duties and compensation. The executive director shall serve at the pleasure of the commission, and together with the treasurer, shall be bonded in an amount determined by the commission. The commission may establish through its by-laws an executive committee composed of one member elected by each delegation.
    ''(b) The commission shall adopt by-laws for the conduct of its business by a two-thirds vote, and shall have the power by the same vote to amend and rescind these by-laws. The commission shall publish its by-laws in convenient form with the appropriate agency or officer in each of the participating states. The by-laws shall provide for appropriate notice to the delegations of all commission meetings and hearings and of the business to be transacted at such meetings or hearings. Notice also shall be given to other agencies or officers of participating states as provided by the laws of those states.

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    ''(c) The commission shall file an annual report with the Secretary of Agriculture of the United States, and with each of the participating states by submitting copies to the governor, both houses of the legislature, and the head of the state department having responsibilities for agriculture.
    ''(d) In addition to the powers and duties elsewhere prescribed in this compact, the commission shall have the power:
    ''(1) To sue and be sued in any state or federal court;
    ''(2) To have a seal and alter the same at pleasure;
    ''(3) To acquire, hold, and dispose of real and personal property by gift, purchase, lease, license, or other similar manner, for its corporate purposes;

    ''(4) To borrow money and issue notes, to provide for the rights of the holders thereof and to pledge the revenue of the commission as security therefor, subject to the provisions of section eighteen of this compact;
    ''(5) To appoint such officers, agents, and employees as it may deem necessary, prescribe their powers, duties and qualifications; and
    ''(6) To create and abolish such offices, employments and positions as it deems necessary for the purposes of the compact and provide for the removal, term, tenure, compensation, fringe benefits, pension, and retirement rights of its officers and employees. The commission may also retain personal services on a contract basis.
''§7. RULEMAKING POWER
    ''In addition to the power to promulgate a compact over-order price or commission marketing orders as provided by this compact, the commission is further empowered to make and enforce such additional rules and regulations as it deems necessary to implement any provisions of this compact, or to effectuate in any other respect the purposes of this compact.
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''ARTICLE IV. POWERS OF THE COMMISSION
''§8. POWERS TO PROMOTE REGULATORY UNIFORMITY, SIMPLICITY, AND INTERSTATE COOPERATION
    ''The commission is hereby empowered to:
    ''(1) Investigate or provide for investigations or research projects designed to review the existing laws and regulations of the participating states, to consider their administration and costs, to measure their impact on the production and marketing of milk and their effects on the shipment of milk and milk products within the region.
    ''(2) Study and recommend to the participating states joint or cooperative programs for the administration of the dairy marketing laws and regulations and to prepare estimates of cost savings and benefits of such programs.
    ''(3) Encourage the harmonious relationships between the various elements in the industry for the solution of their material problems. Conduct symposia or conferences designed to improve industry relations, or a better understanding of problems.
    ''(4) Prepare and release periodic reports on activities and results of the commission's efforts to the participating states.
    ''(5) Review the existing marketing system for milk and milk products and recommend changes in the existing structure for assembly and distribution of milk which may assist, improve or promote more efficient assembly and distribution of milk.
    ''(6) Investigate costs and charges for producing, hauling, handling, processing, distributing, selling and for all other services performed with respect to milk.
    ''(7) Examine current economic forces affecting producers, probable trends in production and consumption, the level of dairy farm prices in relation to costs, the financial conditions of dairy farmers, and the need for an emergency order to relieve critical conditions on dairy farms.

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''§9. EQUITABLE FARM PRICES
    ''(a) The powers granted in this section and section ten shall apply only to the establishment of a compact over-order price, so long as federal milk marketing orders remain in effect in the region. In the event that any or all such orders are terminated, this article shall authorize the commission to establish one or more commission marketing orders, as herein provided, in the region or parts thereof as defined in the order.
    ''(b) A compact over-order price established pursuant to this section shall apply only to Class I milk. Such compact over-order price shall not exceed one dollar and fifty cents per gallon at Atlanta, Ga., however, this compact over-order price shall be adjusted upward or downward at other locations in the region to reflect differences in minimum federal order prices. Beginning in nineteen hundred ninety, and using that year as a base, the foregoing one dollar fifty cents per gallon maximum shall be adjusted annually by the rate of change in the Consumer Price Index as reported by the Bureau of Labor Statistics of the United States Department of Labor. For purposes of the pooling and equalization of an over-order price, the value of milk used in other use classifications shall be calculated at the appropriate class price established pursuant to the applicable federal order or state dairy regulation and the value of unregulated milk shall be calculated in relation to the nearest prevailing class price in accordance with and subject to such adjustments as the commission may prescribe in regulations.

    ''(c) A commission marketing order shall apply to all classes and uses of milk.
    ''(d) The commission is hereby empowered to establish a compact over-order price for milk to be paid by pool plants and partially regulated plants. The commission is also empowered to establish a compact over-order price to be paid by all other handlers receiving milk from producers located in a regulated area. This price shall be established either as a compact over-order price or by one or more commission marketing orders. Whenever such a price has been established by either type of regulation, the legal obligation to pay such price shall be determined solely by the terms and purpose of the regulation without regard to the situs of the transfer of title, possession or any other factors not related to the purposes of the regulation and this compact. Producer-handlers as defined in an applicable federal market order shall not be subject to a compact over-order price. The commission shall provide for similar treatment of producer-handlers under commission marketing orders.
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    ''(e) In determining the price, the commission shall consider the balance between production and consumption of milk and milk products in the regulated area, the costs of production including, but not limited to the price of feed, the cost of labor including the reasonable value of the producer's own labor and management, machinery expense, and interest expense, the prevailing price for milk outside the regulated area, the purchasing power of the public and the price necessary to yield a reasonable return to the producer and distributor.

    ''(f) When establishing a compact over-order price, the commission shall take such other action as is necessary and feasible to help ensure that the over-order price does not cause or compensate producers so as to generate local production of milk in excess of those quantities necessary to assure consumers of an adequate supply for fluid purposes.
    ''(g) The commission shall whenever possible enter into agreements with state or federal agencies for exchange of information or services for the purpose of reducing regulatory burden and cost of administering the compact. The commission may reimburse other agencies for the reasonable cost of providing these services.
''§10. OPTIONAL PROVISIONS FOR PRICING ORDER
    ''Regulations establishing a compact over-order price or a commission marketing order may contain, but shall not be limited to any of the following:
    ''(1) Provisions classifying milk in accordance with the form in which or purpose for which it is used, or creating a flat pricing program.
    ''(2) With respect to a commission marketing order only, provisions establishing or providing a method for establishing separate minimum prices for each use classification prescribed by the commission, or a single minimum price for milk purchased from producers or associations of producers.
    ''(3) With respect to an over-order minimum price, provisions establishing or providing a method for establishing such minimum price for Class I milk.
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    ''(4) Provisions for establishing either an over-order price or a commission marketing order may make use of any reasonable method for establishing such price or prices including flat pricing and formula pricing. Provision may also be made for location adjustments, zone differentials and for competitive credits with respect to regulated handlers who market outside the regulated area.
    ''(5) Provisions for the payment to all producers and associations of producers delivering milk to all handlers of uniform prices for all milk so delivered, irrespective of the uses made of such milk by the individual handler to whom it is delivered, or for the payment of producers delivering milk to the same handler of uniform prices for all milk delivered by them.
    ''(A) With respect to regulations establishing a compact over-order price, the commission may establish one equalization pool within the regulated area for the sole purpose of equalizing returns to producers throughout the regulated area.
    ''(B) With respect to any commission marketing order, as defined in section two, subdivision three, which replaces one or more terminated federal orders or state dairy regulations, the marketing area of now separate state or federal orders shall not be merged without the affirmative consent of each state, voting through its delegation, which is partly or wholly included within any such new marketing area.

    ''(6) Provisions requiring persons who bring Class I milk into the regulated area to make compensatory payments with respect to all such milk to the extent necessary to equalize the cost of milk purchased by handlers subject to a compact over-order price or commission marketing order. No such provisions shall discriminate against milk producers outside the regulated area. The provisions for compensatory payments may require payment of the difference between the Class I price required to be paid for such milk in the state of production by a federal milk marketing order or state dairy regulation and the Class I price established by the compact over-order price or commission marketing order.
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    ''(7) Provisions specially governing the pricing and pooling of milk handled by partially regulated plants.
    ''(8) Provisions requiring that the account of any person regulated under the compact over-order price shall be adjusted for any payments made to or received by such persons with respect to a producer settlement fund of any federal or state milk marketing order or other state dairy regulation within the regulated area.
    ''(9) Provision requiring the payment by handlers of an assessment to cover the costs of the administration and enforcement of such order pursuant to Article VII, Section 18(a).
    ''(10) Provisions for reimbursement to participants of the Women, Infants and Children Special Supplemental Food Program of the United States Child Nutrition Act of 1966.
    ''(11) Other provisions and requirements as the commission may find are necessary or appropriate to effectuate the purposes of this compact and to provide for the payment of fair and equitable minimum prices to producers.
''ARTICLE V. RULEMAKING PROCEDURE
''§11. RULEMAKING PROCEDURE
    ''Before promulgation of any regulations establishing a compact over-order price or commission marketing order, including any provision with respect to milk supply under subsection 9(f), or amendment thereof, as provided in Article IV, the commission shall conduct an informal rulemaking proceeding to provide interested persons with an opportunity to present data and views. Such rulemaking proceeding shall be governed by section four of the Federal Administrative Procedure Act, as amended (5 U.S.C. §553). In addition, the commission shall, to the extent practicable, publish notice of rulemaking proceedings in the official register of each participating state. Before the initial adoption of regulations establishing a compact over-order price or a commission marketing order and thereafter before any amendment with regard to prices or assessments, the commission shall hold a public hearing. The commission may commence a rulemaking proceeding on its own initiative or may in its sole discretion act upon the petition of any person including individual milk producers, any organization of milk producers or handlers, general farm organizations, consumer or public interest groups, and local, state or federal officials.
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''§12. FINDINGS AND REFERENDUM
    ''(a) In addition to the concise general statement of basis and purpose required by section 4(b) of the Federal Administrative Procedure Act, as amended (5 U.S.C. §553(c)), the commission shall make findings of fact with respect to:
    ''(1) Whether the public interest will be served by the establishment of minimum milk prices to dairy farmers under Article IV.
    ''(2) What level of prices will assure that producers receive a price sufficient to cover their costs of production and will elicit an adequate supply of milk for the inhabitants of the regulated area and for manufacturing purposes.

    ''(3) Whether the major provisions of the order, other than those fixing minimum milk prices, are in the public interest and are reasonably designed to achieve the purposes of the order.
    ''(4) Whether the terms of the proposed regional order or amendment are approved by producers as provided in section thirteen.
''§13. PRODUCER REFERENDUM
    ''(a) For the purpose of ascertaining whether the issuance or amendment of regulations establishing a compact over-order price or a commission marketing order, including any provision with respect to milk supply under subsection 9(f), is approved by producers, the commission shall conduct a referendum among producers. The referendum shall be held in a timely manner, as determined by regulation of the commission. The terms and conditions of the proposed order or amendment shall be described by the commission in the ballot used in the conduct of the referendum, but the nature, content, or extent of such description shall not be a basis for attacking the legality of the order or any action relating thereto.
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    ''(b) An order or amendment shall be deemed approved by producers if the commission determines that it is approved by at least two-thirds of the voting producers who, during a representative period determined by the commission, have been engaged in the production of milk the price of which would be regulated under the proposed order or amendment.
    ''(c) For purposes of any referendum, the commission shall consider the approval or disapproval by any cooperative association of producers, qualified under the provisions of the Act of Congress of February 18, 1922, as amended, known as the Capper-Volstead Act, bona fide engaged in marketing milk, or in rendering services for or advancing the interests of producers of such commodity, as the approval or disapproval of the producers who are members or stockholders in, or under contract with, such cooperative association of producers, except as provided in subdivision (1) hereof and subject to the provisions of subdivision (2) through (5) hereof.
    ''(1) No cooperative which has been formed to act as a common marketing agency for both cooperatives and individual producers shall be qualified to block vote for either.
    ''(2) Any cooperative which is qualified to block vote shall, before submitting its approval or disapproval in any referendum, give prior written notice to each of its members as to whether and how it intends to cast its vote. The notice shall be given in a timely manner as established, and in the form prescribed, by the commission.
    ''(3) Any producer may obtain a ballot from the commission in order to register approval or disapproval of the proposed order.
    ''(4) A producer who is a member of a cooperative which has provided notice of its intent to approve or not to approve a proposed order, and who obtains a ballot and with such ballot expresses his approval or disapproval of the proposed order, shall notify the commission as to the name of the cooperative of which he or she is a member, and the commission shall remove such producer's name from the list certified by such cooperative with its corporate vote.
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    ''(5) In order to insure that all milk producers are informed regarding the proposed order, the commission shall notify all milk producers that an order is being considered and that each producer may register his approval or disapproval with the commission either directly or through his or her cooperative.
''§14. TERMINATION OF OVER-ORDER PRICE OR MARKETING ORDER
    ''(a) The commission shall terminate any regulations establishing an over-order price or commission marketing order issued under this article whenever it finds that such order or price obstructs or does not tend to effectuate the declared policy of this compact.
    ''(b) The commission shall terminate any regulations establishing an over-order price or a commission marketing order issued under this article whenever it finds that such termination is favored by a majority of the producers who, during a representative period determined by the commission, have been engaged in the production of milk the price of which is regulated by such order; but such termination shall be effective only if announced on or before such date as may be specified in such marketing agreement or order.

    ''(c) The termination or suspension of any order or provision thereof, shall not be considered an order within the meaning of this article and shall require no hearing, but shall comply with the requirements for informal rulemaking prescribed by section four of the Federal Administrative Procedure Act, as amended (5 U.S.C. §553).

''ARTICLE VI. ENFORCEMENT
''§15. RECORDS; REPORTS; ACCESS TO PREMISES
    ''(a) The commission may by rule and regulation prescribe record keeping and reporting requirements for all regulated persons. For purposes of the administration and enforcement of this compact, the commission is authorized to examine the books and records of any regulated person relating to his or her milk business and for that purpose, the commission's properly designated officers, employees, or agents shall have full access during normal business hours to the premises and records of all regulated persons.
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    ''(b) Information furnished to or acquired by the commission officers, employees, or its agents pursuant to this section shall be confidential and not subject to disclosure except to the extent that the commission deems disclosure to be necessary in any administrative or judicial proceeding involving the administration or enforcement of this compact, an over-order price, a compact marketing order, or other regulations of the commission. The commission may promulgate regulations further defining the confidentiality of information pursuant to this section. Nothing in this section shall be deemed to prohibit (i) the issuance of general statements based upon the reports of a number of handlers, which do not identify the information furnished by any person, or (ii) the publication by direction of the commission of the name of any person violating any regulation of the commission, together with a statement of the particular provisions violated by such person.
    ''(c) No officer, employee, or agent of the commission shall intentionally disclose information, by inference or otherwise, which is made confidential pursuant to this section. Any person violating the provisions of this section shall, upon conviction, be subject to a fine of not more than one thousand dollars or to imprisonment for not more than one year, or to both, and shall be removed from office. The commission shall refer any allegation of a violation of this section to the appropriate state enforcement authority or United States Attorney.
''§16. SUBPOENA; HEARINGS AND JUDICIAL REVIEW
    ''(a) The commission is hereby authorized and empowered by its members and its properly designated officers to administer oaths and issue subpoenas throughout all signatory states to compel the attendance of witnesses and the giving of testimony and the production of other evidence.
    ''(b) Any handler subject to an order may file a written petition with the commission stating that any such order or any provision of any such order or any obligation imposed in connection therewith is not in accordance with law and praying for a modification thereof or to be exempted therefrom. He shall thereupon be given an opportunity for a hearing upon such petition, in accordance with regulations made by the commission. After such hearing, the commission shall make a ruling upon the prayer of such petition which shall be final, if in accordance with law.
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    ''(c) The district courts of the United States in any district in which such handler is an inhabitant, or has his principal place of business, are hereby vested with jurisdiction to review such ruling, provided a complaint for that purpose is filed within thirty days from the date of the entry of such ruling. Service of process in such proceedings may be had upon the commission by delivering to it a copy of the complaint. If the court determines that such ruling is not in accordance with law, it shall remand such proceedings to the commission with directions either (1) to make such ruling as the court shall determine to be in accordance with law, or (2) to take such further proceedings as, in its opinion, the law requires. The pendency of proceedings instituted pursuant to this subdivision shall not impede, hinder, or delay the commission from obtaining relief pursuant to section seventeen. Any proceedings brought pursuant to section seventeen, except where brought by way of counterclaim in proceedings instituted pursuant to this section, shall abate whenever a final decree has been rendered in proceedings between the same parties, and covering the same subject matter, instituted pursuant to this section.
''§17. ENFORCEMENT WITH RESPECT TO HANDLERS
    ''(a) Any violation by a handler of the provisions of regulations establishing an over-order price or a commission marketing order, or other regulations adopted pursuant to this compact shall:
    ''(1) Constitute a violation of the laws of each of the signatory states. Such violation shall render the violator subject to a civil penalty in an amount as may be prescribed by the laws of each of the participating states, recoverable in any state or federal court of competent jurisdiction. Each day such violation continues shall constitute a separate violation.
    ''(2) Constitute grounds for the revocation of license or permit to engage in the milk business under the applicable laws of the participating states.
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    ''(b) With respect to handlers, the commission shall enforce the provisions of this compact, regulations establishing an over-order price, a commission marketing order or other regulations adopted hereunder by:
    ''(1) Commencing an action for legal or equitable relief brought in the name of the commission of any state or federal court of competent jurisdiction; or

    ''(2) Referral to the state agency for enforcement by judicial or administrative remedy with the agreement of the appropriate state agency of a participating state.
    ''(c) With respect to handlers, the commission may bring an action for injunction to enforce the provisions of this compact or the order or regulations adopted thereunder without being compelled to allege or prove that an adequate remedy of law does not exist.
''ARTICLE VII. FINANCE
''§18. FINANCE OF START-UP AND REGULAR COSTS
    ''(a) To provide for its start-up costs, the commission may borrow money pursuant to its general power under section six, subdivision (d), paragraph four. In order to finance the costs of administration and enforcement of this compact, including payback of start-up costs, the commission is hereby empowered to collect an assessment from each handler who purchases milk from producers within the region. If imposed, this assessment shall be collected on a monthly basis for up to one year from the date the commission convenes, in an amount not to exceed $.015 per hundredweight of milk purchased from producers during the period of the assessment. The initial assessment may apply to the projected purchases of handlers for the two-month period following the date the commission convenes. In addition, if regulations establishing an over-order price or a compact marketing order are adopted, they may include an assessment for the specific purpose of their administration. These regulations shall provide for establishment of a reserve for the commission's ongoing operating expenses.
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    ''(b) The commission shall not pledge the credit of any participating state or of the United States. Notes issued by the commission and all other financial obligations incurred by it, shall be its sole responsibility and no participating state or the United States shall be liable therefor.
''§19. AUDIT AND ACCOUNTS
    ''(a) The commission shall keep accurate accounts of all receipts and disbursements, which shall be subject to the audit and accounting procedures established under its rules. In addition, all receipts and disbursements of funds handled by the commission shall be audited yearly by a qualified public accountant and the report of the audit shall be included in and become part of the annual report of the commission.
    ''(b) The accounts of the commission shall be open at any reasonable time for inspection by duly constituted officers of the participating states and by any persons authorized by the commission.
    ''(c) Nothing contained in this article shall be construed to prevent commission compliance with laws relating to audit or inspection of accounts by or on behalf of any participating state or of the United States.
''ARTICLE VIII. ENTRY INTO FORCE; ADDITIONAL MEMBERS AND WITHDRAWAL
''§20. ENTRY INTO FORCE; ADDITIONAL MEMBERS
    ''The compact shall enter into force effective when enacted into law by any three states of the group of states composed of Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia and West Virginia and when the consent of Congress has been obtained.
''§21. WITHDRAWAL FROM COMPACT
    ''Any participating state may withdraw from this compact by enacting a statute repealing the same, but no such withdrawal shall take effect until one year after notice in writing of the withdrawal is given to the commission and the governors of all other participating states. No withdrawal shall affect any liability already incurred by or chargeable to a participating state prior to the time of such withdrawal.
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''§22. SEVERABILITY
    ''If any part or provision of this compact is adjudged invalid by any court, such judgment shall be confined in its operation to the part or provision directly involved in the controversy in which such judgment shall have been rendered and shall not affect or impair the validity of the remainder of this compact. In the event Congress consents to this compact subject to conditions, said conditions shall not impair the validity of this compact when said conditions are accepted by three or more compacting states. A compacting state may accept the conditions of Congress by implementation of this compact.''.
SEC. 202. RESERVATION OF RIGHTS.
    The right to alter, amend, or repeal this title is reserved.

    Mr. NADLER. Thank you, Mr. Chairman.

    Mr. GEKAS. We will render one exception to the statement by the Chair that opening statements will be restricted to the gentleman from New York, because Ms. Baldwin of Wisconsin has a unique—of course, we all have unique—interest in this subject matter, but since the lady has prevailed upon the Chair for an opening statement, I will succumb to her entreaties. The lady is recognized.

    Ms. BALDWIN. Thank you, Mr. Chairman.

    I want to begin by commending you for holding a hearing on the bill before us today. Allow me to state for the record that I am a co-sponsor and strong supporter of H.R. 744, introduced by the gentleman from Wisconsin, a bill that would end the destructive Northeast Interstate Dairy Compact.
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    [The bill, H.R. 744, follows:]

106TH CONGRESS
    1ST SESSION
  H. R. 744
To rescind the consent of Congress to the Northeast Interstate Dairy Compact.
     
IN THE HOUSE OF REPRESENTATIVES
FEBRUARY 11, 1999
Mr. SENSENBRENNER (for himself, Mr. OBEY, Mr. KIND, Mr. GREEN of Wisconsin, Mr. STUPAK, Mr. RAMSTAD, Mr. OBERSTAR, Mr. VENTO, Mr. MINGE, Ms. BALDWIN, Mr. LUTHER, Mr. BARRETT of Wisconsin, Mr. RYAN of Wisconsin, Mr. POMEROY, Mr. PETRI, Mr. FRANK of Massachusetts, Mr. GOODLATTE, Mr. GUTKNECHT, Mr. KLECZKA, Mr. MANZULLO, and Mr. SESSIONS) introduced the following bill; which was referred to the Committee on the Judiciary
     
A BILL
To rescind the consent of Congress to the Northeast Interstate Dairy Compact.

    Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. CONGRESSIONAL RESCISSION OF NORTHEAST INTERSTATE DAIRY COMPACT.
    (a) FINDINGS.—Congress finds the following:
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    (1) In section 147 of the Agricultural Market Transition Act (title I of Public Law 104–127; 7 U.S.C. 7256), Congress gave conditional consent to the Northeast Interstate Dairy Compact entered into among the States of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont, as specified in section 1(b) of Senate Joint Resolution 28 of the 104th Congress (as placed on the calendar of the Senate).
    (2) In section 22 of the Northeast Interstate Dairy Compact, Congress expressly reserved the right to amend or rescind the Northeast Interstate Dairy Compact at any time.
    (b) RESCISSION.—Pursuant to the reservation of authority referred to in subsection (a)(2), Congress hereby rescinds its consent to the Northeast Interstate Dairy Compact entered into among the States of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont.
    (c) CONFORMING AMENDMENT.—Section 147 of the Agricultural Market Transition Act (title I of Public Law 104–127; 7 U.S.C. 7256) is repealed.
    (d) EFFECTIVE DATE.—This section and the amendment made by this section shall take effect on the date of the enactment of this Act.

    Ms. BALDWIN. Some people may think this hearing is about how much a gallon of milk costs consumers, but the impact of dairy compacts reaches much further than that. This hearing is about whether the United States Congress will continue to ban free trade between the States, upset the national markets, and force thousands of hardworking Wisconsin dairy farmers out of business because their hands are tied. The compact makes it impossible to compete fairly.

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    Mr. Chairman, a bit of history: the Articles of the Confederation were ratified to form our Nation out of 13 colonies, but by 1787, it was clear that the articles were weak, and so the Constitutional Convention created what is now our Constitution. What made the Articles of Confederation weak? Well, the States were enacting tariffs on each other impeding the free flow of commerce, and I believe that the dairy compacts we are discussing today are very much like the situation we had before our Constitution was established to create a more perfect Union.

    In the Constitution, the Framers allowed for compacts if Congress consents to them. It is unclear whether Congress consented to the creation of the Northeast Dairy Compact. In fact, the opposite may be true. Neither the House nor Senate versions of the 1996 farm bill contained the dairy compact. The Senate Agriculture Committee placed the compact language in their reported version, but the compact was stripped out on the Senate floor by a recorded vote. However, when the farm bill came out of conference, legislative magic had occurred. The compact language had reappeared. Congressional consent? Not exactly.

    Mr. Chairman, Wisconsin dairy producers are known around the world for their proficient milk production, but even their expertise and efficiency cannot counter the harmful effects of dairy compacts. The harm the Northeast Dairy Compact creates in conjunction with Federal Milk Marketing Orders, which give Wisconsin farmers the lowest price for their product compared to the rest of the Nation, pushes my dairy farming constituents out of business. Wisconsin now leads the country in dairy farm losses, literally losing 7,000 family farms over the past 6 years.

    I find much of the support for dairy compacts ironic. Congress, in recent years, has enacted trade legislation that, for the most part, eases trade restrictions and lowers tariffs on trade with other countries yet we are, today, debating whether we should continue and even expand what is effectively trade barriers between the States. If we are going to have free trade between countries, why can't we have free trade between States?
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    Mr. Chairman, I would like to yield the balance of my time to the gentleman from Wisconsin, Mr. Sensenbrenner.

    Mr. SENSENBRENNER. I thank the gentlewoman for yielding to me. I have a rather lengthy statement in support of my bill to allow the Northeast Dairy Compact to be rescinded immediately. I did not ask to be a witness at today's hearing simply because of the length of the hearing and the number of witnesses that have come from all over the country, but let me associate myself with the remarks of the gentlewoman from Wisconsin, Ms. Baldwin, and say that one of the reasons why the Articles of Confederation failed and the Constitution was written in 1787 was because of all of the barriers to free trade amongst the new 13 independent States of the United States of America, and the major centralization of power in the Federal Government was the Commerce Clause that gave the Congress the exclusive right to regulate interstate commerce and also gave the Congress the requirement to ratify interstate compacts prior to their becoming effective.

    Most interstate compacts in the first 200 years of our country's history were settling border disputes and policing powers, and, to my knowledge, the Northeast Dairy Compact was the first that attempted to go back to the Articles of Confederation stage which limited the economic expansion of the new United States of America, and it is wrong. It impedes free trade; it is anti-consumer in that it artificially raises the price of milk on the shelf in the Northeast States, and I think that it is a terrible precedent which should not be expanded, either geographically or to other areas.

    In the 1993–1994 session of Congress, the Senate did approve the Northeast Dairy Compact. It came over to this committee, which under House rules has got exclusive jurisdiction to consider the ratification of interstate compacts, and was killed here. Then in the 1996 dairy bill, the House never voted on it, because it was obvious that the ratification would have been defeated overwhelmingly. The Senate defeated it by a 50 to 46 roll call vote, and, low and behold, it appeared in the conference report because of the sneaky action by Senator Leahy from Vermont.
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    I think the time has come that we deal with this issue directly; we look at the impact on consumers, and we look at the impact on interstate commerce, which the Constitution gives the Congress the power to regulate. So, I would ask unanimous consent that my lengthy statement, which would have been testimony, be inserted in the record and thank the gentlewoman for yielding.

    Mr. GEKAS. Without objection, the statement will be so included.

    [The prepared statement of Mr. Sensenbrenner follows:]

PREPARED STATEMENT OF HON. F. JAMES SENSENBRENNER, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN

    I would like to thank the Subcommittee Chairman for calling this hearing today to discuss dairy compacts and, in particular, my legislation, H.R. 744, to eliminate the Northeast Interstate Dairy Compact.

    The Founder Fathers were fearful of having too much power concentrated in the hands of the federal government. As a result, they drafted the Articles of Confederation, which allowed the states to control interstate commerce. However, state tariffs severely restricted free trade and held back the economy of the new United States. To replace the insufficient Articles, the Founders drafted the current U.S. Constitution, in which they clearly expressed their desire to implement a national free-market system throughout the United States. This decision provided a vital spark to the economic success of the U.S. that has ensued since the drafting of the Constitution.
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    Incredibly, today, we are discussing the possible expansion of policies that serve to reverse the Founders' efforts to stamp out state protectionism. Dairy compacts erect trade barriers within our borders and create regional cartels that artificially increase the price of milk for producers in the compact region, essentially imposing a ''milk tax'' on consumers. This serves to drive down consumption in the region and reduce prices for farmers outside of the compact area.

    Compacts have never had as their purpose the implementation of protectionist trading policies. It was not until the creation of the Northeast Interstate Dairy Compact that Congress allowed such a compact to exist. Previous compacts had been used to resolve border disputes or create regional policing powers. By breaking ground on an unprecedented application of the Commerce Clause, the Dairy Compact set a dangerous precedent for regional pricing schemes that threaten the very foundation of interstate commerce and the free-market economy that our Founders created.

    The benefits of dairy compacts are illusory. According to the International Dairy Foods Association, one year after the Northeast Interstate Dairy Compact went into effect, dairy farms in the region went out of business 41% faster than they had in the two previous years. Most of the dividends from the ''milk tax'' go to already successful, large-scale producers. Dairy compacts do little or nothing to inhibit the continued loss of small family farms.

    Compacts are harmful to consumers. An OMB report found that the retail price of milk in Boston rose 8% and packaged milk sales dropped nearly 1% since the implementation of the Compact. The price hikes are especially costly to low-income consumers and school districts that must spend millions of dollars every year to provide milk to their students.
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    For the sake of consumers in New England and farmers across the country, and true to the intent of our Founders, Congress should eliminate this protectionist compact immediately.

    Mr. WATT. Mr. Chairman?

    Mr. GEKAS. The time has come—yes, the gentleman from North Carolina?

    Mr. WATT. Thank you, Mr. Chairman. As a co-sponsor of H.R. 1604, I might be inclined to ask for equal time, but I won't do that. I am seeking recognition simply for the purpose of asking unanimous consent to offer into the record a copy of a letter from the commissioner of agriculture from the State of North Carolina, Jim Graham, and a copy of a letter from the Governor of North Carolina, Jim Hunt, in support of H.R. 1604 and in opposition to H.R. 744, and that might give some people an indication of where I stand on this issue.

    Mr. GEKAS. Without objection, the statements and letters will be made a part of the record.

    [The information referred to follows:]

63851a.eps

63851b.eps
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State of North Carolina,
Department of Agriculture,
Raleigh, NC, June 15, 1999.
Hon. JERROLD NADLER,
Committee on the Judiciary,
House of Representatives, Washington, DC.

    DEAR CONGRESSMAN NADLER: The dairy industry in North Carolina and surrounding states is in a very critical situation. We are losing our dairy producers and supporting industries. Consequently, we are becoming more dependent on imported milk supplies and are jeopardizing our ability to meet consumer demands. Our state and neighboring states need the ability to work together to resolve our dairy industry problems. It is my belief that the development of a dairy compact system would provide the mechanics to address these issues. As Commissioner of Agriculture in North Carolina, I strongly encourage you to secure passage of the HR 1604 Dairy Consumer and Producer Protection Act. Consideration of HR 744 is not feasible and will only weaken our ability to address the dairy industry concerns of our region.

    North Carolina and 23 other Commissioners of Agriculture have worked to secure state legislation providing permission to participate in dairy compacts. Several other states are also considering legislation. Only by us working together can we resolve our mutual problems. Our current system of marketing provides no means to address our consumption demands or the shortages that increase daily as our dairy production base shrinks.

    The development of a dairy compact will provide the mechanics for North Carolina and other states to work together on these concerns. This action can be accomplished with no additional governmental expenditures, which is the opposite from current price support and appropriated disaster programs. The development of a dairy compact also compliments the Federal Milk Marketing System. For the first time consumers, producers, processors and retailers would be able to work together to determine a reasonable price and address the problems that effect our region's ability to secure an ample and fresh supply of fluid milk. We currently have no method to address any of these dairy industry issues on a local or regional level.
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    A dairy compact would also provide the mechanics; to stabilize the marketplace and encourage industry development. Without your approval of HR 1604 Dairy Consumer and Producer Protection Act, our dairy industry and supporting industries will perish and our citizens will be held hostage by an antiquated marketing system. The current system discriminates against our regional ability to address our problems and resources to resolve these problems.

    As the North Carolina Commissioner of Agriculture, I strongly encourage you to support and seek quick passage of FIR 1604 Dairy Consumer and Producer Protection Act.

Respectfully,
James A. Graham, Commissioner.


    Mr. GEKAS. The time has come to greet the first set of panelists, and since they both emanate from the great State of Wisconsin, we will, again, yield to the lady from Wisconsin to accord us formal introductions.

    Ms. BALDWIN. Thank you, Mr. Chairman.

    I have the privilege of introducing our two panelists today, elected officials with whom I have served for many years, both of whom have a strong background in the topic before us.

    Senator Russ Feingold is well known to this Congress and the Nation as an advocate for campaign finance reform, government reform, and responsible Federal budgets, but during his years in the Senate, as well as in the Wisconsin State legislature, he was also known as a strong advocate for family farmers. What is equally relevant for this hearing is that Senator Feingold is a member of the Senate Judiciary Subcommittee on the Constitution and has been focusing on the question of dairy compacts and compacts in general for many years. I am delighted to welcome my colleague from Wisconsin and look forward to his testimony.
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    We are also fortunate to have before us the Governor of Wisconsin, Tommy Thompson. Governor Thompson is no stranger to Congress. This institution has heard from Governor Thompson many times as a witness on a variety of issues. From transportation to health care, the programs in Wisconsin often serve as a model to the rest of the Nation. While we are on different sides of the aisle, there is one issue where there is no disagreement between us and that is defending family farmers in Wisconsin. Under Governor Thompson's leadership, Wisconsin has maintained its preeminence in the dairy industry. I look forward to hearing our Governor Thompson and getting his perspective on the impact of dairy compacts on the State of Wisconsin and the rest of the Nation. Welcome.

    Mr. GEKAS. We thank the lady, and we note that they have been joined at the witness table by Senator Landrieu, the first lady elected to the Senate from the State of Louisiana, who had at age 23—I guess that was last year——[Laughter.]

    Ms. LANDRIEU. Thank you.

    Mr. GEKAS [continuing]. At age 23 was elected to the Louisiana State House of Representatives, and she has been an active Member of the U.S. Senate since her first day in office. She is joined, of course, by Governor Thompson and Senator Feingold. The batting order will be left to the panel.

    Senator Feingold, you may begin.

STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR FROM THE STATE OF WISCONSIN
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    Mr. FEINGOLD. Thank you very much, Mr. Chairman. I would like to begin——

    Mr. GEKAS. At the outset, I will just say that any written statements will be made automatically a part of the record, and you can feel free to summarize your written statements.

    Mr. FEINGOLD. Thank you, Mr. Chairman, very much and the other members of the committee for holding this hearing. I especially am delighted to see my two friends from Wisconsin, Congresswoman Baldwin and Congressman Sensenbrenner. We have worked together on these and other issues many times, and I thank you for the kind introduction. I feel like I know this committee; I don't know why. Maybe it is because I had a chance to sit under the Senate rule silently for 6 weeks and hear them earlier this year, and I, frankly, was very impressed with the committee, and I am glad to be here to speak to you briefly and allowing me the opportunity to testify on the vitally important issue of dairy compacts and more specifically on H.R. 1604, the deceivingly named Dairy Consumers and Producers Protection Act.

    I am especially honored to have on my left our Governor, our distinguished Governor, Tommy Thompson. We don't always agree, but he is a fighter for Wisconsin, and I am just delighted that he would take the time to come out here and show how we are united in the defense of Wisconsin dairy farmers and dairy farmers in the Upper Midwest who, frankly, have not gotten a fair shake with Federal policy for decades ad decades.

    Despite the discrimination against dairy farmers in Wisconsin under the Federal dairy policy known as the Eau Claire rule, the 1996 farm bill provided the final nail in the coffin for many Wisconsin dairy farmers when it created and authorized for 3 years the existence of the Northeast Interstate Dairy Compact. It sounded, perhaps, benign in 1996, but its effect has been anything but, magnifying the already significant inequities of the system.
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    This commission that was set up set minimum prices for fluid milk higher even than those established under the Federal Milk Marketing Order. Never mind that the Federal Milk Marketing Order system under the Eau Claire rule already provided farmers in the region with minimum prices in the New England higher than those received by most other dairy farmers throughout the Nation.

    The Compact Commission, which controlled approximately only 3 percent of the country's milk, not only allowed the six States to set artificially high prices for their producers, it allowed them to block entry of lower priced milk from producers in competing States. To give them even a bigger advantage, processors in the Northeast got a subsidy to export their higher priced milk to non-compact States. So, it is a windfall for Northeast dairy farmers. It is also plainly unfair and unjust to the rest of the country.

    The Northeast Dairy Compact is set to expire at the implementation of USDA's new Federal Milk Marketing Order system. According to the omnibus appropriations measure passed last year, the expiration date is supposed to be October 1 of this year. Now, Members of Congress are pushing for an extension and expansion of the existing milk cartel and for the authorization of another.

    To make clear the magnitude of this legislation on producers and consumers, Mr. Chairman, you only have to look at the numbers. Currently, 3 percent of the milk produced in the United States is under a compact. Conceivably, under this measure, over 40 percent of the country's milk would be produced under a compact system. More importantly, 100 percent of this country's milk prices will be affected. In Wisconsin, prices will be affected in a way that may well prove disastrous for our farmers.
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    Recently, dairy economists at the University of Missouri studied the effects of this latest compact initiative on both the proposed compact regions and areas outside of those regions, and the results were not surprising. It is what we predicted. These economists found that with the compact regions, farmers would overproduce. Fluid milk consumption within the compact regions will drop. Per capita fluid milk consumption will fall 3 pounds, or 1.6 percent, in response to a 15 cents per gallon increase in the retail price of fluid milk in their model. Class III use increases 17.8 percent due to greater milk marketings and lower Class I use.

    The study at the University of Missouri concludes that compacts will devastate many dairy industries that are outside of the borders of those compacts. The study estimates that in Wisconsin, alone, Class I prices will fall 23 cents per hundredweight due to a lower Class I mover. The Federal order blend price will fall 22 cents per hundredweight due to lower class prices. Effective farm prices will fall 21 cents per hundredweight due to lower class prices. Other areas suffer 17 to 21 cents per hundredweight. Farm milk sales, which are equal to milk marketings times the effective farm price, will fall $64 million or 2.3 percent.

    Mr. Chairman, compacts amount to nothing short of Government-sponsored price fixing. They are unfair and bad policy. Now, some of my colleagues would like to make this compact permanent, expand it to other States, and authorize a Southern Dairy Compact. We know the damage these compacts are causing already. After 3 years, we already know what the Northeast Dairy Compact has caused. It blatantly interferes with interstate commerce and wildly distorts the marketplace by erecting artificial barriers around specially protected regions of the Nation. It arbitrarily provides preferential price treatments for farmers in the Northeast at the expense of farmers in other regions who work just as hard, who love their homes just as much, and whose products are just as good, or maybe better in Wisconsin. It irresponsibly encourages excess milk production in one region without establishing effective supply control. This practice flaunts basic economic principles and ignores the fact that it drives down milk prices for producers everywhere else in the country. It raises retail milk prices for million of consumers in the compact region, and it imposes higher costs on every taxpayer, because we all pay for nutrition programs, such as food stamps and the national school lunch programs that provide milk and other dairy products.
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    As a Government sanctioned price fixing device, the Northeast Interstate Dairy Compact was unprecedented in the history of this Nation. As a dairy cartel, it is bad precedents and a poor legislative fix for low milk prices. The 3-year life of the compact has already been extended 6 months.

    I urge you to not let this destructive policy go on any longer than the current law allows. Many of our Nation's farmers are being economically crippled by this dairy policy. As many of us struggle to reform the entire Federal dairy system, this dairy cartel, the compact, just puts us at a greater disadvantage. It is time to bring some justice, after many, many years, to the Federal Dairy policy and give Wisconsin dairy farmers a fair shot in the marketplace.

    Mr. Chairman, I would, with respect to your comments, put the rest of my comments in the record, but I do greatly appreciate your holding this hearing and allowing us to make this point which, frankly, is one of the two or three most important issues that a Wisconsin representative can talk about.

    [The prepared statement of Mr. Feingold follows:]

PREPARED STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR FROM THE STATE OF WISCONSIN

    I would like to begin by thanking Chairman Gekas and other Members of the Committee for allowing me the opportunity to testify on the vitally important issue of dairy compacts and more specifically, on H.R. 1604, the deceivingly named ''Dairy Consumers and Producers Protection Act.''
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    Despite the discrimination against dairy farmers in Wisconsin under the Federal Dairy policy known as the Eau Claire rule, the 1996 Farm Bill provided the final nail in the coffin for many Wisconsin dairy farmers when it created and authorized for three years, the existence of the Northeast Interstate Dairy Compact. The Northeast Interstate Dairy Compact sounded benign in 1996, but its effect has been anything but, magnifying the existing inequities of the system.

    As you know, the bill which authorized the Northeast Interstate Dairy Compact established a commission for six Northeastern States—Vermont, Maine, New Hampshire, Massachusetts, Rhode Island, and Connecticut. This commission set minimum prices for fluid milk higher even than those established under Federal Milk Marketing Orders. Never mind that the Federal Milk Marketing Order system, under the Eau Claire rule, already provided farmers in the region with minimum prices higher than those received by most other dairy farmers throughout the nation.

    The compact commission, which controlled approximately three percent of the country's milk, not only allowed the six States to set artificially high prices for their producers, it allowed them to block entry of lower priced milk from producers in competing States. To give them an even bigger advantage, processors in the Northeast get a subsidy to export their higher priced milk to noncompact States. It's a windfall for Northeast dairy farmers. Its also plainly unfair and unjust to the rest of the country.

    Mr. President, the Northeast Interstate Dairy Compact (NEIDC) is set to expire at the implementation of USDA's new Federal Milk Market Order system. According to the Omnibus Appropriations measure passed last year, the expiration date of the NEIDC is scheduled for October 1, 1999. Now, Members of Congress are pushing for an extension and expansion of the existing milk cartel and for the authorization of another.
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    To make clear the magnitude of this legislation on producers and consumers we need to only look at the numbers. Currently, three percent of milk produced in the United States is under a compact, conceivably, under this new measure, over 40% of this country's milk will be produced under a compact. More importantly, one hundred percent of this country's milk prices will be affected—in Wisconsin, prices will be affected in a way that will prove disastrous for our farmers.

    Recently, dairy economists at the University of Missouri studied the effects of this latest compact initiative on both the proposed compact regions and areas outside of those regions. Their results were not surprising. These economists found that, with their model, within Compact regions:

 Farmers would overproduce.

 Fluid milk consumption within the compact regions will drop. Per capita fluid milk consumption will fall 3 pounds or 1.6 percent in response to a fifteen cent per gallon increase in the retail price of fluid milk in their model.

 Class III use increases 17.8 percent due to greater milk marketings and lower Class I use.

    The University of Missouri study concludes that Compacts will devastate many dairy industries outside their borders. The study estimates that in Wisconsin alone:

 Class I prices will fall twenty three cents per hundredweight due to a lower Class I mover.
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 The Federal order blend price will fall twenty two cents per hundredweight due to lower class prices.

 Effective farm prices will fall twenty one cents per hundredweight due to lower class prices. Other areas suffer seventeen to twenty one cents per hundredweight.

 Farm milk sales, which are equal to milk marketings times the effective farm price will fall sixty four million dollars or 2.3 percent.

    Compacts amount to nothing short of government-sponsored price fixing. They are unfair, and bad policy. Now, some of my colleagues would like to you make this compact permanent, expand it to include other states, and authorize a southern dairy compact. We know the damage that these compacts are causing an already struggling dairy industry. After three years, we know that the Northeast dairy compact:

 Blatantly interferes with interstate commerce and wildly distorts the marketplace by erecting artificial barriers around specially protected regions of the Nation;

 Arbitrarily provides preferential price treatment for farmers in the Northeast at the expense of farmers in other regions who work just as hard, who love their homes just as much and whose products are just as good - maybe better in Wisconsin;

 Irresponsibly encourage excess milk production in one region without establishing effective supply control. This practice flaunts basic economic principles and ignores the fact that it drives down milk prices for producers everywhere else in the country;
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 Raises retail milk prices for the millions of consumers in the Compact region;

 Imposes higher costs on every taxpayer because we all pay for nutrition programs such as food stamps and the national school lunch programs that provide milk and other dairy products.

    As a government sanctioned price-fixing device, the Northeast Interstate Dairy Compact was unprecedented in the history of this Nation. As a dairy cartel, it is a bad precedent and a poor legislative fix for low milk prices.

    The three year life of the compact has already been stretched by six months. I urge you not to let this destructive policy go on any longer than the current law allows.

    Many of our nation's dairy farmers are being economically crippled by this dairy policy. As many of us struggle to reform the entire Federal dairy system, this dairy cartel, the compact, just puts us at an even greater disadvantage. It's time to bring justice to federal dairy policy, and give Wisconsin Dairy farmers a fair shot in the market place.

    In summary, Compacts result in an increase in manufactured dairy products, which result in lower farm prices for non-compact farmers. Consumers in a compact region pay more for fluid milk and therefore consume less fluid milk. Lower dairy consumption is bad for all dairy producers.

    I urge all committee Members to work together towards a fair national dairy policy. A policy that provides all dairy producers a fair price for their commodity, a policy that allows all of this country's dairy producers to succeed on the basis of hard work and a good product.
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    I urge you to oppose any legislation which allows the existence of dairy compacts.

    Mr. GEKAS. We thank the Senator, and we turn our attention to the Governor of Wisconsin.

STATEMENT OF TOMMY G. THOMPSON, GOVERNOR, STATE OF WISCONSIN

    Mr. THOMPSON. Thank you very much, Mr. Chairman, and it is a real privilege for me to have this opportunity to appear in front of this organized body, and I personally want to thank the new Congressperson from Wisconsin, Tammy Baldwin, who has been a friend of mine for a long time in the legislature even though we come from different political parties—thank you very much for your kind introduction—and my friend, Congressman Sensenbrenner, who started out with me in the legislature many years ago. You see how far he has gone, and I still have to be back in Wisconsin, so it is nice to be here and to have this opportunity to represent my State in this very important hearing.

    On behalf of the State of Wisconsin, I would like to thank all of you for this opportunity to hear our concerns about dairy policy. Wisconsin, as you may know, is the largest dairy producing State in the Federal Milk Marketing Order system and is home, currently, to 21,000 dairy farmers. However, today, I am not here to talk about the unfair policies of the Federal Milk Marketing Orders but to speak out against regional dairy pricing compacts, for allowing States to form these pricing compacts is absolutely the wrong direction for our national dairy policy.
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    As you all know, Wisconsin dairy farmers are already discriminated against under the Federal Dairy policy known as the Eau Claire rule. In 1996, Congress added more disadvantages to midwestern dairy farmers when it authorized the Northeast Interstate Dairy Compact. This compact is a windfall for northeastern dairy farmers at the expense of dairy farmers across the country. It sets minimum prices for fluid milk higher than those established under the Federal Milk Marketing Orders even though under the Federal Milk Marketing Order System farmers in the Northeast were also provided with minimum prices higher than those received by most other dairy farmers throughout the Nation.

    Compacts were originally designed to save family dairy farmers. However, the opposite has proven to be true. Together, compacts and the Federal Milk Marketing Orders have resulted in a detrimental—and I want to stress this—a detrimental impact on the midwestern dairy farmer. In 1990, ladies and gentlemen, we had 35,000 dairy farmers in the State of Wisconsin. Today, that number has decreased to 21,000, representing a loss of 3 dairy farms each and every day. In fact, Wisconsin has lost more dairy farms than any other State ever had. What is even more distressing is the dramatic increase in the number of farms that have gone out of business since the compacts were enacted. Between 1997 and 1998, more than 2,000 family farms folded, an increase of roughly 100 percent over the previous average yearly loss.

    I would also like to gently remind committee members of this country's strong history and the advocacy of free trade. We have the opportunity and the ability to practice what we preach yet the Federal Government and some Members of Congress—some of my friends—continue to cling to an antiquated system which penalizes farmers simply for where they live. Wisconsin and midwestern farmers work just as hard as their counterparts in the South or the Northeast. They should also receive the same price for their efforts. It is long past due to entirely reform this flawed system and let the free market—let something really radical—let the free market dictate the price of market in America; something radical.
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    Regional price in compacts run counter to the intent and spirit of our Constitution. The Constitution's Commerce Clause, article 1, section 10 was written by our Founding Fathers to prevent States from erecting trade barriers, as pointed out by Congressman Sensenbrenner. Our Founding Fathers knew that the Commerce Clause was vital, because the lack of such a clause in the Articles of Confederation had led to damaging trade barriers between the States and the national Government. Compacts erect trade barriers to the free flow of milk across State borders. If milk is priced above the marketplace, through a compact, rational economics dictates that cheaper milk would flow from outside the compact region into the compact region. However, compacts attempt to eliminate this pricing advantage by requiring all milk within the compact area to be sold at the higher price regardless of where the milk was produced. This eliminates the ability of the cheaper milk to flow freely into the compact region.

    This reminds me of tariffs. The Congress has worked very hard—and I congratulate you on this—to reduce or eliminate tariffs imposed by Europe, Japan, or other countries in an attempt to keep our U.S. products involved in interstate commerce. Congress has consistently recognized that tariffs are discriminatory and hurt American agriculture and industry yet some Members of Congress proposed to put a tariff-like system, not only internationally but also between regions of the country. This is irrational economics, and it is the very thing I believe our Founding Fathers sought to prevent.

    We made a commitment in the 1996 farm bill to decrease Government intervention in our agricultural markets. Dairy pricing compacts fly in the fact of this commitment to market-based pricing reform. I am amazed at some of the so-called free market advocates in Congress who are supporting these pricing cartels, and I ask you to consider whether compacts are truly legal under the GATT system.
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    Pricing compacts guarantee higher fluid milk prices to dairy producers in the compact regions. Basic economics born out with the experience of the Northeast Compact States tells us that higher milk prices result in two things—increased milk production at the farm and decreased milk sales at the supermarket. The net results—too much milk. This excess fluid milk is sold to manufacturers of storable dairy product—cheese, butter, and non-fat dry milk. This excess fluid milk increases the amount of milk available for making dairy products, and this drives down the price for milk used for manufacturing. So, while fluid milk prices are up in the compact regions, manufacturing milk prices are down in all regions of the country.

    So, Mr. Chairman, pricing compacts send the wrong signals to both producers and consumers. The market reacts to these signals however true or distorted they are. Some argue that a compact in one area has no effect on another area. This is either ignorance or intentional misrepresentation. We cannot evade the power of the marketplace. A compact in one region will lead to lower prices in another region, because we are lessening, not increasing, consumer demand due to higher prices. When supply outstrips demand, something has to give. In this case, you are asking the consumers in the compact regions as well as the dairy producers in non-compact regions of the country to do the giving, and we have given enough.

    Now, some may be saying that Wisconsin is opposed to compacts, because compacts are not a viable option for a dairy manufacturing State in the Midwest, the Southwest, and the West. Well, it is true that Upper Midwest producers would not benefit from a compact since higher fluid prices would be more than offset by lower manufacturing prices, and 85 percent of our milk goes into the cheese production. So, therefore, it is not the lack of benefit to us but the very real imposition of costs on us that is objectionable.
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    Finally, I would like to remind Congress that the Northeast Interstate Dairy Compact was never intended to be a permanent fixture. It was intended as an interim measure designed to sunset with the implementation of Federal orders reform. In fact, Mr. Chairman, we in the Upper Midwest wonder why there should be a Federal order system if much of it is going to be essentially replaced by compacts? Simply stated, we are doing our national dairy industry, I believe, a real disservice, if we proceed down this path of regional pricing compacts. These pricing compacts are a real step backwards in moving our agricultural markets toward true market-driven reform, which I thought was the intention of the agriculture bill in 1996.

    So, what the Wisconsin and the American farmer will benefit most from is bold and dramatic reform that eliminates Eau Claire as the standard for setting milk prices paid to farmers and forgets about pricing milk regionally. What is the free market worth? If we were to get rid of the Federal Milk Marketing Order and create a level playing field, it would mean an additional $5,300 for the average farmer across America. The Northeast Interstate Dairy Compact is set to expire. Let it expire.

    Mr. Chairman, members of the committee, I urge you to do the fair and the just thing and rid the entire country of dairy compacts, not create more. We are not asking this Congress for an unfair advantage but rather a policy that provides all dairy producers a fair market, a fair market-driven price for milk, a policy that allows all of this country's dairy farmers and dairy producers to succeed on the basis of hard work, ability to adjust to the market, and the American farming ingenuity.

    Mr. Chairman, members of the committee, I urge you to support Congressman Sensenbrenner's legislation that would rid this country of regional milk pricing, do the right thing, and put in place a pricing system that treats every farmer in America fairly, not pitting one region against another region.
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    Thank you very much.

    [The prepared statement of Mr. Thompson follows:]

PREPARED STATEMENT OF TOMMY G. THOMPSON, GOVERNOR, STATE OF WISCONSIN

    Good morning, Mr. Chairman (George Gekas), and members of the subcommittee.

    I would like to say a special good morning to one of your newest representatives representing the wonderful state of Wisconsin, Representative Tammy Baldwin.

    On behalf of the State of Wisconsin, I would like to thank you all for the opportunity to address this committee regarding federal dairy policies. Wisconsin, as you may know, is the largest dairy producing state in the Federal Milk Marketing Order System and is home to 21,000 family dairy farms.

    However, today I am not here to talk about the unfair policies of the Federal Milk Marketing Orders, but to speak out against regional dairy pricing compacts. For allowing states to form these pricing compacts is absolutely the wrong direction for our national dairy policy.

    As you all know, Wisconsin dairy farmers are already discriminated against under the Federal Dairy policy known as the Eau Claire rule. In 1996, Congress added more disadvantages to Midwestern dairy farmers when it authorized the Northeast Interstate Dairy Compact.
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    This compact is a windfall for Northeastern dairy farmers at the expense of dairy farmers across the country. It sets minimum prices for fluid milk higher than those established under Federal Milk Marketing Orders even though under the Federal Milk Marketing Order System, farmers in the Northeast were provided with minimum prices higher than those received by most other dairy farmers throughout the nation.

    Compacts were originally designed to save family dairy farms. However, the opposite has proven to be true. Together, compacts and the Federal Milk Marketing Orders have resulted in a detrimental effect on the Midwestern dairy farmer.

    In 1990, ladies and gentlemen, 34,000 dairy farms existed in Wisconsin. Today that number has dwindled to 21,000, representing a loss of three dairy farms each and every day. In fact, Wisconsin has lost more dairy farms than any other state has ever had.

    What is even more distressing is the dramatic increase in the number of farms that have gone out of business since the compacts were enacted. Between 1997 and 1998, more than 2,000 family farms [1–99 head] folded, an increase of roughly 100 percent over the previous average yearly loss.

    I would also like to gently remind committee members of this country's strong history and advocacy of free trade. We have the opportunity and ability to practice what we preach yet the federal government and some members of Congress continue to cling to an antiquated system, which penalizes farmers simply for where they live.

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    Wisconsin and Midwestern farmers work just as hard as their counterparts in other states. They should receive the same price for their efforts.

    It is long past due to entirely reform this flawed system and let the free market dictate the price of milk in America.

Regional dairy pricing compacts erect trade barriers between states and may have negative consequences for trade outside our national borders.

    Regional pricing compacts run counter to the intent and spirit of our Constitution. The Constitution's Commerce Clause, Article 1, Section 10, was written by our founding fathers to prevent states from erecting trade barriers. Our founding fathers knew that the Commerce Clause was vital because the lack of such a clause in the Articles of Confederation had led to damaging trade barriers between the states and national disunity.

    Compacts erect trade barriers to the free flow of milk across state borders. If milk is priced above the marketplace through a compact, rational economics dictates that cheaper milk would flow from outside the compact region into the compact region. However, compacts attempt to eliminate this pricing advantage by requiring all milk within the compact area to be sold at the higher price, regardless of where the milk was produced. This eliminates the ability of the cheaper milk to flow freely into the compact region.

    This reminds me of tariffs. The Congress has worked very hard to reduce or eliminate tariffs imposed by Europe, Japan, or other countries in an attempt to keep out U.S. products. Congress has consistently recognized that tariffs are discriminatory and hurt American agriculture and industry. Yet, some Members of Congress propose to put a tariff-like system not only internationally, but also between regions of the country. This is irrational economics and is the very thing our founding fathers sought to prevent.
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    We made a commitment in the 1996 Farm Bill to decrease government intervention in our agricultural markets. Dairy pricing compacts fly in the face of this commitment to market-based pricing reform. I am amazed at some of the so-called ''free market'' advocates in Congress who are supporting these pricing cartels. And, I ask you to consider whether compacts are GATT-legal.

Regional pricing compacts are unfair to small family dairy farmers.

    Pricing compacts guarantee higher fluid milk prices to dairy producers in the compact regions. Basic economics, born out by the experience in the Northeast Compact states, tells us that higher milk prices result in two things: increased milk production at the farm, and decreased milk sales at the supermarket. The net result? Too much milk. This excess fluid milk is sold to manufacturers of storable dairy products—cheese, butter, and nonfat dry milk. This excess fluid milk increases the amount of milk available for making dairy products, and thus drives down the price for milk used for manufacturing. So, while fluid milk prices are up in the compact regions, manufacturing milk prices are down in all regions.

    It is unfair that producers in compact regions receive higher milk prices at the expense of producers in non-compact regions. An analysis by the University of Missouri shows that if a Northeast and Southern Compact were in place, producers outside of the compact states stand to lose between $0.17 and $0.21 per hundredweight of milk. This is unconscionable! Benefiting some dairy producers to the detriment of other producers only serves to build destructive forces within our national dairy industry.

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Regional dairy pricing compacts distort market signals and are disruptive to national markets.

    Mr. Chairman, Pricing compacts send the wrong signals to both producers and consumers. The market reacts to these signals, however ''true'' or ''distorted'' they are. Some argue that a compact in one area has no effect in another area. This is either economic ignorance or intentional misrepresentation. We cannot evade the power of the marketplace. A compact in one region will lead to lower prices in another region because we are lessening, not increasing consumer demand due to higher prices. When supply outstrips demand, something has to give. In this case, you are asking the consumers in the compact regions and dairy producers in the non-compact regions of the country to do the giving.

Compacts will hurt, not help the manufacturing states of the Midwest, Southwest and West.

    Now, some may be saying that Wisconsin is opposed to compacts because compacts are not a viable option for dairy manufacturing states in the Midwest, Southwest and West. While it is true that Upper Midwest producers would not benefit from a Compact since higher fluid prices would be more than offset by lower manufacturing prices, it is not the lack of benefit to us, but the very real imposition of costs on us that is objectionable.

The Northeast Compact was never intended to be permanent.

    Finally, I would like to remind Congress that the Northeast Interstate Dairy Compact was never intended to be a permanent fixture. It was intended as an interim measure, designed to sunset with the implementation of federal order reform. In fact, Mr. Chairman, we in the Upper Midwest wonder why there should be a federal order system if much of it will be essentially replaced by compacts.
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    Simply stated, we are doing our national dairy industry a real disservice if we proceed down this path of regional pricing compacts. These pricing compacts are a real step backward in moving our agricultural markets towards true, market-driven reform.

    What the Wisconsin and the American farmer will benefit most from is bold and dramatic reform that eliminates Eau Claire as the standard for setting milk prices paid to farmers and forgets about pricing milk regionally.

    Let the free market work. If we were to get rid of the Federal Milk Marketing Order system and create a level playing field, it would mean an additional $5,300 for the average farmer in Wisconsin—money that can help keep the family dairy farm in operation.

    The Northeast Interstate Dairy Compact is set to expire at the implementation of USDA's new Federal Milk Market Order system. And according to the Omnibus Appropriations measure passed last year, the expiration date of the Compact is scheduled for October 1, 1999.

    Mr. Chairman, members of the committee, I urge you to do the fair and just thing, and rid the entire country of dairy compacts, not create more. We are not asking this Congress for a unfair advantage, but rather a policy that provides all dairy producers a fair, market-driven price for milk, a policy that allows all of this country's dairy producers to succeed on the basis of hard work, ability to adjust to the market and American farming ingenuity.

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    Mr. Chairman, members of the Committee, I urge you to support Congressman Sensenbrenner's legislation that would rid this country of regional milk cartels. Do the right thing and put in place a pricing system that treats every farmer in America fairly.

    Thank you.

    Mr. GEKAS. We thank the Governor.

    Before we recognize Senator Landrieu, we welcome to the witness table Senator Schumer who I thought was marching in to take his place up here on the rostrum with us until he took a direct right turn—left turn into the witness table. [Laughter.]

    And, so, we will hear from Senator Landrieu before hearing from Senator Schumer.

    Senator Landrieu?

STATEMENT OF HON. MARY L. LANDRIEU, A U.S. SENATOR FROM THE STATE OF LOUISIANA

    Ms. LANDRIEU. Thank you, Mr. Chairman and Mr. Nadler and all of you on the committee. We are happy to have Senator Schumer on our side. I know you all miss him a great deal over here, but he has been a wonderful addition, and we are proud to have him, and I am happy to appear with him this morning in opposition to the position that has just been articulated and actually in support of the terrific bill that is being led over here, H.R. 1604, by Mr. Hutchinson, and I think over 150 Members—I couldn't count that quickly as I was sitting here—but it looks like a long list of House Members who are in support of furthering the Northeast Interstate Dairy Compact and allowing the Southern States to form their own compact, which we think would be helpful and in line with the reforms that we are contemplating.
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    Let me begin by saying that I recognize that the Governor and my good friend, Senator Feingold, are in a rather challenging position being from Wisconsin, representing different facets of a very important industry for our Nation, and theirs is truly a very challenging leadership position, because they have to represent farmers. They also have to represent different kinds of producers and manufacturers, and it is tough. In our State, in Louisiana, in the South, where Mr. Hutchinson is from, we have got dairy farmers that we are losing—have lost in the last few years 50 percent of our dairy farmers because of the volatile price of milk, the inability of the system that we have created to give any sort of sense of permanency or stability in a way that they can count on it and have successful production.

    So, I strongly support the Northeast Dairy Compact and have looked with great interest as to how it has worked over the last 3 years as an attempt, maybe, to model something that may work for the Southern States and for our farmers to help keep them in business, to not subsidize, however, because the compact does actually the opposite; it is no cost to the Federal Government. It is a way for our farmers to work together in a region to keep their prices stable. It is free trade and fair trade, and that is what we are here about in terms of the principle.

    In addition, let me just say a few things: that we have seen a significant reduction in Federal support for farm programs across the board as we struggle with a new way for our country to deal with all of our commodities. These reductions, coupled with falling commodity prices equal to those a farmer received a decade ago, have forced, as I said earlier, over half of Louisiana dairy farmers out of business, and I am sure Mr. Hutchinson can say the same for Arkansas. This situation has resulted in an acute shortage of fluid milk at certain times of the year for our growing population, and we now have become a milk deficit State. Consequently, passage of this legislation will help us immeasurably. It is critical to ensuring a viable dairy industry in Louisiana and in the Southeast. Moreover, if our dairy farmers continue to go out of business, consumers will pay much more for fluid milk that will have to be hauled in over long distances from other regions of the country and add cost there associated.
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    Let me briefly discuss just a few key provisions. First, the Compact Commission that is created under this bill includes representation from consumers, processors, and dairy farmers, alike, which is fair. Each member of the commission and all of the participating States will work closely together in examining the milk price. Equally as important, WIC and other domestic nutritional programs are fully protected by any increase in milk prices through the action of the commission.

    Dairy farmers, right now, have no say over the price of fluid milk once it leaves the farm, and as you can see from the chart I have produced, farm milk prices have remained almost static for the last 18 years at about 60 cents per half gallon. In comparison, retail prices have increased from a $1.05 in 1980 to approximately $1.60 a half gallon in 1998. The compact gives dairy producers a chance to work with consumers and processors to determine if they are receiving a fair share. Consumers are hurt by volatile swings in milk prices as are farmers. When farm prices dropped as much as 60 cents per gallon this last March, consumers only saw their retail milk price drop as little as 12 cents at the supermarket.

    Today, you have already heard a lot of negative testimony about the compacts, about why they don't work, about driving prices up. Nothing could be further from the truth. This compact has been audited; it has been sued; it has been reviewed, and it has stood the test of time in the Northeast, and the South would like the opportunity to operate under the same sort of circumstances to keep our dairy farmers in business, to produce stable prices for the consumer, to help bring some stability to this market, and also to be fair to the processors and the manufacturers. You have also heard that the price of milk in that area has raised. The reports will show that the price has been 5 cents below the national average in the Northeast, which is good for the consumer.
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    And, so, while we struggle for reform in this area, Mr. Chairman, we think the compacts have a lot of merit. We believe that States should be allowed to come together and to solve some of their own problems without Federal micromanagement. The compacts allow that. We believe that it might be part of the solution, and perhaps the Wisconsin farmers would like a compact of their own, and we would be happy to work with them.

    Thank you so much.

    [The prepared statement of Ms. Landrieu follows:]

PREPARED STATEMENT OF HON. MARY L. LANDRIEU, A U.S. SENATOR FROM THE STATE OF LOUISIANA

    I strongly support H.R. 1604, the Dairy Consumer Producer Protection Act and its companion bill in the Senate, Senate Joint Resolution 22 of which I am one of 39 cosponsors. This legislation, vital to dairy farmers in Louisiana and a number of other states, would ratify the Southern Dairy Compact and reauthorize the Northeast Dairy Compact.

    My reason for supporting this legislation is that I believe it represents sound public policy. Over the last few years, Congress has been returning more and more power to the states. The Dairy Compact legislation is another important step in that direction as it allows states to work together in determining fair prices for locally produced supplies of fresh milk.

    We have seen significant reductions in federal support for farm programs across the board, as a result of the 1996 Farm Bill. These reductions, coupled with falling commodity prices equal to those farmers received a decade ago, have forced over half of Louisiana's dairy farmers out of business. The unprecedented and dramatic drop in milk prices to farmers this spring threatens the very survival of the 500 plus dairy farmers left in Louisiana and many other producers in the Southeast. This situation has resulted in an acute shortage of fluid milk at certain times of the year for our growing population and we have now become a ''milk deficit'' state.
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    Consequently, passage of this legislation will help us immeasurably and it is critical to ensuring a viable dairy industry in Louisiana and the Southeast. Moreover, if our dairy farmers continue to go out of business, consumers will pay much more for fluid milk that will have to be hauled over long distances from other regions of the country.

    Let me briefly discuss some of the key provisions of this legislation which will ensure its success.

    First, the Compact Commission that is created under the bill includes representation from consumers, processors and dairy farmers alike. Each of the members of the Commission and all of the participating states must work closely together in examining fluid milk prices.

    Equally as important, WIC and other domestic nutrition programs are fully protected by any increases in milk prices through the actions of the Commission.

    Dairy farmers have no say over the price of fluid milk once it leaves the farm. Farm milk prices have remained almost static for the past 18 years at about .60 cents per half gallon. In comparison, retail milk prices have increased from $1.05 in 1980 to $1.60 per half gallon in 1998.

    The Compact Commission gives dairy producers a chance to work with consumers and processors to determine if they are receiving a fair share of fluid milk prices.

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    Consumers are hurt as much by volatile swings in milk prices as farmers. Most recently, when farm milk prices dropped as much as .60 cents per gallon this past March, consumers only saw their retail milk prices drop by as little as .12 cents per gallon in the supermarket.

    Today you will hear a lot of negative testimony about Dairy Compacts. Contrary to what you hear, the Northeast Dairy Compact, which has been in place for the past two years has been highly successful.

    You will also hear the complaint that Compacts will prevent milk from other dairy producing areas from coming into the Compact region. This is simply not true. Furthermore, you will likely be told that low income families will be hurt if the Compact commission increases fluid milk prices for farmers. This has simply not happened in the New England region as retail milk prices average .5 cents per gallon below the national average.

    In summary, I urge you to pass H.R. 1604. This will not only help dairy farmers, but the thousands of local rural economies that dairy farmers support.

    Thank you.

    Mr. GEKAS. We thank the Senator, and we turn to Senator Schumer.

STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE STATE OF NEW YORK
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    Mr. SCHUMER. Well, thank you, Mr. Chairman.

    Mr. GEKAS. The written statement would be made a part of the record automatically. You may summarize, if you wish.

    Mr. SCHUMER. Thank you, and I will——

    Mr. NADLER. Mr. Chairman, could I ask unanimous consent simply to extend a welcome to Senator Schumer to this committee in his new capacity as a Senator from our entire State instead of a Congressman from part of our city. It is a pleasure to see him sitting there in this committee instead of up here even though—no offense intended, obviously—I was going to say, even though we expect great things from his successor, Congressman Weiner, and I would ask that Congressman Weiner be able to make a statement.

    Mr. GEKAS. We recognize the gentleman from New York, but before we do, I want to also recognize that the gentleman from Tennessee has taken his place in the committee, and we have been joined also by Congressman Hutchinson of Arkansas who is auditing this hearing.

    Mr. WEINER. Thank you, Mr. Chairman. I, too, want to welcome Senator Chuck Schumer. For over 100 years, my constituents have had the good fortune to have representation on this committee, and while one of my predecessors is on the wall there, perhaps my most famous predecessor, perhaps, is Senator Schumer. We got to know him on this committee for his leadership on crime, immigration reform, and juvenile justice, but now folks in Syracuse and Elmyra and Buffalo are learning that he is a leader on economic development, in job creation in agriculture, and under Chuck's leadership, I should point out, not only are the Knicks in the finals but the Buffalo Sabres are in the finals, as well, so I, too, want to welcome Chuck and thank him for taking the time today.
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    Mr. SCHUMER. Well, thank you, and I want to thank all of my colleagues, our chairman, who I have served with—I think we came in together in 1980 on this committee—and all of the members of the committee and particularly my good friends from my home State, Jerry Nadler and Anthony Weiner, and I can say—Jerry said it was nice sitting on this side. You know, it is a lot easier to sit up there than to sit down here. You feel sort of low down and looking up at the great lords and ladies of the court; no gray wigs yet, but it is a different view.

    Let me just say, in all seriousness, first of all, that I have such fond memories of sitting on that side of the table, this great committee which has done so many different things over the years. In fact, when my worthy successor, Congressman Weiner, asked me for advice with committees, I said Judiciary is a great committee, and you will do all sorts of things, some of which you will like, some of which you don't like, but there is always plenty of action, and I guess today is testimony to that, as well, and so—today, on the floor as well as here. So, I am glad to be here, and I have many, many fond memories and hope to be back many times testifying to the committee, and I thank the Chair for introducing my statement into the record.

    I will be brief, because I know the committee has much business today. And I am, along with 37 of my Senate colleagues, a co-sponsor of the companion bill of Mr. Hutchinson's bill, H.R. 1604. Our bill is S.J. Res. 22. It is sponsored by Jim Jeffords of Vermont. It reauthorizes the Northeast Dairy Compact; allows the New England States to collectively stabilize milk prices, and it extends that to New York, New Jersey, Maryland, Pennsylvania, Delaware, and Ohio, and the Jeffords bill, as my friend and colleague and just a great Senator and a great person, Senator Landrieu has mentioned, extends this to the South.
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    And let me just say to my colleagues and particularly my colleagues from New York State, until I ran for the Senate, as Jerry Nadler mentioned, I was focused on my city district, but this great process we have—and the more I am around, the more impressed I am, and the greater it is—forces you out there to get to see all sorts of things and people you never did.

    And as I campaigned, and, even more importantly, as I have served as Senator, I visited every corner of our State. In fact, I made a pledge to visit all 62 counties in my first year. I am up to 35 right now; I am going to have a busy summer. And I saw the impact of dairy on our State. I saw farmers, hardworking people, not very different from the constituents I represented, although they didn't get on a subway in the morning to go work in their factories and offices, struggling. And you would look at the pain in their faces and the pain in their eyes; people who had had dairy farms in their family for decades and decades and decades, and asked for some modest form of help, and I learned that they had a very good point; that if we were not to have this Northeast Dairy Compact and extend it to the State of New York; if we were to do total free market, which, in all due respect to my good friend, the Governor of Wisconsin, who has done a fabulous job, none of us support in many different ways, we don't have a complete free market in any—we are going to debate steel next week, and I guess many of the representatives from the Governor's State might say, ''Hey, there are reasons that the free market—dumping or whatever else—might not work in the steel industry.'' If we were to have a complete free market without any help to allow farmers to get together themselves, we would have no dairy industry in our State within a short period of time, and the effect on that economy would just be enormous. It would effect every one of our constituents in the Ninth Congressional District, because the tax base would decline, and upstate is struggling to begin with, and this might be a fatal blow.
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    And, so as I looked at the dairy compact, I said to myself, ''What is the cost to those who purchase milk? What is the benefit?'' And it seemed to me the balance came out strongly in favor of the dairy compact. We have lost in New York State—we have lost 5,400 farms out of 13,000 over the last 10 years, and it is due to the fluctuations in the price of milk, and what the dairy compact seeks to do is not simply put a floor but to say that when the price really drops, that a few pennies added on to that price of milk to keep and allow our farmers to exist would save them. Overall, I think those few pennies will be paid back in dollars in terms of productive farms, in terms of the businesses that serve farms, in terms of a diverse State with good ways of life, both downstate and upstate.

    The New England Compact, is, as Mary Landrieu mentioned, a good example. The price of milk in New England has not risen more than 4 cents over the national average in any given year and is often below the national average. What this has meant is that for milk-consuming families, it is about $3.50 a year. My guess is if you did a referendum and showed New Yorkers in Brooklyn, in Queens, and Manhattan the costs to them versus the cost of the compact, they would say, ''Go with the compact.'' An OMB report showed that during the first 6 months of the New England Compact, it didn't adversely affect farmers outside the compact region, and of course it adds no cost to Federal nutrition programs that many of us strongly believe in, such as the WIC Program.

    So, it is very simple. If we don't have this compact, we are going to very adversely affect every citizen of our State and our region. Wisconsin, yes, they would like to do more. They are doing quite well, but, for us, it is sort of life and death for many dairy farmers, for many small towns, even for some city areas that depend on the processing of this kind of liquid milk, and so I would ask my colleagues, whether they have been for the compact before or not, to consider it this time, because I think at least my experience shows, my travels, that the benefits far outweigh the costs.
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    Thank you, Mr. Chairman.

    [The prepared statement of Mr. Schumer follows:]

PREPARED STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE STATE OF NEW YORK

    I thank the Committee giving me the opportunity to come testify today in favor of the Dairy Compact and Rep. Asa Hutchinson's bill, HR 1604, the ''Dairy Consumers and Producers Protection Act.'' I have another hearing to attend so I will keep my remarks brief.

    Along with 37 of my Senate colleagues, I am a cosponsor of the Senate companion Dairy Compact bill, S. J. Res 22. This bill, sponsored by Jim Jeffords of Vermont, reauthorizes the Northeast Dairy Compact, which allows the New England States to collectively stabilize local milk prices, and extends it to New York, New Jersey, Maryland, Pennsylvania, Delaware and Ohio. The Jeffords bill also authorizes creation of a much-needed Southern Dairy Compact.

    As a former Congressman from Brooklyn, I had previously regarded the Dairy Compact skeptically, as I believed it hurt the consumers in my urban district. But since running for the Senate and visiting the dairy farms throughout New York State, I have become an enthusiastic supporter of the Dairy Compact, which I believe will preserve the economy and a distinct rural way of life in my State and throughout the country.

    And, more importantly, I now believe that the Dairy Compact will actually help consumers by halting the trend of consolidation within the dairy industry into a few large farms that control most of the market and can charge higher prices. Over the last 10 years New York State has lost one-third of its dairy farms—dropping from 13,000 farms down to 8,600 farms—due largely to wide fluctuations in the price of milk.
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    The sad truth is that for New York and the other States not covered by a Dairy Compact the existing Federal milk pricing minimums are simply not sufficient to cover the cost of producing milk on family-sized farms. They are sufficient for large corporate operations—but not the small farms that exemplify American rural life. Meanwhile, the price of milk, by historic standards, is very reasonable, and an occasional few extra pennies at the supermarket seems a small price to pay to keep family farmers in business.

    In fact, in New England, which is now covered by the Dairy Compact, the price of milk has not risen by more than 4 cents over the national average in any given year. This means that for an average of less than $3.50 per family per year, hundreds of family farms and much of New England's cherished rural heritage have been preserved.

    Furthermore, a 1998 OMB report showed that during the first six months of the New England Compact, it did not adversely impact farmers outside the Compact region and added no costs to Federal nutrition programs such as Women, Infants and Children (WIC).

    New York, like New England, is not a state with massive corporate dairy farms. Our dairy farms are family businesses, and the very backbone of rural life in Upstate New York. As a Senator now representing the entire State of New York, I have called upon my colleagues from New York City to support the Dairy Compact to help their fellow New Yorkers in Upstate, and many of them have signed as cosponsors to HR 1604.

    I now make the same appeal to my colleagues from the other parts of the country—please support the Northeast and South in our efforts to save our dairy farms and preserve a way of life that is fast disappearing and will be an irreparable loss to all Americans.
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63851c.eps

    Mr. GEKAS. We thank the Senator, and we thank Governor Thompson, Senator Landrieu, and Senator Schumer. They are excused if they wish to follow their own schedules. Pursuant to the custom that we have established, we do not subject our colleagues to cross-examination, and so we allow you to stay if you wish or leave if you want.

    But, in the meantime, we will introduce Mr. Graves, who is a part of the panel. Mr. Graves is the commissioner of the Vermont Department of Agriculture, Food and Markets, and he is one of the most articulate spokesmen, we understand, on the subject of dairy compacts and particularly of the Northeast Interstate Dairy Compact. He has served as Vermont's commissioner of Agriculture for 4 years. Prior to that appointment, he spent 9 years as a member of the Vermont General Assembly. Mr. Graves grew up on his family's dairy farm in Fairfield, Vermont, and operated that farm from 1973 to 1995. We welcome him, and, as with the others, we pledge to him that his written statement will become a part of the record, and we will ask you to summarize as quickly as you can the written statement.

    We are already behind time, because we allowed the politicians, whom you are one, of course, no time limits at all.

STATEMENT OF LEON C. GRAVES, COMMISSIONER, VERMONT DEPARTMENT OF AGRICULTURE, FOOD AND MARKETS

    Mr. GRAVES. Thank you, Mr. Chairman, and I would like to ask for your permission to enter into the record a letter that I have here today introduced to Senator Lott from 17 Governors in support of H.R. 1604. I would like to enter that into the record.
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    Mr. GEKAS. Without objection, it will be so entered.

    Mr. GRAVES. Thank you, and thank you very much for affording me the opportunity to meet with you and to discuss the issues relative to the dairy compact. As the chairman indicated in his introduction, I am the commissioner of agriculture in Vermont, a life-long farmer in Vermont, and hold an inborn fondness for that industry that I am pleased to be here today to represent our farmers and our citizens from Vermont and the Northeast relative to this important bill.

    Governor Thompson, it takes me back about 3 years ago when we were in Wisconsin having this same debate with then Secretary Allen Tracey, the same debates that I have with Secretary Ben Bransell now and Commissioner Hugason from Minnesota relative to the pros and the cons of dairy pricing, and I would like to present to you some information on how the compact has worked that may very well be counter to some of things that you have heard here today based on what I believe is a very strong and proven track record for this particular compact here in the Northeast.

    And it has always been a puzzlement to me, by way of introductory comments, that when you look at the milk pricing situation in Wisconsin and in the Upper Midwest and when you look at net pay prices, despite the rather archaic system that we operate under, that the net pay prices to farmers in that section of the country usually exceed those prices in the Northeast and for those farmers who are under the compact with the exception of about two to 3 months out of the year. So, there is a lot to be said about milk pricing and a lot to be said about the pros and cons.
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    The agriculture industry in New England is very, very important. Although New England, the region, is small geographically, when you look at the region as a whole, New England produces food and fiber for nearly one-third of our Nation's consumers that are located near or around the New England borders. Farms are very important in the region for the regional economies that they support and the creation and the maintenance of an agriculturally sound, environmentally sound working landscape. While the region as a whole produces less than 3 percent of the Nation's milk supply, Vermont is the most dairy dependent State in the Nation. About 85 percent of our $1.2 billion to $1.3 billion agriculture economy in farm gate sales comes directly off of the dairy farm—70 percent from the sale of milk, another 10 to 12 percent from the sale of beef, cattle, and calves in those dairy farms, and then the balance from the maple industry. We also produce the most milk per capita in the United States. So, as dairy goes in Vermont, so goes the agricultural industry, and I am here today to tell you that we absolutely need the continuance, the expansion of the Northeast Interstate Dairy Compact as well as the opportunity for the compact to be established in the Southeast.

    A little bit of history about the compact and a couple of points that I think are worth bringing out at this point in time. In 1996, Congress consented to the Northeast Interstate Dairy Compact—a six-State compact. The purpose of the compact, as stated in its authorizing language, was, one, to recognize the interstate character of the dairy industry in the Northeast, and, number two, I think even more importantly, the compact further provides that the mission of the commission is to take such steps as are necessary to assure the continued viability of dairy farming in the Northeast and to assure consumers of an adequate local supply of pure and wholesome milk, and as much has been said here this morning about free marketing in dairy, I can tell you with a great deal of experience that it does not work, and it will not work, and if we think that the free market system under the current farm bill and the rules that are proposed by USDA without the compact are going to maintain farming, as Senator Schumer has said, in New York or in the Northeast, it is not going to happen.
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    The other thing that I think that is important to note is that Congress required the USDA, required the Secretary of Agriculture to make an affirmative finding of compelling public interest. Remember, the USDA has looked at this as to whether or not it is appropriate policy for the Northeast and found after a great deal of deliberation and debate that indeed there was a compelling public interest for the Northeast States to enter into a compact relative to dairy pricing.

    I am pleased to appear before you today to tell you that the compact has worked exactly as envisioned in its first 2 years of operation. The compact is sound public policy. The goal of the compact is to stabilize the price received by dairy farmers for fluid milk thereby reducing the uncertainty in their businesses and ensuring a stable, fresh supply, wholesome supply, of milk in the region. Consumers also benefit from a stable milk price, not only because it keeps the region's dairy farmers in business to provide a local supply of milk, but also makes processor costs more predictable providing an opportunity for less fluctuation in retail prices.

    When June 1999 compact payments are made, the compact will have returned an average of 51 cents per hundredweight to farmers in the first 2 years of operation. That averages about $13,000 net income, an increase of net income to those farmers for the life of the compact. In April of this year, farmers felt the effect of a record $6 per hundredweight drop in the basic formula price. In New England, blend prices dropped nearly $4 a hundredweight. The compact made up about $1.43 of that, nearly half the loss for the Northeast farmers.

    Dairy farmers benefit from a compact by receiving a higher, more stable price for their milk. It provides them an opportunity to do cash flow projections making it easier to get money in the marketplace, lower interest rates when their income stream is more predictable. The Compact Commission also chose to establish a floor price as opposed to a price to be added on to the basic formula price for milk for fluid purposes in order to lessen the impact in the marketplace when the price of milk was already above the $16.94 per hundredweight.
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    Consumers also benefit from a stable price, not only because it helps keep dairy farmers in business but, again, it provides a fresh, local supply of milk. This pricing scenario for the long-term should lead to more stable retail prices in the long run, as well.

    Senator Schumer referred to the OMB study that was done, and I will only reiterate a couple of points that he made. Number one, consumer prices for milk after the first 6 months under the compact, on average, were 5 cents per gallon lower, not higher, than retail store prices in the rest of the Nation. OMB could find absolutely no adverse effects for farmers outside the region. In fact, the report notes that farmers outside the region did better, because contrary to what you are hearing about tariffs and restriction of free trade, farmers outside the compact region can ship milk into the compact region and benefit from those over-order prices, as well. The compact helped dairy producers by boosting their income about 6 percent based on blend prices, and the compact, as has been noted already here today, does not add to the Federal cost of nutrition programs compared to other regions.

    When we talk about the effects of production, I think there are some numbers that bear looking at, as well, in production in other parts of the country. Milk production in the first 3 months of 1999, under the compact, rose 2 percent during the first 3 months compared with the same 3 months the previous year. In contrast, the western States increased their production by one billion pounds, or 8 percent, during the same period.

    Another important point that Senator Landrieu made that I would like to reiterate is that H.R. 1604 not only provides for reauthorizing and expanding the Northeast Compact but also for the establishment of a compact in the Southeast. Dairy farmers in the Northeast and Southeast are all experiencing the same kind of difficulties and would benefit greatly under the pricing opportunity afforded by the compact. There has already been some discussion about the impacts of market order reform and the impact of not having a compact in the Northeast under the Market Order Reform Plan. This is a totally unacceptable situation when you look at the effects of a modified 1(b) pricing formula, the loss of the CCC price supports at the end of this year under this farm bill, we would be looking at reductions in the marketplace in the Northeast that would more than offset any benefits that we have had under the compact.
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    In conclusion, I would like to say that the support for family farmers is inherent in support for this particular bill. The compact also supports farmers without any government subsidization in any way. The dairy provisions of this current farm bill coupled with USDA's proposed final rule will have a devastating impact on our family dairy farm. The compact has a proven successful track record, returning over $51 million to the region's farmers while eliminating some of the risk of the deregulated milk prices. The compact can maintain stable prices for farmers and consumers, alike.

    My goal as commissioner of agriculture is to facilitate the development and enactment of favorable policies that will encourage farmers to farm by providing fair and stable prices. If you share my goals and concerns and believe as I do that the family farmer is still the backbone of American agriculture, I ask for your support for H.R. 1604. The compact has a proven track record, one that can stabilize prices for both farmers and consumers while at the same time ensuring the long-term viability and sustainability of our family farms.

    I would also ask you to consider this one question in my closing comments: Why would 27 States, the majority of them being milk-deficit States from a fluid milk standpoint, dominated by consumers in their legislatures, pass legislation that would call for the authorization and/or implementation of compacts if it was bad for farmers, and, more importantly, if it was bad for consumers?

    I thank you for this opportunity to appear before you today and ask for your careful consideration of this very important issue. Thank you, Mr. Chairman.

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    [The prepared statement of Mr. Graves follows:]

PREPARED STATEMENT OF LEON C. GRAVES, COMMISSIONER, VERMONT DEPARTMENT OF AGRICULTURE, FOOD AND MARKETS

    I am Leon Graves, Commissioner of the Vermont Department of Agriculture, Food & Markets. I have been Vermont's Commissioner of Agriculture for four years. Prior to June 15, 1995, I spent nine years as a member of the Vermont General Assembly. I grew up on our family dairy farm in Fairfield, Vermont and operated the farm from October 1, 1973 through June 15, 1995.

    I thank you for the opportunity to appear before you today to explain to you the significance and importance of the Dairy Compact. I hope that my remarks will help gain your support for this very important piece of legislation, HR1604, the Dairy Producers and Consumers Protection Act. I would also urge you to not support HR744, a bill to rescind the consent of Congress to the Northeast Interstate Dairy Compact.

NEW ENGLAND DAIRY INDUSTRY

    The agricultural industry is very important to New England. Although the New England states are small geographically, as a region, New England farmers provide food and fiber for millions of Americans and are in close proximity to nearly one-third of our nation's consumers. Consumers appreciate farms, their contribution to local and regional economies and their creation and maintenance of an environmentally sound working landscape.

    While the region as a whole produces less than 3 percent of our nation's milk supply, Vermont is the most dairy dependent state in the nation. Over 70 percent of Vermont's agricultural farm gate sales go to dairy farmers for milk produced. Dairy beef, cattle and calves, maple syrup sales and other income account for approximately 85 percent of Vermont's farm income generated on dairy farms. Vermont farmers also produce the most milk per capita in the United States. In the past several years, Vermonters have supported the expenditure of millions of state tax dollars to enhance the economic viability and sustainability of our family farms. Proceeds from the sale of development rights, funding programs for the implementation of environmental initiatives and farm loan programs, just to name a few, have enabled farmers to invest in the future. Vermonter's support their farmers and appreciate the fact that they are still in business to provide locally produced milk and other products.
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COMPACT HISTORY

    In 1996, Congress consented to the Northeast Interstate Dairy Compact, a six-state compact. The purpose of the Compact as stated in its authorizing language was to: (1) recognize the interstate character of the northeast dairy industry and to form an interstate commission for the northeast region; (2) the Compact further provides that the ''mission of the Commission is to take such steps as are necessary to assure the continued viability of dairy farming in the northeast, and to assure consumers of an adequate, local supply of pure and wholesome milk.''

    The Congressional authorization required the Secretary of Agriculture to make an affirmative finding of ''compelling public interest'' for the Compact. After considerable scrutiny, analysis and debate, Secretary Glickman finally issued the necessary finding, enabling the establishment of the Commission and the development of its bylaws.

    In December 1996, the Commission undertook a rulemaking procedure to consider whether to adopt an over-order price regulation. After a five and one-half month regulatory process, the Commission, on April 28, 1997, issued a notice of proposed rulemaking in which it proposed a combined Federal Order 1 and Compact over-order price of $16.94 per hundredweight. On May 30, 1997, after this proposed rule was opened to additional comment, the Commission voted unanimously to adopt an over-order price regulation of $16.94 for the six-month period of July 1–December 31, 1997.

    In September 1997, the Commission issued another notice of proposed rulemaking to consider whether to extend the price regulation beyond the initial December 31, 1997 expiration date. After conducting public hearings and analyzing the public comments, the Commission, on November 25, 1997 voted to extend the price regulation, leaving the Compact over-order price the same at $16.94 per hundredweight, for the period of January 1, 1998 through termination of the Compact pricing regulation.
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COMPACT BENEFITS

    I am pleased to appear before you today to tell you that the Compact has worked exactly as envisioned during its first two years of operation. The compact is sound public policy. The goal of the Compact is to stabilize the price received by dairy farmers for fluid milk, thereby reducing uncertainty in their businesses and ensuring a stable supply of fresh, wholesome milk in the region. Consumers benefit from a stable milk price, not only because it helps keep the region's dairy farmers in business to provide a local supply of milk, but also makes processor costs more predictable, providing an opportunity for less fluctuation in retail prices.

    When June 1999 Compact payments are paid, the Compact will have returned an average of 51 cents per hundredweight of milk to farmers over the first two years of operation. The average Vermont family farm realized an additional $13,000 net income during the life of the Compact. For seven of those months no payments were made because market prices were above the Compact floor. In April of this year, farmers felt the effect of a record $6.00 per hundredweight drop in the Basic Formula Price. In New England, blend prices dropped an unprecedented $3.93 per hundredweight from the previous month, but the Compact payment of $1.43 made up nearly half of the loss for Northeast farmers.

    Dairy farmers benefit from the Compact by receiving a higher, more stable price for their milk. A stable price allows dairy farmers to make accurate cash flow projections which allow them to plan more reliably. Lenders are more willing to make operating loans to farmers, and farmers can borrow at lower interest rates when the income stream is predictable. Establishing an over-order price of $16.94, means the Compact benefits are greatest when Class I prices are low. As federally mandated minimum Class I prices increase, the Compact premium paid to farmers is reduced (and eventually disappears as it did from September 1998 to March 1999, when the Class I price exceeded $16.94). The Commission actively chose the over-order obligation mechanism rather than a Class I charge of a certain amount on top of the Class I price each month, which would have been a cost to consumers every month. The benefit is not only stabilizing milk prices, but the timing of receipt of Compact payments when federal minimum prices are low. The Compact's over-order obligation pricing regulation minimizes the market impacts to consumers, while maximizing benefits to farmers when they need it most.
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    The combined effect of higher and more stable prices has benefited northeast farmers. The Vermont dairy farm attrition rate has been reduced from a historical level of four percent to approximately two percent per year.

CONSUMER BENEFITS

    Consumers benefit from a stable milk price, not only because it helps keep dairy farmers in business to provide a reliable supply of fresh, local milk, but also because a stable milk price to producers ensures that processors' costs and margins are more predictable. This pricing scenario should lead to a lower, more stable, retail price in the long run. Now that the Compact has been in place for almost two years, we are beginning to see that stabilizing effect on retail prices in New England. There appears to be very little relationship between farmgate and retail milk prices. In fact, as indicated in Appendix D, you will note that prices in the New York City and New Jersey markets have exceeded Boston prices during several months since the Compact has been in place. Another interesting point to note is that retail markup percentages have increased from an average of 73.1 percent prior to the Compact's implementation to an average mark-up of 78.7 percent from July 1997 through June 1998.

OMB STUDY

    The Office of Management and Budget (OMB) did a study on the effects of the Compact. The study's findings undercut common arguments used by the Compact's opponents. The report concludes that:

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 Consumer prices for milk after the first six months under the Compact on average were five cents per gallon lower—not higher—than retail store prices in the rest of the nation;

 OMB could find absolutely no adverse affects for farmers outside the region; in fact, the report notes that some farmers outside the region did better under the Compact by selling their milk into the region;

 The Compact helped dairy producers by boosting their income about 6 percent, based on blend prices;

 The Compact has not added to federal costs in nutrition programs as compared to other regions.

    The Compact, while adding an element of stability for the region's producers, has not resulted in encouraging excess production, contrary to the opponents contentions.

NEW ENGLAND MILK PRODUCTION COMPARED TO OTHER REGIONS

    New England states increased their milk production by 26 million pounds, or 2 percent during the first three months of 1999, compared with the same three months last year. In contrast, the western states increased their production by almost one billion pounds (982 million) or 8 percent, during the same period. Arizona, California, Idaho, Nebraska, New Mexico, and Washington each individually increased their production by more than the six New England states combined. According to Exhibit E the California increase of 511 million pounds was greater than the combined total production of 506 million pounds in Connecticut, Maine, Massachusetts, New Hampshire, and Rhode Island. Idaho, Arizona and Washington individually produce more milk today than all six New England states combined, and New Mexico is also close to exceeding New England in milk production.
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AUTHORIZATION FOR A SOUTHERN DAIRY COMPACT

    HR1604 not only provides for re-authorizing the Northeast Compact, but provides an opportunity for expansion as well. I strongly urge your support for this provision. Dairy farmers in the Northeast and Southeast are all experiencing similar difficulties and would benefit greatly under the pricing opportunity afforded by the Compact. Many states are deficit fluid milk producers and are in danger of losing the critical mass necessary to maintain any semblance of competitiveness and the ability to provide, locally produced milk for their consumers' fluid needs.

COMPACT AND MARKET ORDER REFORM

    In addition to offering supportive comments regarding the Compact, I feel that I must also share my concerns about market order reform issues brought about by the provisions of the 1996 FAIR Act.

    The 1996 Farm Bill requires USDA to restructure and reorganize the Federal Milk Marketing Order system and adopt a new pricing formula while at the same time phasing out all price supports by the end of this year.

    This is a totally unacceptable situation, especially due to the impact of USDA's final rule, a plan that would drop prices paid to farmers not only in New England, but nationally.

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    The Compact provides an opportunity to allow farmers, processors and, most importantly, consumers to have an equal voice at the table in establishing a fair fluid milk price, a price that attempts to cover production costs on a regional basis, allowing family farmers to continue to provide locally produced, fresh fluid milk. The Commission members must set aside self-interest in favor of common interests when establishing Compact policy and regulations. The Commission operates by each state having one vote. This means producers cannot and do not control the process.

CONCLUSION

    The Compact provides this support to family farmers from prices obtained in the marketplace. It achieves this support for farmers without any government subsidization.

    Dairy farmers have always been price takers, with little opportunity to bargain for prices of their perishable product. The processing and manufacturing side of the industry is continuing to consolidate and concentrate, providing fewer and fewer marketing options.

    The dairy provisions of this current farm bill coupled with USDA's proposed final rule, will have a devastating impact on our family dairy farms.

    The Compact has a proven successful track record returning over $51 million to the regions farmers, while eliminating some of the risk of deregulated milk prices.

    The Compact can maintain stable prices for farmers and consumers alike. Our family farmers support local and regional economies, and protect the environment while maintaining a desirable working landscape for all to enjoy.
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    My goal as Commissioner of Agriculture is to facilitate the development and enactment of favorable policies that will encourage farmers to farm, by providing fair and stable prices. If you share my concerns and goals, and believe as I do that the family farmer is still the backbone of American agriculture, I ask for your support of HR1604. The Compact has a proven track record, one that can stabilize prices for both farmers and consumers, while at the same time ensuring the long term viability and sustainability of our family farms.

    Thank you for this opportunity to appear before you and for your careful consideration of this important piece of legislation.

APPENDIX

63851d.eps

63851e.eps

63851f.eps

63851g.eps

63851h.eps

63851i.eps

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    Mr. GEKAS. We thank the gentleman.

    Before we begin a round of questions, I want the record to show that the gentleman from Florida, Mr. Canady, a member of the committee and chairman of the Subcommittee on the Constitution, has joined us. He has vital interest in this legislation and knows some of the panelists personally.

    The Chair recognizes the gentleman from New York. We will impose the 5-minute rule on members of the committee for the purpose of reviewing questions.

    Mr. NADLER. Thank you. First, let me just make a brief statement. I represent a very urban district—parts of Manhattan and parts of Brooklyn—and the concern in that district, obviously, is the impact of this or anything on the consumers. I also, probably unbeknownst to my constituents, spent 8 years of my childhood on a farm in New Jersey, a family farm which went under. I remember when the FHA, when I was 10 years old, foreclosed, and I remember the anguish of my parents at the time, and I have a great deal of regard and sympathy for small farmers who are often in the impossible situation.

    Let me ask Governor Thompson a question. I am somewhat open-minded and more than a little confused on the economics of all this, but I have a question that supplants that a little and that is that you say that this would unfairly benefit farmers in the Northeast and, perhaps, Southeast as against farmers in the Midwest, and it is for that reason, essentially, we shouldn't do it. People in the Northeast—in New York, and, perhaps, some other States—we have had a large problem for many years with tremendous air pollution wafting in from the Midwest, damaging our people, giving us asthma, costing us billions of dollars in trying to deal with the problem, and the States in the Midwest have succeeded in going to court to prevent the Environmental Protection Administration from trying to do something about this. We have no jurisdiction in Ohio or Wisconsin or wherever it is coming from to do something about that, and the Midwest States don't seem to be terribly sympathetic to the problems of the people who have to breathe the air or pay for the cost of dealing with those problems in New York and in Boston and in other places. In other words, the Midwest doesn't seem to care about that problem for the Northeast.
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    Mr. THOMPSON. Mr. Nadler, I think you have raised about three points. The first one, that you had a family farm that was foreclosed on. Let me quickly respond to that. We had 34,000 farms in the State of Wisconsin in 1990. We are down to 21,000. During the time that this compact was in existence, we lost 2,000 farms in 1 year—1997 to 1998. Vermont lost 100; New York lost 300; we lost 2,000.

    Mr. NADLER. Do you know what the percentages are of the States?

    Mr. THOMPSON. Yes, it is a much higher percentage. We have lost a much higher percentage of farmers than either New York or Vermont. We have lost more farmers, dairy farmers, than any other State even had; that is number one. Number two, in regards to the pricing, you represent an urban area. It is obvious by the testimony of the commissioner from Vermont, Mr. Graves—he says the farmers are receiving $13,000. I don't know if that is annually or bi-annually—I will take it bi-annually; that is $6,500 more each year. That money is taken out of the farmers in the Midwest; therefore, it is discriminatory against them. The third thing is in regards to the environment, I don't know how that relates to dairy policy, but I would like to point out——

    Mr. NADLER. Excuse me 1 second. Let me just pursue that. That $13,000——

    Mr. THOMPSON. But I am just——

    Mr. NADLER. No, let me—before you go on to the next point, I am sorry. That $13,000 comes out of the farmers in the Midwest? Why do you think that is the case rather than, perhaps, coming out of the processors?
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    Mr. THOMPSON. Out of what?

    Mr. NADLER. Out of the processors. You saw that differential chart that Senator Landrieu had.

    Mr. THOMPSON. Because the processors—we cannot compete. We cannot send our fluid milk into the Northeast Compact without paying the same price as the compact prices. Therefore, by increasing the fluid price of milk, the excess milk is going to go into the manufacturing process, which is not in the compact, and, therefore, considering Wisconsin, which 85 percent of our milk goes into the manufacturing of cheese, it has a deleterious impact on the manufacturing price.

    With regards to the environment, I agree with you. We have the same problem in Wisconsin that you have in New York. We have air coming in from all over America, including Mexico coming into Wisconsin, and I don't like it. We are paying for it in Wisconsin. We are under several different kinds of environmental concerns, and we have invested millions of dollars in Wisconsin to clean up our air and clean up our water, and I don't think you can use Wisconsin as an example of sending our bad air to New York. It may be recycled from Ohio, from Mexico, and maybe from Massachusetts, but it is not coming from Wisconsin, Mr. Nadler.

    Mr. GEKAS. The gentleman is yielded another 1 minute to ask a question.

    Mr. NADLER. Thank you. I will just ask Mr. Graves, the air pollution question aside, to comment on what Governor Thompson said in answer to my economics on farms.
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    Mr. GRAVES. I would be happy to. The first thing I would like to say is that there is nothing under the compact legislation or regulation that precludes milk from outside of the compact region coming into the compact region and receiving the over-order compact price. In fact, approximately one-third of the milk going into Federal Order One, which is primarily the New England region into the Boston market, comes out of New York State, and each and every one of those farmers in New York State—New York not obviously being part of the Compact Commission region right now—benefit from that $16.94 over-order price for fluid milk. So, it is not accurate to say that milk cannot flow from outside the compact region into the compact region. That would be a restriction of trade, and that would be inappropriate to do.

    I would also say with respect to the retail price, it is interesting to note that when you look at price surveys that we have done in Vermont and other departments of agriculture, during several months, the retail price of milk in the Boston market was lower than the retail price of milk in the New York market and in the north Jersey market while we were under compacts in the Northeast for the farmers providing milk to the Boston market. So, we have not seen an increase over a long period of time of fluid prices of milk at the retail level.

    And I would also say to you that there is very little relationship to the retail price of milk and the wholesale or farmer price of milk. In fact, what has happened in the past is that, over time, within the last 12 to 15 years, farmers used to be paid about 50 percent of the retail price of milk. That has since eroded to about 35 to 38 percent of the retail price of milk.

    Mr. NADLER. Thank you.
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    Mr. GEKAS. The time of the gentleman has expired.

    We recognize the gentleman from Tennessee for a period of 5 minutes.

    Mr. BRYANT. Thank you, Mr. Chairman, and thank you for having this hearing. I just am continually amazed in Washington to wake up today and come to this hearing and first find out that I agree with Charles Schumer on something and then to sit here and listen to the questions and find out that my colleague from New York, Mr. Nadler, was raised on a farm, and he will next tell me he invented the Internet. [Laughter.]

    That was our Vice President, right.

    But it is a pleasure to be here today and to welcome the great Governor from Wisconsin who has done just an outstanding job, and also I thank my colleague from Arkansas for introducing this bill, Mr. Hutchinson, who does so much good work up here.

    For so long—and I think Mr. Schumer has made the point so well—that I have felt that a lot of people here in Washington think that the food is grown and raised and produced in the local supermarket; in my case, Krogers—I am a big Krogers fan back home in Tennessee. But there is a lot more that goes into it before it gets to the Krogers of the world, and I am glad to see Mr. Schumer come around to that point. I just need to work on him on the gun issue a little bit more, and, perhaps, I will see Amtrak differently one of these days for his sake.

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    But there are a lot of problems out here, and I think what Mr. Hutchinson's bill does really—and I would respectfully disagree with the Governor from Wisconsin. I understand his position, and I know he understands my position and my constituency in Tennessee and my farm bureau and the fact that we are also like Vermont and other places, Wisconsin, losing our dairy farmers, and we see this compact as an opportunity to help our dairy farmers. But I think there are problems in the entire community of agriculture. It is not just the dairy farmers, but the farmers are suffering all over, and I must say that I have concern for this Nation as we begin to see more and more of our farmers going into not only chapter 12 bankruptcies in an effort to reorganize but to just close down completely, and I hope these aren't signs of the times even though as a national economy we seem to be doing well. Again, our agriculture communities are in trouble, and I just ask my colleagues across the board, no matter what areas you represent, to be aware of that and to help out.

    In this dairy compact, it may not be totally consistent with free trade, but as I look at charts like Senator Landrieu brought in, and I see not only in dairy farms but in agriculture in general the prices that they are being paid are 1950's prices, but they are having to pay 1999 expenses, and I don't know any business that can do that. I don't know what the ultimate solution is, but I do know that we need a strong agriculture community in this country. I know the people that are up stream from agriculture complain, ''Well, you really don't want to do this, because it hurts us,'' but they are making it. They are making profits, and they are not going out of business like our farmers are. I think there are things that we can do to help the people up stream and other areas, whether it is taxation or regulation, litigation, things like that that we can help them on, but I think the immediate, pressing problem right now are our farmers, and in this day, the hearing is about our dairy farmers, and, again, my concern are those in Tennessee who support this compact arrangement for the Southeast, and, with that said, Mr. Chairman, I will yield back the balance of my time.
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    Mr. GEKAS. We thank the gentleman.

    We turn to the lady from Wisconsin for a period of 5 minutes.

    Ms. BALDWIN. Thank you, Mr. Chairman. I have a question for each of the remaining panelists from this first panel.

    Let me start with Mr. Graves. People are giving their testimonials on where their districts are, their experience with family farms. I, until very recently, had represented an urban district in the Wisconsin legislature and now am delighted to have a district that is about one-third rural, one-third suburban, and one-third urban. I have spent a lot of time in the last several months of my life learning about dairy farming, visiting—June is dairy month in Wisconsin—visiting farms, and I heard some poignant testimony about politicians in various States getting their introduction to dairy farming and looking in the eyes of the farmer who is struggling to survive economically. It is obviously very frustrating when the solution that one politician finds to that problem is one that serves to the detriment of farmers in others areas of the country, like Wisconsin.

    But because saving the family farm—and I want to emphasize the word ''family farm''—has been emphasized so much in defense of the compacts, I guess I want to challenge that assertion. In some of the reviews that I have seen on the efficacy of the Northeast Dairy Compact, what I am reading is that the compact is contributing to the loss of small scale family farms in New England, and, in fact, the growth is in large scale, and, the percent change between the time when the compact came in effect and our current period has been devastating for family farms in the New England region, and I am wondering if you can comment. I know that that is not the only reason why a compact is entered into—but since defense of the small scale family farm has been reiterated over and over again as a reason for the compacts, I wonder if you can explain this discrepancy in what is happening in New England?
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    Mr. GRAVES. I would be happy to; thank you, Congresswoman. The issue of large farms versus small farms is one of a great deal of concern to many, obviously. I would, first of all, start by saying that most of the dairy farms in New England, most of the dairy farms in Vermont are family farms. They are definitely family farms in terms of the way they are operated, in terms of the way they are managed, and the interesting thing to note is that one of the reasons that we are seeing our smaller farms being lost is due to the pricing policies that we have nationwide in the dairy industry, prices that reflect the late fifties, early sixties, in terms of real buying power. The compact returns money back to farmers on a per hundredweight basis. It does not discriminate in any way between large farms and small farms. Unfortunately, I would add, absent the dairy compact and the 50 cents that it has returned in addition to the market-driven prices, absent that money back to farms, we would see an even greater exodus of our smaller farms and an even greater necessity for them to actually combine into larger farms. So, the compact is definitely not a large farm versus small farm issue, and all of our farms in Vermont and New England from a dairy perspective are family farms.

    Ms. BALDWIN. Governor, I have a question for you. With regard to your testimony, you did make a reference to the GATT legality of the compacts. I wonder if you can explain, and I also want to afford you the same opportunity to rebuttal that other panelists have gotten.

    Mr. THOMPSON. Well, thank you very much, Congresswoman Baldwin; thank you so very much for your introduction, and thank you for your tremendous interest in this subject.

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    I would like to, if I might, just explain—I am sorry that Congressman Bryant and Congressman Hutchinson are not here, because they are individuals who I have a great deal of respect for in regards to their free trade situation. But you said it, Congresswoman, and that is that why should we pit one area of the country against another? If we are going to do this for milk, why don't we do it for beer? Why don't we do it for cotton? Why don't we do it for steel? Why don't we do it for clothing? Why just milk? Why not beans? Why not all these other products that are made in the agriculture community? And everybody is concerned by the loss of small farmers. Vermont lost 100 farms in the past year; we lost 2,000. New York lost 300; we lost 2,000 in Wisconsin, 2,000. We lost more than all the Northeast region combined.

    In regard to the GATT, the GATT is set up so you don't have subsidies. This is subsidies to the Northeast farmers to the detriment of the Midwestern farmer, the Western farmer, and the Southwest farmer, and I don't understand why we are trying to pit one region against another. Why don't we try and come up with a milk policy that is going to benefit the farmers in Vermont the same as it is going to benefit the farmers in Wisconsin the same way as we are going to benefit the farmers in California? Why should we discriminate so that the farmers in the Midwest are going to have to bear the burden and lose their farms? My farmers, as your farmers, Congresswoman Baldwin, have the same children, the same kind of concerns, the same kind of aspirations when they lose a farm as somebody from Vermont, and what we are doing is we are hastening farmers out of the business in Wisconsin to benefit farmers from the Northeast. I can't understand that policy.

    And, finally, I would like to point out that we have a system in which we have approximately 40 milk orders in America based upon a discriminatory policy started in 1935, and on top of that—not only does the milk policies hurt Wisconsin farmers, the dairy farmers, all over America—on top of that we are going to put, now, regional pricing on top of it. So, why do we have to pit one region against another? Why don't we come up with a dairy policy that is going to benefit us all?
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    Mr. GEKAS. The time of the lady has expired.

    The gentleman from North Carolina is recognized for 5 minutes.

    Mr. WATT. Thank you, Mr. Chairman. I find this a very fascinating issue and a difficult issue, because part of the problem is that dairy farmers are being impacted all over the country, apparently, and everybody is struggling to survive and hold on, and that always makes for problems when people are trying to survive. Everybody has their story to tell about how they come to this issue. Of all the congressional districts in America, I guess mine has changed more than—more often over the last 6 years than anybody else's in the country, and my congressional district certainly has evolved substantially from one that was almost exclusively an urban congressional district to more recently one that is about one-third rural and agricultural. I have not evolved with that process. Interestingly enough, I was one of the sponsors of the original Northeast Dairy Compact, probably because I used to sit right beside Bernie Sanders on the Banking Committee, and when nothing else was going on on the Banking Committee, he would just spend his time beating on me about how the Northeast Dairy Compact was so critical and he spent a lot of time educating me about the impact that the absence of that compact was having on dairy farmers in Vermont, and in order to kind of get rid of him, I decided I would just get on the bill as a co-sponsor not knowing that sometime further down the road it would begin to have a more direct impact on me in terms of the constituency that I would be representing.

    Just this Monday of this week, I spent a substantial amount of time doing what Senator Schumer said he did during the Senate campaign—looking into the eyes of the dairy farmers in my congressional district and looking at their operation and actually looking at their bottom line—the figures, financial records. We have the highest producing cow in the country. Elsie, the cow, is one of my constituents now, and it gives you an interesting perspective on this issue. I am also a co-sponsor of the Southeastern Dairy Compact bill.
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    And the one thing that struck me, Mr. Graves, was something that you said this morning is that there is very little correlation between the retail price that the consumer pays for milk and the price that is being paid to farmers, and so the question I wanted to get a better handle on, if I could, was how the compact deals with that issue, because it seems to me that a substantial amount of the problem is generated because there really is no correlation or little correlation between the retail price and what the farmers are getting. And, so it may be that we are pitting dairy farmers from geographic sections against each other when a major part of the problem is the profit margins that retailers are making, and I was wondering if you would just give me a little information about how this compact impacts the relationship between the price that is paid to farmers and the retail price that consumers pay off the shelf?

    Mr. GEKAS. We yield to the gentleman an additional 2 minutes so that he can illicit an answer.

    Mr. GRAVES. The compact price is a minimum pay price that processors and handlers are required to pay when the market price for milk is actually below that for fresh fluid milk purposes. There really is no relationship between the compact price that the processors and handlers have to pay with relationship to what they can charge in the marketplace. They obviously have the opportunity to the extent that there is an over-order premium—that difference that is the compact premium that is returned to farmers—processors and handlers have the option to absorb some of that if they choose to or to pass it along in its entirety in the marketplace, but what we have noted with interest again is that over a period of time, since the compact has been in place, the fluid price of milk has actually stabilized pretty significantly in the Boston market, and we have found also that that price, at times, is lower than the markets in the region.
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    Mr. WATT. Now, is that because the retailer has been squeezed, and, if so, why are the retailers not here screaming just like the Governor is here screaming?

    Mr. GRAVES. I suspect that you will hear later in this presentation from the—certainly, from the processors and handlers and from the retailers exactly how they view this situation and how they feel they are being squeezed, as well, and I would certainly welcome that opportunity to hear that answer myself.

    Mr. WATT. Thank you, Mr. Chairman. I just want to applaud the chairman for having this hearing and giving everybody the opportunity to express their views on it. It is really a very, very difficult issue and one with not many good solutions, apparently. Thank you, Mr. Chairman.

    Mr. GEKAS. The time of the gentleman has expired.

    We turn to the gentleman from Massachusetts for a period of 5 minutes.

    Mr. DELAHUNT. Yes, thank you, Mr. Chairman.

    I come from a district in Massachusetts where there are not a lot of cows left. Elsie never stopped in Boston on her way down to North Carolina, but I certainly have heard from Bernie Sanders who has obviously advocated vigorously for the New England compact.

    I guess my question is a rather simple one, and I am not as conversant, obviously, with the issue, and I do also want to applaud the chairman for these hearings, because, as my friend from North Carolina indicated, it is very informative. I presume the premise and the rationale for the compact is to attempt to minimize the decline of the small farm, particularly the small dairy farm, in this Nation, in these different regions where this compact is established, but I think it was you, Governor Thompson, who indicated that everywhere there continues to be a decline, whether it is due to consolidation with larger farms, but, in any event, it would appear that it is not really accomplishing its purpose. Is it an effective way to assist the small farms? I mean, I think that even for members from districts that are more urban or suburban in nature, clearly, there is a recognition that the small farmer has a special role in our history and adds to community life other than simply a dollars and cents measurement. We, I, I am sure others in the House want to retain that, but is this really doing the job? Governor?
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    Mr. THOMPSON. I don't think it is, and I know it isn't in Wisconsin. I know the dairy compact and the Northeast Compact is hastening the demise of the small dairy farm, the small family farm in Wisconsin, evidenced by the fact that we lost 2,000 farmers, dairy farmers, in the last year.

    Mr. DELAHUNT. Governor, where are they going? Are they selling this land off for development?

    Mr. THOMPSON. What they do is they sell their land; they sell their cattle; they sell their machinery, and then they go in and hopefully get a job in a factory in a small town that they are adjacent to.

    Mr. DELAHUNT. Are there larger dairy farms that are——

    Mr. THOMPSON. Sometimes the land is bought by adjacent farmers that are getting larger, but most of the time the farmers are going out of business, and the land is then rented out and nobody farms it as far as a dairy operation is concerned. We have gone from 34,000 dairy farmers, which is more than any other State in America, to 21,000 in the last 9 years, and we lost 2,000 this past year. It is accelerating because of the regional pricing we think is pretty much directly related to that. While we lost 2,000, Vermont lost 100; New York lost 300. So, you can see the disproportionate amount of heartache is certainly in Wisconsin, and that is why with the regional pricing on top of the milk pricing orders, which now it has been reduced down to about 12 and with the new agriculture policy——

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    Mr. DELAHUNT. You know, Governor, I really find this interesting, because I note my friend from Arkansas, you indicated earlier, Mr. Hutchinson, this, certainly, I would say contradicts the——

    Mr. THOMPSON. Free enterprise?

    Mr. DELAHUNT [continuing]. The free enterprise philosophy here.

    Mr. THOMPSON. You know, Congressman Hutchinson is one of my heroes, and I—but even a hero once in a while makes a mistake. [Laughter.]

    Mr. DELAHUNT. I wish he would make a few more mistakes.

    Mr. THOMPSON. I said that——

    Mr. GEKAS. The gentleman is extended another 2 minutes to complete the question and answer.

    Mr. DELAHUNT. I would be interested in a response from Mr. Graves, but when you are introduced to this concept of a compact—boy, if this is not an example of government managing the economy—I mean, there is nothing else that I am aware of—I mean, this borders on—oh, I don't want to use those nasty words like socialism——

    Mr. THOMPSON. I agree with you, Mr. Congressman.
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    Mr. DELAHUNT [continuing]. And I am not suggesting that my friend from Arkansas borders on socialistic, but this is really a rather unique effort, and I could support it if it worked. Mr. Graves, is it working in New England?

    Mr. GRAVES. I believe that it is working and——

    Mr. DELAHUNT. What happened to those 100 farmers? Why are we continuing to lose those 100 farmers?

    Mr. GRAVES. We are losing those farmers because of the tremendous competition with other regions in this country. The total amount of milk produced in this country continues to grow at significant rates due to a lot of factors.

    Mr. DELAHUNT. Are we fighting a losing battle here?

    Mr. GRAVES. I don't believe we are fighting a losing battle when it comes to looking at maintaining the production base that is necessary to provide fresh fluid milk on a State-by-State basis.

    Mr. DELAHUNT. Let me put it this way: I am supportive—I don't want to lose the production base, but I certainly don't want to impede the free market and still have the result, a consolidation in the State of Vermont with large corporate agri-businesses providing the production base. We are not here to create an environment to secure advantages for large agri-businesses. I mean, if this is going to work for the small farmer, that is one thing, but if this is just going to procure advantages for large dairy farmers who are making substantial profits, that is a whole other issue.
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    Mr. GRAVES. I would agree with you; that is a whole other issue. The rate of attrition for dairy farms in Vermont actually was cut in half in 1998, from about 4 percent down to 2 percent. It definitely is working for our farms in Vermont. Now, your Commissioner of Agriculture, Commissioner Healy, expresses those points of view very, very nicely as a member of the Compact Commission and in front of the Compact Commission, I would also—as I have said to Commissioner Healy many times—while he is still wringing his hands, as I am sure you are, about the loss of family dairy farms in Massachusetts—without the kind input back into those dairy farms that the compact has provided strictly out of the marketplace, we would see the tide being much more red in terms of the loss of dairy farms.

    I would also add that while Federal Government gives, under the Constitution, the States the right to form compacts, the Compact Commission, itself, on a State-by-State basis is made up of, with an equal voice, farmers, processors, handlers, and consumers, and at any point in time, if the consumers in any of those States in New England, all of which with the exception of Vermont—Maine is about neutral in terms of its production—feel that it is not a good deal to be supporting the farms that produce the fresh milk, at least from a beverage milk Class I standpoint, at any point in time when they feel that it is not a good deal, I am sure those concerns will be expressed and listened to in front of the Compact Commission.

    I feel it is working and it is working well, and we do have—and I feel for what Governor Thompson is saying about the demise and the loss of his farms and Chairwoman Baldwin—Congresswoman Baldwin. I feel that it is definitely—it is a travesty that farm prices in this country, not only from dairy but from the respect of the other commodities are as low as they are. It is a very difficult situation.
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    Mr. GEKAS. The time of the gentleman has expired.

    The Chair yields itself such time as it might consume and transfers that yield to the gentleman from Arkansas, Mr. Hutchinson.

    Mr. HUTCHINSON. I thank the chairman for yielding, and, most importantly, I am grateful for your willingness to conduct this hearing today. I think it has been very informative and helpful and really is just the beginning, because we have a number of panels to follow. I am delighted to be a sponsor of this dairy compact legislation with 160 of my colleagues from 27 different States representing a broad spectrum of philosophies. And, so it really crosses regions and crosses philosophies. I think everyone is trying to do what is good for the farmers in a balanced way.

    Governor Thompson, I want to welcome you, and you are one of my genuine heroes. I have followed your work in Wisconsin for many years, and thank you for being here and looking out for the interests of your State so well. I have to talk about the free market system a little bit, since my credentials have been challenged severely today. [Laughter.]

    You know, I will just tell you how I got involved in this issue. Dairy farmers came to me and started talking about it. I grew up on a farm, but I wasn't a dairy farmer, so, I had an education process to go through. They have been talking to me about this for a couple years, but I learned about it. I started understanding about it, and then I insisted upon seeing the OMB study about the Northeast Compact, asking the tough questions. How is it working? How is it impacting the other regions of the country. And then I started debating the philosophy within myself: is this consistent with the free market system?
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    So, it took me a long time to get to where I am, and in reference to the free market system, I just don't see the option as a regulatory system versus a free market system. That is not on the table today. We have a Federal price marketing system that is in place; I don't see any movement to change that. It is not going to happen, and, therefore, we have to have a system that works the best, and I believe that the regional approach where you can have some local State influence in that price marketing structure would be helpful.

    Even though I have studied it, I don't pretend to be an expert yet, but I looked at this Congressional Research Service study, and it talked about Class I differentials, and this is presently the circumstances where you have the distancing factor from Eau Claire, Wisconsin. The Food Security Act of 1985 increased the Class I differentials because of the distances traveled, and it talks about Class I prices more closely reflecting the actual costs of supplying fluid markets. Handlers were generally paying more than minimum price to cover the true cost of supplying the market, and then it goes on and it talks about the marketing orders reflecting the differences between the North Atlantic and the Southeastern regions.

    This is not a free market system. And I think you agree with me, Governor Thompson. And, so I just think that there can be some help given to our farmers, and we can't move to the free market system completely. I am not sure that it would be good to do that under the regulated environment that we have. So, I feel very comfortable doing this. It is bringing some regional influence to this pricing structure.

    Now, I am going to give you, Governor Thompson, a chance to say something here in just a minute—but one of the things that troubled me somewhat was you don't want to have a guaranteed price for farmers so they produce everything and you have an oversupply, but I understand, Mr. Graves, that this pricing structure, through the compact, affects what is sold and not what is produced. Is that correct?
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    Mr. GRAVES. It affects what is sold for fluid purposes, what is for drinking milk.

    Mr. HUTCHINSON. Right. In other words, it is even more limited than that. It affects the prices for fluid Class I milk, but it is not what is produced. So, a farmer can't go out there and just produce all the milk he wants and get a guaranteed price.

    Mr. GRAVES. Essentially, farmers can still do that today, but the guaranteed price has much less to do with the compact than it does the system that you have just described in terms of pricing differentials and very complicated formulas.

    Mr. HUTCHINSON. Did I describe it complicated enough?

    Mr. GRAVES. It gets a lot worse than that.

    Mr. HUTCHINSON. So, the compact would not impact the production because of the price that is set.

    Mr. GRAVES. No, there is a requirement within the authorizing legislation, though, that requires the Compact Commission to address that issue of supply management with respect to payments of the over-order premium, and that is something that the Commission is working on and addressing at this point in time.

    Mr. GEKAS. The Chair yields an additional 1 minute to the gentleman from——
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    Mr. HUTCHINSON. And I am going to yield that to my good friend, Governor Thompson, just to reply, perhaps, to some of my comments, and, again, I want to welcome you and thank you for your testimony today.

    Mr. THOMPSON. Congressman, let me just try and explain how difficult this situation is. Eau Claire, Wisconsin, in 1935 had the majority of the dairy farms around that area. So, the government, in its infinite wisdom, decided to regulate milk, and they paid people to produce milk, the farther away from Eau Claire, more money. So, a farmer in Arkansas gets more money for producing milk than a farmer in Eau Claire because of the differential, because of milk pricing. It is akin to Hollywood producing movies, and the further you get from Hollywood, you would be paying more for a movie ticket. That doesn't work.

    Mr. HUTCHINSON. The present system doesn't work.

    Mr. THOMPSON. So, Wisconsin, first, is being discriminated against because of the milk pricing orders that are in existence today. On top of that, not only are we being discriminated against under the current rules and regulations, you added on top of that original pricing which also discriminates against the Wisconsin farmer, which has the majority of the dairy farmers, and that dairy farmer in Vermont does get paid more for as much fluid milk as he produces, and, therefore, artificially can produce more milk and get a larger price. So, you are infringing upon the free market; twice against the farmer from Wisconsin.

    Mr. HUTCHINSON. Governor, are your farmers still selling into the Northeast?
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    Mr. THOMPSON. No, 85 percent of the milk that we produce in Wisconsin goes into cheese.

    Mr. HUTCHINSON. Goes into cheese. Mr. Graves, is there any importation of milk into the Northeast still despite the fact of the dairy compact?

    Mr. GRAVES. Yes. We still, as I said earlier, we still import into the New England region about one-third of the total milk needs from the State of New York, which is a non-compact State.

    Mr. HUTCHINSON. I thank the Chair.

    Mr. GEKAS. The time of the Chair has expired, and, therefore, Mr. Hutchinson has expired. [Laughter.]

    This session has expired. We will recess until 1 p.m. to accommodate the voting pattern on the floor and to accommodate all those who wish to have some milk between now and 1 o'clock. [Laughter.]

    [Recess.]

    Mr. GEKAS [presiding]. The hour of one o'clock having arrive, the committee will come to order.

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    Even though we do not yet have a quorum for the purposes of a hearing, I believe we will begin with the introduction of the panel and have them seated pending the arrival of another member.

    So, we will begin with my own constituent, wherever he may be—I can't see beyond the bench—Mr. Kopp. Oh, there, come right up. Mr. Kopp is a second generation dairy farmer. Together, with his brother, he operates an 800-acre dairy farm in Middletown, Pennsylvania. Middletown, as the whole world knows or should know, is the area where the Three-Mile Island incident took place about 600 years ago, it was. Mr. Kopp is a member of the Pennsylvania Farm Bureau as well as the local and State Holstein Association. He has served as the Pennsylvania dairy representative for the National Beef Council for the last 3 years. He is also a member of the Lebanon Valley Farmers Bank Ag Advisory Committee. So, we welcome him to the panel.

    And we will proceed with the introduction of the next individual, Mr. David Krug. He, together with his wife, owns and operates the Krug Homestead Dairy Farms in Taylor County, Wisconsin. His farm consists of 280 acres of crop and pasture land which has been in the Krug family since 1896. He milks 75 Holstein cows, 25 of which are registered. Mr. Krug is president of Family Dairies USA, which is a grassroots organization that represents nearly 7,000 small- and medium-sized dairy farm families in nine Upper Midwest States. It is considered to be the second largest dairy co-op based on membership. He has been a member of the Cooperative Board for the past 19 years and a 13-year member of the Wisconsin Milk Marketing Board.

    He will be joined at the table by Albert Simmons. Mr. Simmons is a dairy, tobacco, and beef farmer from Flemingsburg, Kentucky. Together, with his wife Jean and business partner, he operates a 385-acre dairy and tobacco farm where they milk 60 cows. He also helps out his father on his 200-acre beef farm. He appears today on behalf of the National Family Farm Coalition, an organization comprised of 31 advocacy and trade groups located throughout the Nation. Mr. Simmons is also a member of the Community Farm Alliance, a grassroots farm and rural advocacy group that has more than 2,000 family farm members. He was a board member of the Milk Marketing, Inc., a dairy cooperative, from 1993 to 1995.
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    Joining these individuals will be Wayne Bok, president of the Associated Milk Products, Incorporated, representing the Upper Midwest Dairy Coalition from Geddes, South Dakota. Mr. Bok is a dairy farmer from Geddes—Geddes, is it? Is that the way it is pronounced? He is currently serving his third term as president of Associated Milk Producers, Inc., a milk marketing cooperative with 6,500 members from seven Midwest States. Mr. Bok appears today on behalf of the Upper Midwest Dairy Coalition which is a group of 18 dairy cooperatives of which Associated Milk is a member. The coalition represents approximately 34,000 dairy producers in 11 Midwestern States. Producers represented by the coalition account for nearly one-third of milk producers in the United States.

    Gary Corbett is also with us. He is vice president of Governmental and Dairy Industry Relations, Dean Foods Company, Franklin Park, Illinois. Mr. Corbett is vice president of Governmental and Dairy Industry Relations for Dean Foods Company. Deans Foods is—is it Dean or Deans?

    Mr. CORBETT. Dean.

    Mr. GEKAS. Dean Foods is a Fortune 500 broad-based dairy and specialty food processor with more than 11,000 employees and 50 production facilities with annual sales of $4 billion. He is responsible for analyzing government programs and policies. Mr. Corbett also is the chairman of the Federal Orders Committee of the Milk Industry Foundation. In his spare time, he, together with his wife, owns and operates a large dairy farm in Northwest Illinois. In addition to appearing on behalf of Dean Foods, Mr. Corbett represents the International Dairy Foods Association, which is a trade association devoted to advancing interests of dairy processors, manufacturers, marketers, and distributors of dairy products. The association is comprised of three constituent organizations—the Milk Industry Foundation, the National Cheese Institute, and the International Ice Cream Association.
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    Next on the panel is James Green, vice president and general manager of the Maola Milk & Ice Cream Company, New Bern, North Carolina. Is that the correct pronunciation—Maola?

    Mr. GREEN. Maola is correct.

    Mr. GEKAS. Mr. Green is vice president and general manager of that company in New Bern, North Carolina. Maola has been described as the sole surviving, independent, North Carolina owned milk and ice cream company. It supplies milk and ice cream to various Federal military installations and public school systems. North Carolina, we are told, is a milk-deficit State. As a result, Maola, since 1996, has paid approximately $1.4 million in import charges on raw milk.

    We now turn the podium over to the gentleman from Florida, Mr. Canady, for the purposes of the next introduction.

    Mr. CANADY. Thank you, Mr. Chairman. I appreciate your allowing me the opportunity to join the subcommittee today for the purpose of introducing a witness who will be testifying, who is from the 12th District of Florida, which I represent.

    As a member of the full Committee on the Judiciary, it is my pleasure to welcome Scott Charlton, vice president of Manufacturing for Publix Supermarkets, who will testify on behalf of Publix and the Food Marketing Institute. Publix, where shopping is a pleasure, is headquartered in Lakeland, Florida, my hometown, and the largest city in the 12th Congressional District. Publix supermarkets is the largest employee-owned supermarket in the United States and seventh largest volume food company in the Nation. Publix, which currently operates multiple dairy processing facilities—thus their interest and presence here today—was named as one of Fortune's most admired companies this year and has received civic and industry recognition as a result of its commitment to customer service and community support. I wanted to thank Mr. Charlton for taking the time to be here to testify on this important issue, along with all the other members of the panel, and thank you, once again, Mr. Chairman, for affording Publix an opportunity to present its views at this hearing today.
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    Mr. GEKAS. We thank the gentleman, and we now will seat the final member of this particular panel, Charles Parker, general manager and chief operating officer of Gold Star Dairy of Little Rock, Arkansas. Mr. Parker is the general manager and chief operating officer of that company, which is owned and operated by Affiliated Foods Southwest, Inc. Affiliated is a retailer-owned grocery cooperative with members located throughout Arkansas, Texas, Louisiana, Mississippi, Tennessee, and Oklahoma. Gold Star processes more than 200 million pounds of raw milk annually. Prior to joining Gold Star, Mr. Parker was the president of Associated Grocers of Birmingham, Alabama. He previously was the executive vice president of Zippy Mart convenience store chain in Jacksonville, Florida, for 19 years.

    Owing to the absence of a quorum for the purpose of this hearing, I think we will break into song. We will sing Farmer in the Dell and There is a Church in the Valley and Polly Wolly Doodle in that order. [Laughter.]

    And Old McDonald.

    I do intend and have confined myself ever since we gained the majority two terms ago to adhere to the rules of the House as they pertain to committees, and, as I indicated before, to start the meetings and hearings on time. But because the rules prevail over my instincts, we now have to recess while you remain at your seats until another body should appear.

    We stand in recess and sit in recess.

    [Recess.]
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    Mr. GEKAS. The time of the recess having expired, the committee will come to order. Let the record indicate that the lady from Wisconsin, Ms. Baldwin, is in attendance, and we will proceed with the testimony of our witnesses.

    All of the written statements will be accepted for the record, without objection, and we will ask each individual to try to summarize that portion of the testimony within 5 minutes. Otherwise, we would be here till midnight. So, we will start with my own constituent, Mr. Kopp; 5 minutes.

STATEMENT OF JAY KOPP, MIDDLETOWN, PA

    Mr. KOPP. Thank you. Good afternoon, Chairman Gekas, Mr. Nadler, and distinguished members of the committee. My name is Jay Kopp. I am a second generation dairy farmer. My brother and I operate a dairy farm in Middletown, Pennsylvania. We milk 120 cows, average 22,000 pounds of milk per year, and I have come to Washington today to testify in opposition to H.R. 744, and I would like to direct my testimony to support H.R. 1604, the Dairy Consumer and Producers Act, which would reauthorize the Northeast Interstate Dairy Compact and allow the Southern States to form a compact of their own.

    The Pennsylvania legislators have recently passed legislation to join the Northeast Interstate Dairy Compact. Once our Governor signs the bill, our State will be the 24th State to pass such legislation. Pennsylvania, like most States, has seen the significant decline in the number of dairy farms. In the last 10 years, alone, over 3,500 farm families left the industry in our State. If we are to prevent this trend from continuing, our State will need the authority to work with the surrounding States, take a more localized approach to pricing fluid milk through our compact.
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    There are three direct benefits that will be provided to our family operations through a compact that I would like to cover today, the first of which is price stability. As a farmer and businessman, the greatest challenge our family business faces is price volatility. The dramatic swing in the prices we receive for our product makes it next to impossible to create a business plan. For example, this March, the basic formula price dropped $6 per hundredweight. This drop has caused the amount we will earn this month for our milk to be over $10,000 less than it was in January, just 5 months ago. Our overhead dairy costs of operation are fixed costs. Cows do not respond to price swings. They still need to eat, and they still need to be milked.

    According to Pennsylvania Agriculture Statistic Service, it costs the average Pennsylvania dairy farmer $13.26 to produce 100 pounds of milk. It is important to point out that the cost of production figures does not reflect any return on management or equity. A better reflection of returns needed to produce 100 pounds of milk in Pennsylvania would be to include a modest return of 5 percent on milk receipts for management and a 6 percent return on equity, which brings the average cost of milk production in Pennsylvania to $16.11 per hundredweight of milk. We are currently receiving a mailbox price of $11.57. Unfortunately, this drop in price hits us even harder, because it comes at a time when we must spend the most. In the spring months, we have the additional cost of buying seed, crop protectants, and getting our farm machinery going again.

    Unlike other businesses, we cannot slow down production nor can we store our product until the price comes back up. We in the dairy business have become thankful when we break even and further accept that as part of the business. There are going to be times when we don't. It is no mystery to me why so few young people choose to get into the dairy business, if success is merely breaking even.
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    The compact will provide a baseline of income that we can depend on. It won't prevent the fluctuations in price, but we can at least make an ethical business decision if we know the price will not go below the floor price established. Many producers, today, find themselves deeper and deeper in debt when the price drops out. The result is that even when prices are higher like they were last fall, the extra income is not reinvested in their business or taken home as extra pay, it is used to catch up on bills and try to pay down the interest on the additional debt that has been incurred during hard times.

    The second benefit I see in the compact is not the amount of payment but when it would be received. When the Federal price falls, the compact will kick in, act as a safety net catching the price before it drops too low. When we need the payment most, we will receive it. In comparison, while dairymen are thankful for the Federal allocations we will soon be receiving to help take the sting out of low prices, it has taken more than a year to get the money in the hands of the producer.

    The third benefit is the ability to sit at the table with the consumer, the processor, and to establish a fair floor price that everyone can live with. As it stands now, both farmers and consumers are price takers with no ability to have any input.

    Mr. GEKAS. Would the gentleman draw the testimony to a close, if you can. Your full statement will be reviewed then.

    Mr. KOPP. All right. It is not simply in the interest of my family that we continue to milk cows in Pennsylvania, it is and should be of interest to those who consume the milk and enjoy the open space our farm provides.
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    It is my understanding that some people say that we in the Northeast should not continue to milk cows because our costs of doing business are higher. The reason our cost of doing business is higher is because we operate our business where the people are and the people demand and consume fluid milk. Our farm is a 15-minute drive from downtown Harrisburg, which is our State Capital city. Needless to say, land prices are high, and we must compete for land with wealthy suburban neighbors, and we would like it if you would take these into consideration and you would consider supporting the dairy compact when it comes up for a vote.

    Thank you.

    [The prepared statement of Mr. Kopp follows:]

PREPARED STATEMENT OF JAY KOPP, MIDDLETOWN, PA

    Good morning Chairman Gekas, Mr. Nadler, and distinguished members of the committee, my name is Jay Kopp, I am a second generation dairy farmer. My brother and I operate a dairy farm in Middletown, Pennsylvania. We milk about 120 cows averaging 22,000 pounds of milk per cow per year. I have come to Washington today to testify in Opposition of H.R. 744 and would like to direct my testimony in Support of H.R. 1604 THE DAIRY CONSUMERS AND PRODUCERS ACT, which would reauthorize the Northeast Interstate Dairy Compact and allow the Southern states form a Compact of their own.

    The Pennsylvania legislature has recently passed legislation to join the Northeast Interstate Dairy Compact. Once our Governor signs the bill our state will be the 24th state to have passed such legislation. Pennsylvania, like most states has seen a significant decline in the number of dairy farms. In the last ten years alone over 3,500 farm families left the industry in our state. If we are to prevent this trend from continuing, our state will need the authority to work with the surrounding states and take a more localized approach to pricing fluid milk through a Compact.
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    There are three direct benefits that will be provided to our family operation through a Compact that I would like to cover today. The first of which is price stability. As a farmer and businessman the greatest challenge to our family business faces is price volatility. The dramatic swings in the price we receive for our product makes it next to impossible to create business plan.

    For example, this March the Basic Formula Price dropped $6 per hundred weight. This drop has caused the amount we will earn this month for our milk to be over $10,000 less than it was in January, just five months ago. Our overhead and daily costs of operation are fixed. Cows do not respond to price swings, they still need to eat and they still need to be milked. According to the Pennsylvania

    Agricultural Statistics Service, it costs the average Pennsylvania dairy farm $13.26 to produce a hundred pounds of milk. It is important to point out that this cost of production figure does not reflect any returns on management or equity. A better reflection of the returns needed to produce a hundred pounds of milk in Pennsylvania would be to include a modest return of five percent on milk receipts for management and a six percent return on equity which brings the average cost of milk production in Pennsylvania to $16.11 per hundred weight of milk. We are currently receiving a mailbox price of $11.57. Unfortunately, this drop in price hits us even harder because it comes at a time when we must spend the most. In the spring months we have the additional costs of buying seed, crop protectants and getting our farm machinery going again.

    Unlike other businesses, we cannot slow down production, nor can we store our product until the price comes back up. We in the dairy business have become thankful when we break even, and have further accepted that as part of the business, there are going to be times when we don't. It is no mystery to me why so few young people choose to get into the dairy business, if success is merely breaking even.
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    The Compact will provide a base line of income that we can depend on. It won't prevent the fluctuations in price, but we can at least make equitable business decisions if we know the price will not go below the floor price established. Many producers today find themselves deeper and deeper in debt when the price drops out. The result is, that even when prices are higher, as they were last fall, the extra income is not reinvested in their business or taken home as extra pay, it's used to catch up on bills and trying to pay down the interest on the additional debt that has been incurred during hard times.

    The second benefit I see in the Compact is not the amount of the payment, but when we would receive it. When the Federal price falls, the Compact will kick in and act as a safety net catching the price before it drops too low. When we need the payment the most, we will receive it. In comparison, while dairymen are thankful for the federal allocation we will soon be receiving to help take the sting out low prices, it has taken more than year to get that money in the hands of producers.

    The third benefit is the ability to sit at the table with consumers and processors and to establish a fair floor price that everyone can live with. As it stands now both farmers and consumers are price takers, with no ability to have any input. It is not simply in the interest of my family that we continue to milk cows in Pennsylvania, it is and should be of interest to those who consume that milk and enjoy the open space our farm provides.

    It is my understanding that some people say we in the Northeast should not continue to milk cows because our costs of doing business are higher. The reason our cost of doing business is higher is because we are operating our business where the people are, the people who demand and consume fluid milk. Our farm is a fifteen minute drive from downtown Harrisburg, which is our state's capitol city. Needless to say, land values are high. We must compete for land with our wealthy suburban neighbors. We pay steep property taxes and spend a lot of dollars making sure our operation is environmentally sound and with good eye appeal to our consumer neighbors. While there are cost competitive disadvantages to dairy farming near the population centers, there are real advantages to having locally produced milk for the consumer. No other region can provide the people of Pennsylvania with a better a quality for a cheaper price. Milk ages when it leaves the cow, not when it hits the shelf. Our friends in the south have shown us what happens when you start shipping milk in from other regions. Local producer price declines and consumer prices rise.
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    Pennsylvania has long recognized the importance of assuring an adequate and fresh supply of locally produced milk for consumers by providing over-order premiums to producers through the Pennsylvania Milk Marketing Board. However, our state pricing agency is limited by the interstate commerce clause and can only provide the premium price to producers whose milk is produced, processed and sold in Pennsylvania. Less than twenty-percent of the milk produced in the state qualifies for that premium price. Under the Northeast Interstate Compact, nearly one-hundred-percent of the milk produced in Pennsylvania for Class I use, or milk used for drinking purposes, will have the safety-net protection of a minimum price that will help the average dairy farmer in Pennsylvania have an opportunity to remain economically viable.

    I hope that this committee will allow this legislation to move forward to enable farms like ours to continue to provide the best quality milk to the consumers in our area.

    Mr. GEKAS. We thank you, Mr. Kopp, and we turn to Mr. Krug for 5 minutes.

STATEMENT OF DAVID KRUG, REPRESENTING FAMILY DAIRIES USA, OWEN, WI

    Mr. KRUG. Good afternoon and thank you, Chairman Gekas and members of the subcommittee, for this opportunity to share our members' concerns on dairy compacts. I am David Krug, president of Family Dairies USA, and I am a dairy farmer from Taylor County, Wisconsin, in America's traditional dairy heartland. My wife, Juanita, and I milk 75 cows, farm 280 acres of crop and pasture land. The farm has been in my family four generations, a total of 103 years.
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    Family Dairies USA is a grassroots organization representing nearly 7,000 small- and medium-sized dairy farm families in nine upper Midwestern States. The annual survey of cooperatives published in the October 10, 1998, issue of Hoard's Dairyman magazine ranks Family Dairies USA as the Nation's second largest dairy cooperative in terms of membership.

    I am testifying today on behalf of Family Dairies USA and the Upper Midwest Dairy Coalition, which is a group of 18 dairy and farm organizations representing 34,000 dairy farmers working for milk pricing reform. I appear today in opposition to H.R. 1604 and in support of H.R. 744. I want to thank the sponsor of H.R. 744, Congressman Jim Sensenbrenner, along with Congresswoman Tammy Baldwin and other co-sponsors who are working with us in the struggle to bring equity and simplicity to our Nation's milk pricing rules.

    We are strongly opposed to regional compacts. Compacts are contrary to our goal of uniform national dairy policy that treats dairy producers equitably regardless of where they live and where their milk is marketed. These unfair milk pricing cartels erect new trade barriers to the movement of raw milk among regions of the country. Like the Eau Claire base Class I differentials, compacts legalize the principle that it is okay to maintain pricing rules that discriminate against many producers in some regions. If Congress were to authorize a Southern Compact, what was to be a temporary crutch for the New England States could engulf over half the States and seriously endanger the moderate reforms of the 1996 farm bill.

    With milk price supports scheduled to be phased out at the end of this year, price volatility is a major concern of our dairy industry. Dairy compacts, however, are not the solution to the price stability problem. Surplus milk production in the Northeast Compact region depresses manufacturing milk prices for producers in our region, further adding to our price volatility. This is a serious problem for the Upper Midwest where 85 percent of our milk is made into manufacturing dairy products whose prices have been reduced because of surpluses created by compacts.
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    A recent University of Missouri study shows that a majority of producers in the Nation would be harmed by the combined effects of regional compacts in the Northeast, Mid-Atlantic, and Southeastern States. Producers in every region outside the compact area stand to lose between 17 and 21 cents per hundredweight of milk according to that study.

    Compacts are not slowing the decline of small dairy farms. Ironically, statistics from the New England Federal Milk Order indicate that the rate of decline of small dairy farm numbers has actually increased since the inception of the Northeast Dairy Compact while the number of large farms has grown at an accelerated rate. The Northeast Compact has failed in its primary mission of preserving small dairy farms in the New England region.

    According to the Consumer Federation of America, the Northeast Compact has already cost New England consumers $65 million in higher milk prices while child nutrition programs costs in the region have increased by millions of dollars. The International Dairy Foods Association estimates that the cost could rise $2 billion annually for 60 percent of the Nation's consumers if compacts are expanded as proposed. At a time when so many Members of Congress are raising concerns about trade barriers erected by other nations against American products, it would be ironic to allow similar trade barriers to be erected within our own borders hindering commerce between regions of the United States.

    Finally, regional dairy compacts raise troubling constitutional issues that should prevent Congress from moving forward with new compact legislation. William Van Alstyne, a noted constitutional law professor at Duke University, whose testimony, I understand, is being presented here today, recently commented on constitutional issues raised by proposed compact legislation. Professor Van Alstyne stated the following: ''They, the compacts, mean to put up fences which the Constitution otherwise forbids them to do. Within these fences, multi-State cartels of participating States will administer regimes of economic protectionism of a kind the Constitution will not otherwise condone.'' Professor Van Alstyne goes on to raise three issues that Congress must consider during the current debate. I quote from his statement: ''Is regional economic protectionism, the balkanization of trade within the United States by trade barriers erected by groups of States, consistent with the premises of the Constitution of the United States? Second, does any historic co-precedent provide any measure of support for the notion that it is appropriate for Congress to approve compacts to be joined by two or more contiguous States to permit them to engage in economic protectionism? And, third, did the Framers of the Constitution and did the people of the United States who replaced the Articles of Confederation with the Constitution in order to form a more perfect Union envision that interstate compacts would be utilized to permit States to engage in economic protectionism?''
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    Mr. GEKAS. Would the gentleman bring his——

    Mr. KRUG. These questions deserve your careful consideration, and I certainly thank you for this opportunity to present our views today.

    [The prepared statement of Mr. Krug follows:]

PREPARED STATEMENT OF DAVID KRUG, REPRESENTING FAMILY DAIRIES USA, OWEN, WI

    Good day and thank you, Chairman Gekas and members of the Subcommittee, for this opportunity to share our members' concerns on dairy compacts. I am David J. Krug, president of Family Dairies USA. I am a dairy farmer from Taylor County, Wisconsin, in America's traditional ''Dairy Heartland.'' My wife Juanita and I milk 75 cows and farm 280 acres of crop and pasture land. The farm has been in my family for 103 years.

    Family Dairies USA is a grassroots organization representing nearly 7,000 small and medium-sized dairy farm families in nine Upper Midwest states. The annual survey of cooperatives published in the October 10, 1998 issue of Hoard's Dairyman magazine ranks Family Dairies USA as the nation's second largest dairy co-op in terms of membership. As a member of the Upper Midwest Dairy Coalition, we are working closely with other groups to reform harmful federal dairy policies that discriminate against our members.

    I appear today in support of H.R. 744 and in opposition to H.R. 1604. We applaud those members of the House and Senate who are working with us in the struggle to bring equity and simplicity to our nation's milk pricing rules.
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    We are strongly opposed to regional dairy compacts. Compacts are contrary to our goal of a uniform national dairy policy that treats all dairy producers equitably regardless of where they live or where their milk is marketed. These unfair milk pricing cartels erect new trade barriers to the movement of raw milk among regions of the country. Like the Eau Claire-based Class I differentials, compacts legalize the principle that it's okay to maintain pricing rules that discriminate against many producers in some regions.

    We shouldn't even be having this debate. The Northeast Interstate Dairy Compact was not part of the 1996 Farm Bill debate until it was inserted at the last minute in conference. Since July 1997, the Northeast Compact has fixed the regional price of fluid milk in the New England States. Since the compact was to be a transitional step between outdated federal milk regulation and federal milk order reform mandated by the 1996 Farm Bill, Congress scheduled it to sunset in April 1999.

    Unfortunately, the opponents of dairy reform inserted provisions in the fiscal year 1999 omnibus appropriations bill that delayed the sunset of the Northeast Compact until October 1, 1999 as part of a broader effort to delay and obstruct the reform process. Allowing the extension of the Northeast Compact amounted to major backsliding from the 1996 Farm Bill which was intended to move the dairy industry toward greater market orientation in milk pricing.

    The extension of the Northeast Compact has emboldened other states to stray from the path of reform. Many states have enacted or are considering legislation allowing them to join the Northeast Compact or form a Southern Dairy Compact. If Congress were to authorize a Southern Compact, what was to be a temporary crutch in the New England States could engulf over half the states and seriously endanger the moderate reforms of the 1996 Farm Bill.
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    Milk price volatility and farm level prices are the core issues in the debate on dairy compacts. From late 1998 to early 1999 raw milk prices went from record highs to record lows. (See attached chart.) With milk price supports scheduled to be phased out at the end of this year, price volatility is a major concern for our industry. Small to negative profit margins combined with extreme volatility are financially disastrous for dairy farmers. Farmers, processors and consumers will all benefit from a greater degree of price stability in dairy markets. Dairy compacts, however, are not the solution to the price stability problem. Surplus milk production with the Northeast Compact region depresses manufacturing milk prices for producers in our region, further adding to our price volatility.

    Compacts are not slowing the decline of small dairy farms. Compacts pay a premium on milk production without regard to farm size so large operations receive more benefit than small farms. Ironically, statistics from the New England Order indicate that the rate of decline in small dairy farm numbers has actually increased since the inception of the Northeast Dairy Compact, while the number of large farms has grown at an accelerated rate. The Northeast Compact has failed in its primary mission of preserving small dairy farms in the New England region.

    Farmers outside the compact region would see their milk prices lowered to benefit dairy farmers within the compact area. About 34 percent of producers in the nation reside in the states where compacts either exist or are under active consideration. By artificially propping up the price of milk for 34 percent of the producers in the nation, compacts directly depress the price for the other 66 percent of the nation's producers.

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    The Northeast Interstate Dairy Compact has caused surplus milk production in the member states that has depressed manufacturing milk prices for producers outside the compact area. Artificially high prices both stimulate production of raw milk and suppress demand for bottled milk. The resulting surplus must be manufactured into products such as cheese and butter. This is a serious problem for the Midwest where up to 85% of our milk is made into manufactured dairy products whose prices have been reduced because of surpluses created by compacts.

    A recent University of Missouri study shows that a majority of producers in the nation would be harmed by the combined effects of regional compacts in the Northeast, Mid-Atlantic and Southeastern states. Producers in every region outside of the Northeast, Mid-Atlantic and Southeast stand to lose between 17 and 21 cents per hundredweight of milk, according to the study.

    While the study shows that producers in the compact region benefit from compacts, those benefits also would come at the direct expense of fluid milk consumers in the compact region. According to the Consumer Federation of America, the Northeast Compact has already cost New England consumers $65 million in higher milk prices. The International Dairy Foods Association estimates that the cost will rise to $2 billion annually for 60 percent of the nation's consumers if compacts are expanded as proposed.

    Nutrition program costs also rise under dairy compacts. The Consumer Federation of America estimates that child nutrition costs have increased by $9 million in the New England states since the Northeast Compact was started.

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    If allowed to continue, compacts will carve the country into milk trading blocs. This harmful balkanization of the milk industry will further distort milk prices and supplies. Open interstate commerce has been one of the major hallmarks of our national economy since the birth on our nation. Dairy compacts are an unjustifiable exception to this rule, pitting farmers in compact states against those who are not.

    As Secretary Glickman noted in his February 10, 1999 testimony before the House Agriculture Appropriations Subcommittee, compacts fly in the face of a national dairy policy by erecting trade barriers between regions.

    Congress should not approve agricultural policies that so clearly provide benefits to the producers of one region, at the direct expense of the consumers of that region and producers elsewhere. Instead, there should be an effort to create a more rational and uniform national dairy policy. The Secretary of Agriculture should have the flexibility and authority to maintain a sound and cohesive national milk pricing policy, without the regional fragmentation caused by compacts.

    At a time when so many Members of Congress are raising concerns about trade barriers erected by other nations against American products, it would be ironic to allow similar trade barriers to be erected within our borders, hindering commerce between regions of the United States. But compacts do exactly that. By fixing milk prices at artificially high levels, the compact proponents understand that their markets become vulnerable to market forces at work elsewhere in the nation. So in order to prevent milk from other regions from entering those compact markets at lower prices, a tariff-like mechanism is established to assure that all milk entering the compact area is priced at the level fixed by the price-fixing commission in the region. This essentially insulates that region from competition or trade from other regions.
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    Congress would be making a collosal mistake to legislate dairy compacts or otherwise interfere in the federal order reform process at this time. Compacts are inconsistent with the broader federal milk marketing order reform process laid out in the 1996 Farm Bill. To retreat to compacts against the background of Congress's work reflected in the 1996 Farm Bill would be a huge step backwards and a costly mistake.

    Finally, regional dairy compacts raise troubling constitutional issues that should prevent Congress from moving forward with new compact legislation. William Van Alstyne, a noted consititutional law professor at Duke University who is testifying here today, recently commented on constitutional issues raised by proposed compact legislation. Professor Van Alstyne stated the following: ''They [compacts] mean to put up fences which the Constitution otherwise forbids them to do. Within these fences, multi-state cartels of participating states will administer regimes of economic protectionism of a kind the Constitution will not otherwise condone.''

    Professor Van Alstyne goes on to raise three issues that Congress must consider in the current debate. I quote from his statement:

1. ''Is regional economic protectionism—the balkanization of trade within the United States by trade barriers erected by groups of states—consistent with the premises of the Constitution of the United States?

2. ''Does any historical precedent provide any measure of support for the notion that it is appropriate for Congress to approve compacts to be joined by two or more contiguous states to permit them to engage in economic protectionism?
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3. ''Did the framers of the Constitution and did 'the people of the United States' who replaced the Articles of Confederation with the Constitution 'in order to form a more perfect union.' envision that interstate compacts would be utilized to permit states to engage in economic protectionism?''

    These questions deserve your careful consideration. Thank you for this opportunity to present our views.

Attachment: Family Dairies USA chart based on USDA data

63851k.eps

    Mr. GEKAS. We thank you, Mr. Krug.

    Mr. Bok—no, Mr. Simmons.

STATEMENT OF ALBERT SIMMONS, REPRESENTING THE NATIONAL FAMILY FARM COALITION, FLEMINGSBURG, KY

    Mr. SIMMONS. I want to thank the committee and the members for allowing me to share my knowledge of dairy compact pricing. My family also milks 60 cows on a dairy farm near Flemingsburg, Kentucky, and we are involved in——

    Mr. WATT. Sir, could you pull that mike closer to you there so we can hear a little better?
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    Mr. SIMMONS. We are involved in beef and tobacco, as well. I come speaking representing the National Family Farm Coalition, an organization of 31 grassroots farm groups, and one of those groups is the Community Farm Alliance that I am a member of in Kentucky, and I feel like the National Family Farm Coalition represents a broad range of people. We have members from Vermont, Wisconsin; we have members from Iowa, and I know of members from California, as well. It is not just a narrow, small regional group; it is a nationwide group.

    My first knowledge of dairy compacts came to me when I was serving on the board of directors of a milk organization called Milk Marketing, Incorporated, a dairy co-op, and I was intrigued by the idea that consumers and dairy farmers were going to be a part of setting a price for milk. This was very intriguing since in the past it had been a long time since consumers had said to the dairy farmer or the producer, ''Let us agree on a price that we can both live with.'' And those things have sort of lost their wayside because of a lot different reasons—consumers don't come to the dairy farm to buy their milk anymore.

    In the years since the link between dairy farmers and consumers has severed, all sorts of shenanigans have taken place in the Federal milk pricing system and retail pricing, leading to lower prices for dairy farmers and higher prices for consumers. One of the things I think that needs to be explained about that is that the Milk Marketing Orders that we hear very often criticized were started out, began to protect—they were organized and set up just to protect the consumer, so that the consumer would have a fresh dairy product in their home wherever in this Nation that they lived.

    The Northeast Interstate Dairy Compact is helping fix some of these problems in New England, and the compact can do the same thing in the South without adversely affecting farmers in other regions. The compact is good public policy on many levels. First, it creates a working solution to our Federal dairy policy in which dairy farmers have virtually no say in the milk prices they receive. Our dairy program develops a base price for all dairy products based on cheese and butter sales at the Chicago Mercantile Exchange, price surveys for food manufacturing plants around the country, also, price manufacturing surveys from dairy manufacturing plants around the country. From that point, the Federal formula makes price adjustments for different classes of dairy products, transportation costs, and other factors. At no point does the formula measure the dairy processors' demands for raw milk—which is what nearly all dairy farmers nationwide actually sell—nor does it measure the market conditions for fluid milk. So, farmers are left completely powerless, because they don't manufacture industrial quantities of cheese and butter.
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    The lack of the dairy farmer input in milk pricing allows big companies, especially Kraft Foods and others, which don't even sell milk in stores, to set farm prices to a significant degree. The result has been increasingly volatile and downward trending for farm prices. At the same time, retailers are left unchecked to raise the price of milk. Some interesting statistics—in February of this year, in 1996, the price rose and the BFP rose from $12.59 per hundredweight in February to $15.37 per hundredweight in September and then sunk to $11.34 by December. The retail price of milk only went up in 1996, rising from $2.82 per gallon in February to $3.12 per gallon by December—an 11 percent hike. Of that, if my math is correct, farmers got 6.5 percent of that.

    Mr. GEKAS. Could you draw the statement to an end?

    Mr. SIMMONS. Okay. I think the thing that is really important that dairy farmers have to have is to get away from this volatile thing, and I think that the compacts will maybe not eliminate that, but it does put a big control on it. I think that it is important to them when we go to the banker, we need to loan money. I am 58 years old, and I can't find young people that want to get into the business. I would like to turn a dairy farm over to some young person some day, but I don't see that happening with the conditions that are here today. There are so many things that are discouraging. I can't find a dairy producer in our area that is encouraged and feels that there is hope under the conditions that we have today. We have got to change.

    [The prepared statement of Mr. Simmons follows:]

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PREPARED STATEMENT OF ALBERT SIMMONS, REPRESENTING THE NATIONAL FAMILY FARM COALITION, FLEMINGSBURG, KY

    To start, I would like to thank the Committee for allowing me to share my knowledge of dairy compact pricing. My family milks 60 cows on our dairy farm near Flemingsburg, Kentucky, and we also raise beef and tobacco. I speak representing the National Family Farm Coalition, an organization comprising 31 grassroots farm groups nationwide, including advocacy and dairy trade groups in all regions of the country. Since we have a national focus, I will be addressing not only how dairy compacts affect NFFC members in Kentucky, but also in Vermont, Wisconsin and other parts.

    My first knowledge of dairy compacts came to me when I sat on the board of Milk Marketing Inc., a milk cooperative headquartered near Cleveland, Ohio, that later merged into Dairy Farmers of America. The thing that intrigued me most about dairy compacts was that consumers and farmers were going to be given an opportunity to price milk, which hasn't happened since the days in which consumers bought milk directly from consumers. In the years since the link between dairy farmers and consumers has been severed, all sorts of shenanigans have taken price in the federal milk pricing system and retail milk pricing, leading to lower prices for dairy farmers and higher prices for consumers. The Northeast Interstate Dairy Compact is helping fix these problems in New England and a compact can do the same in the South without adversely affecting farmers in other regions.

    The compact is good public policy on many levels. Firstly, it creates a working solution to a federal dairy policy in which dairy farmers have virtually no say in the milk prices they receive. Our dairy program develops a base price for all dairy products based on cheese and butter sales at the Chicago Mercantile Exchange and price surveys of dairy manufacturing plants around the country. From that point, the federal formula makes price adjustments for different classes of dairy products, transportation costs, and other factors. At no point does the formula measure the dairy processors' demand for raw milk—which is what nearly all dairy farmers nationwide actually sell—nor does it measure market conditions for fluid milk. So farmers are left completely powerless because they don't manufacture industrial quantities of cheese and butter.
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    That lack of farmer input into milk pricing allows the big companies, especially Kraft Foods, which doesn't even sell milk in stores, to set farm milk prices to a significant degree. The result has been increasingly volatile and downward trending farm prices. At the same time, retailers are left unchecked as they raise prices in the dairy case (the second most profitable section in the store behind frozen foods) when farm prices rise, and decline to cut retail prices significantly when farm prices fall. This happened most clearly in 1996, the year before the Northeast Interstate Dairy Compact went into effect. The federal Basic Formula Price (BFP) for farm milk fluctuated wildly that year, rising from $12.59/cwt in February to $15.37/cwt in September and then sunk to $11.34/cwt by December. The retail price of milk only went up in 1996, rising from $2.82/gallon in February to $3.12/gallon by December, an 11% hike. Overall, there was a 32% increase in retail milk prices nationwide from 1987 to 1997 while farm milk prices rose less than 2% in the same interval.

    Compact pricing takes us out of that wildly inappropriate pricing system and the widening farm- to-retail spread that it fosters, replacing it with a pricing system in which milk producers, consumers, and local processors sit down together to work out a milk price. In the Northeast, the 26 members of the dairy compact commission are broadly spread among these three interest groups, with a slight tilt toward the consumer. We can easily identify our common interests in this setting. Consumers want a supply of wholesome milk at an affordable price, and they would like family farmers to get a price that helps them stay in business, because it keeps milk supplies local and fresh. Farmers want to produce fresh milk and get it to the consumer as quickly as possible, with as little a markup as possible. We can achieve our shared goals by working together to establish a stable minimum price for fluid milk that helps farmers in times of low prices.
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    The model is working in the Northeast. Farmers have seen their prices rise in times when excess production of manufactured dairy products pushed down farm milk prices, and they received absolutely nothing from September 1998 to April 1999, when prices were relatively higher. Overproduction has not been a problem in New England, and there is significant evidence that the Compact actually helped curtail overproduction. USDA statistics show that Wisconsin had a 4.75 times larger milk production increase from 1997 to 1998 than did Vermont. Dairy production is expanding through the Upper Midwest even as family farmers are rapidly and ruthlessly getting pushed off their land. This is happening in large part because processors are paying huge premiums to larger farms for their higher volumes, and many farmers are jumping at the bait, expanding their operations. In the Northeast, meanwhile, compact pricing established a uniform price for farms of all sizes, eliminating the ability of processors to manipulate premiums in order to push for consolidation and expansion. Consumers in New England also did well by the Compact. A 1998 Office of Management and Budget (OMB) study reports that retail milk prices in the Northeast Compact states were $.05 per gallon lower than the national average in 1997 and early 1998.

    This OMB report found that the Northeast Compact created no adverse effects for dairy farmers outside the region since no overproduction resulted and since milk entering the compact from other states received the same price as milk produced within the region. As a national organization with dairy farmers from Minnesota, Wisconsin, and California on our board, NFFC only decided to endorse this compact legislation after deciding that the Compact had not led to significant increases in milk production that would lower prices in other regions.

    The alternative to compact pricing is not pleasant. In Kentucky, we lost 14% of our dairy production from 1995 to 1998, and some states eligible for the Southern Compact lost more than we did. We lose over 5% of our dairy farmers each year in Kentucky, including farmers who have won awards for their efficiency. As dairy farmers leave their land, more milk will be shipped into our area and the consumer will be forced to pay the costs of transportation. When milk is transported over long distances, water is pumped out of the milk so that it can travel in a condensed form, which is lighter and reduces the shipper's transportation cost somewhat. The product is then reconstituted when the milk gets to its destination. In this process, the milk loses its flavor, many of its nutrients, and much of its shelf life. This basically means that consumers would be getting the milk equivalent of a long distance tomato. The product might be technically safe, but it wouldn't be as healthy, nutritious, and fresh as it should be. I wonder if milk lovers of this world would be turned off and start telling us so with their pocketbooks.
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    In short, there are a lot of reasons to support compact milk pricing. Compact takes milk pricing away from the control of dairy manufacturers and returns it to a broader base of farmers, consumers, and local, independent processors. It establishes fairer prices for both farmers and consumers by eliminating volatility. Finally, the Compact ensures a fresh and nutritious milk product, which is why mothers have made milk a staple on their kitchen tables for countless generations. We urge each member of the Subcommittee to co-sponsor and vote for H.R. 1604, the aptly named Dairy Consumers and Producers Protection Act.

    Mr. GEKAS. I thank the gentleman, and we turn to Mr. Bok; 5 minutes.

STATEMENT OF WAYNE BOK, PRESIDENT, ASSOCIATED MILK PRODUCTS, INC., REPRESENTING THE UPPER MIDWEST DAIRY COALITION, GEDDES, SD

    Mr. BOK. On behalf of the Upper Midwest Dairy Coalition, I want to thank you, Mr. Chairman and other members of this committee, for allowing me to testify today. I am Wayne Bok, a dairy farmer from Geddes, South Dakota, and my testimony is in favor of H.R. 744 and in opposition to H.R. 1604.

    I am here to represent the dairy farmers of Associated Milk Producers, Incorporated, and the Upper Midwest Dairy Coalition. The coalition is a group of 34,000 dairy producers in 11 Midwestern States, and these producers account for nearly one-third of the United States milk producers. As president of AMPI and member of the Upper Midwest Coalition, I represent 6,500 dairy producers in my co-op from seven Midwest States, and though the leadership role that I play in my co-op is very important to me, my real job is owning and operating a dairy farm in South Dakota, and I am sure the mention of South Dakota conjures up images of cowboys and cattle and wide open spaces, and indeed those images illustrate the mindset from whence I come. We South Dakotans take pride in our open spaces with few fences, and any cowboy knows more fences just need more mending. And now the Nation's dairy producers are quickly learning that bit of logic.
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    One provision of the 1996 farm bill fences out economic realities for dairy farmers in six Northeast States. The Northeast Interstate Dairy Compact places a trade barrier around New England. Fluid milk prices are fixed artificially high for the sole benefit of the dairy producers in that region. This is done at the expense of the region's consumers and the dairy producers outside the area. One might guess this idea is catching on, and dairy producers from the Mid-Atlantic and Southeast States want a piece of this compact pie. They want to force consumers in their regions to pay more for Class I milk, more commonly known as bottled milk, and if you are a dairy producer in these areas, you probably like this idea. Higher prices in your area of the country artificially propped up by compacts will benefit you at the expense of others.

    Compacts increase the price of milk used in bottling. This artificial price increase has two effects. First, it creates an incentive for increased milk production, and, second, consumers drink less milk as a result of the higher prices. The surplus milk that results from these two factors has one clear effect: it increases the production of manufactured products such as cheese, butter, and nonfat dry milk. Bottom line: when the supply of fluid milk in a compact area increases, the value of milk outside the compact area decreases.

    Allow me for a moment to propose a fictional compact to illustrate my point. This compact will benefit those wanting to produce oranges in the Northern half of the U.S. In this compact, we build a fence across the U.S., East and West, and the compact will price oranges sold in the North at higher levels than oranges sold in the other areas. It will only benefit the Northern orange growers. What would happen under such a compact? Production of oranges would increase and consumption decrease in the North. Southern States would see prices drop until the production decreases to compensate.
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    Would that type of compact be acceptable to those formulating agricultural policy? Of course not. It would be devastating to the country's most efficient orange growers. They would lose a big chunk of their market.

    My fictional compact illustrates the absurdity of the compacts you are considering. In the world where South Dakota farmer's soybeans can end up in Japanese tofu and South Dakota farmer's corn can end up in a California gas station, it makes no economic sense to build a trade fence for milk. Isn't this the very reason our forefathers wanted a unified national economy? Long ago, they fought States' efforts to erect protectionist barriers.

    Coming from a State that has more food than people, it does not seem fair to restrict my ability to share products with the rest of the Nation and the world. A free and open domestic market has caused American farmers to become the most efficient food producers in the world. Who benefits from that? We all do. Consumers are the beneficiaries of this country's food policies. Those authoring the 1996 farm bill were very wise when they chose to sunset the compact's provisions in 1999. They knew such a plan did not make economic or constitutional sense.

    And I thank you for the opportunity to share my concerns on the pending dairy compact legislation. I hope you will adopt a South Dakota mindset with your decision on dairy compacts. This country's dairy industry shouldn't be fenced off and devalued. Thank you, Mr. Chairman.

    [The prepared statement of Mr. Bok follows:]

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PREPARED STATEMENT OF WAYNE BOK, PRESIDENT, ASSOCIATED MILK PRODUCTS, INC., REPRESENTING THE UPPER MIDWEST DAIRY COALITION, GEDDES, SD

    On behalf of the Upper Midwest Dairy Coalition, I want to thank you, Chairman Gekas and other members of this subcommittee hearing, for allowing me to testify before the committee.

    I am Wayne Bok, a dairy farmer from Geddes, South Dakota. I am here to represent the dairy farmers of Associated Milk Producers Incorporated and the Upper Midwest Dairy Coalition.

    The coalition is a group of 18 different dairy farm organizations representing about 34,000 dairy producers in 11 Midwestern states. Producers represented by the coalition account for nearly one-third of the United States milk producers.

    As president of Associated Milk Producers Incorporated, a member of the Upper Midwest Dairy Coalition, I represent 6,500 dairy producers from seven Midwest states. Though the leadership role I have in my cooperative is of the utmost importance, my real job is owning and operating a dairy farm near Geddes, South Dakota.

    I am sure just the mention of South Dakota conjures up images of cowboys, cattle and wide open spaces. Indeed, those images illustrate the mind set from whence I come. We South Dakotans take pride in our open spaces with few fences. Any cowboy knows more fences just need more mending. Now the nation's dairy producers are quickly learning that bit of logic.

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    One provision of the 1996 Farm Bill fences out economic realities for dairy farmers in six northeast states. The Northeast Interstate Dairy Compact places a trade barrier around New England. Fluid milk prices are fixed artificially high for the sole benefit of dairy farmers in that region. This is done at the expense of the region's consumers and dairy producers outside the area.

    As one might guess, this idea is catching on and dairy producers from the Mid-Atlantic and Southeastern states want a piece of the compact pie. They want to force consumers from their regions to pay more for Class I milk, more commonly known as bottled milk.

    If you are a dairy producer in these areas, you probably like this idea. Higher prices in your area of the country—artificially propped-up by compacts—will benefit you at the expense of others. Compacts increase the price of milk used in bottling. This artificial price increase has two effects. First, it creates an incentive for increased milk production. And second, consumers drink less milk as a result of higher prices. The surplus milk that results from these two factors has one clear effect: it increases the production of manufactured products such as cheese, butter and nonfat dry milk.

    Bottom line: When the supply of fluid milk in a compact area increases, the value of milk outside the compact area decreases.

    Allow me, for a moment, to propose a fictional compact to better illustrate my point. This compact will benefit those wanting to produce oranges in the Northern half of the U.S. In this compact we will build a fence across the U.S. The compact will price oranges sold in the North at higher levels than oranges sold in other areas. It will benefit Northern orange growers.
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    What would happen under such a compact? Production of oranges would increase and consumption decrease in the North. Southern states would see prices drop until production decreased to compensate. As a new northern crop, oranges might be a more profitable alternative to such traditional agricultural products as milk and corn.

    Would that type of compact be acceptable to those formulating agricultural policy? No, it would be devastating to the country's most efficient orange growers. They would lose a big chunk of their market. My fictional compact illustrates the absurdity of the compacts you are considering.

    In a world where a South Dakota farmer's soybeans can end up in Japanese tofu and a South Dakota farmer's corn can end up in a California gas station, it makes no economic sense to build trade fences for milk.

    Isn't this the very reason our forefathers wanted a unified national economy? Long ago they fought states' efforts to erect protectionist barriers.

    Coming from a state that has more food than people, it makes no sense to restrict my ability to share products with the rest of the nation and world.

    A free and open domestic market has caused American farmers to become the most efficient food producers in the world. Who benefits from that? Well, all of us. Consumers are the beneficiaries of this country's food policies.

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    Those authoring the 1996 Farm Bill were wise when they chose to sunset the compact's provisions in 1999. They knew such a plan did not make economic or constitutional sense.

    I thank you for the opportunity to share my concerns on the pending dairy compact legislation. If ever you want to visit a Midwest dairy farm, you are welcome to my South Dakota home. It's easy to find, there are few fences to cross.

    I hope you'll adopt a South Dakota mind set when making your decisions on dairy compacts. This country's dairy industry shouldn't be fenced off and divided.

    Mr. GEKAS. We thank you, Mr. Bok, for a very thoughtful statement.

    We turn to Mr. Corbett.

STATEMENT OF GARY A. CORBETT, VICE PRESIDENT, GOVERNMENTAL AND DAIRY INDUSTRY RELATIONS, DEAN FOODS COMPANY, FRANKLIN PARK, IL

    Mr. CORBETT. Thank you. Mr. Chairman and members of the subcommittee, thank you for the invitation to testify here today. My name is Gary Corbett. I am vice president for governmental and dairy industry relations for the Dean Foods Company. In addition to speaking on behalf of Dean Foods Company, I am also here representing the International Dairy Foods Association.

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    Dean Foods was founded in 1925. Over the years, we have grown to become a Fortune 500 food processor with over 11,000 employees, 50 production facilities, and annual sales of over $4 billion. Dairy products, including fluid milk and ice cream, remain Dean Food's largest and best known product line.

    Dean Foods and IDFA are strongly opposed to interstate dairy compacts for the following basic reasons. Dairy compacts, by design, increase prices for fluid milk products, which decrease sales of those products. Higher milk prices, in the short run, lead to increased farm milk production and to lower milk prices in the long run, which, in turn, invites further government intervention. Dairy compacts are an unprecedented and inappropriate use of the Commerce clause of the U.S. Constitution.

    Higher milk prices will hurt sales. Consumers choose to buy products based on a variety of factors, including price. For instance, consumers with larger budgets may be willing to pay higher prices for certain products while lower income consumers are more concerned simply with getting enough good food products to feed their families. Most of the sales volumes of fluid milk in the United States moves in larger volume containers that are the most price sensitive of all categories.

    Supermarket scanning data clearly shows that when the price of milk in larger volume containers goes up, sales go down. The volume purchaser of milk is more likely to be a shopper who must stretch his or her food budget. Particularly for low income and fixed income households, the only option available when milk prices go up is to buy less.

    Higher milk prices under dairy compacts will inevitably lead to higher milk production. This has occurred in New England States in just the two short years since the compact came into existence. The compact commission in the Northeast has even published a proposed rule for supply management in the compact region; supply management, just the type of flawed policy Congress has rejected in the past for the dairy and, in fact, ended for most major program commodities like wheat and feed grains in the 1996 farm bill.
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    The increased milk production which results from higher compact milk prices, must flow into dairy products other than fluid milk. Those other dairy products include cheese, butter, and nonfat dry milk, which compete in a national and increasingly international market. Increased production of these products will lead to lower market prices for them and, ultimately, to lower farm milk prices throughout the country. Policies such as compacts may try to benefit one region of the country in the short-run, but end up creating distortions that come at the expense of dairy farmers across the entire country in long-run.

    Dairy compacts create an additional unnecessary layer of regulation and bureaucracy. Most of the country is already subject to Federal Milk Marketing Orders that established the minimum price that a dairy farmer must be paid by dairy processors like Dean Foods. The regulations establishing those pricing controls are exceedingly complex and occupy an entire volume of the Code of Federal Regulations. These existing regulations are designed to ensure that dairy prices are high enough to produce an adequate supply of milk to meet the Nation's needs.

    A key aspect of milk regulation under Federal Milk Marketing Orders is the coordinated system of pricing across all markets regulated by Federal orders. Regional dairy compacts, however, would result in a system of milk price regulation across the United States that would be highly uncoordinated. Across the globe, experiences with government attempts at coordinated central planning in this century have failed miserably. Regional dairy compacts would give the United States uncoordinated central planning. This would be nothing short of a formula for disaster.

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    Using the interstate compact provisions of our Constitution to circumvent one of the fundamental reasons for the establishment of our Republic and the Constitution itself—the free flow of goods and services between and among the States—is unprecedented. This interferes in interstate commerce and will deny consumers the benefit of competition.

    In summary, interstate dairy compacts raise prices which hurt milk sales in the short-run and lead to increased milk production in the long-run. These effects will, in turn, invite further government intervention in the future, either through high government costs of purchasing surplus dairy products, as occurred in the 1980's, or through mandatory supply management programs. Finally, interstate dairy compacts are an unprecedented disruption of interstate commerce, which sets a dangerous and inappropriate precedent for other forms of economic protectionism. We strongly urge Congress to allow the Northeast Dairy Compact to expire and to oppose any further authorization of the use of interstate dairy compacts. Thank you.

    [The prepared statement of Mr. Corbett follows:]

PREPARED STATEMENT OF GARY A. CORBETT, VICE PRESIDENT, GOVERNMENTAL AND DAIRY INDUSTRY RELATIONS, DEAN FOODS COMPANY, FRANKLIN PARK, IL

    Mr. Chairman and members of the subcommittee, thank you for the invitation to testify here today. My name is Gary Corbett, and I am Vice President for Governmental and Dairy Industry Relations of the Dean Foods Company. I am pleased to participate in today's hearing on interstate dairy compacts because of the great importance of this issue both to my company and to the future of our nation's dairy industry.
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    In addition to speaking on behalf of Dean Foods Company, I am here representing the International Dairy Foods Association (IDFA), a trade association dedicated to advancing the interests of dairy processors, manufacturers, marketers and distributors of a wide range of dairy products. IDFA and its three constituent organizations—the Milk Industry Foundation, the National Cheese Institute, and the International Ice Cream Association—represent 85 percent of the fluid milk and milk products, cheese, and ice cream and frozen dairy desserts consumed in the $70 billion U.S. market. I currently serve as Chair of the Milk Industry Foundation's Federal Milk Orders Committee as well as Co-Chair of IDFA's International Trade Committee.

Background on Dean Foods Company

    Dean Foods was founded in 1925 as a small, mid-western dairy. Over the years, we have grown to become a Fortune 500, broad-based dairy and specialty food processor with over 11,000 employees, 50 production facilities and annual sales of over $4 billion dollars.

    Dairy products, including fluid milk and ice cream, remain Dean Foods' largest and best-known product line. Dean's regional dairy brands have long been leaders in their marketing areas and that strength continues to grow. Dean's and Verifine in the Midwest; McArthur and T.G. Lee in Florida; Barber, Coburg, Mayfield, and Purity in the Southeast; and H. Meyer, Hillside and Reiter in Ohio. Add Meadow Brook and Wengert's in Pennsylvania; Cream O' Weber in Utah; Creamland in New Mexico; and Bell, Gandy's and Prices' in Texas and the brand strength becomes even more evident. California is also a critical growth area for Dean with the acquisitions of a group of dairies throughout the state as well as Berkeley Farms, a strong brand name in the Bay area of San Francisco. In addition, Dean manufactures private label dairy products for many of the country's leading retailers. The combination of strong brands and private label production allows Dean economic efficiencies unmatched in the dairy industry in the United States.
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    These economic efficiencies have allowed Dean Foods to make significant investments that build a stronger, more dynamic dairy industry. Innovations, such as our Milk Chugs, make milk a portable and convenient beverage that meets consumer needs and help sell more milk. Milk Chugs have now been introduced in over 20 states and their sales are outpacing any of our previous single-serve packages—in some cases by nearly 300%. This is the type of investment that must be made to insure a healthy dairy industry for U.S. farmers, processors and consumers into the next century.

Why Dean Foods and IDFA are Opposed to Interstate Dairy Compacts

    Government regulation, where necessary, should be crafted in a manner that allows companies' products to compete in the marketplace with alternate products, provides the greatest incentive for product innovation and excellence, and gives consumers the best choices at the most competitive prices. Interstate Dairy Compacts represent government regulation which allows for none of these. Dean Foods and IDFA are strongly opposed to Interstate Dairy Compacts for the following basic reasons, which I will discuss further:

 Dairy Compacts, by design, increase prices for fluid milk products, which decrease sales of these products.

 Higher milk prices in the short run lead to increased farm milk production and to lower milk prices in the long run, which in turn invites further government intervention.

 Dairy Compacts are an unprecedented and inappropriate use of the Commerce Clause of the U.S. Constitution.
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Higher milk prices will hurt sales

    Milk processors can offer a range of products at a variety of prices. Consumers will choose to buy those products based on a variety of factors, including price. For instance, consumers with larger budgets may be willing to pay higher prices for certain attributes or services provided by a product, while lower income consumers are more concerned simply with getting enough good products to feed their families. Milk sold by the gallon is usually purchased for reasons of both volume and price. In some markets, fluid milk is differentiated from one brand to another by quality, but a fairly high standard of quality is expected and delivered by all milk products. Most of the sales volume of fluid milk in the United States moves in larger-volume containers that are the most price sensitive of all categories.

    On the other hand, milk in a single-serve size is judged by many other criteria. Is it available when I want it? Is it cold and ready to drink? Is it the amount I want? Is the container convenient—easy to open, re-sealable, able to fit in my car's cup holder? Is the container as attractive as the containers of other beverages I might purchase at the same location? These additional attributes or services to the consumer are values the consumer is willing to pay extra for and that actually motivate additional consumer purchases.

    Milk competes with other beverages for a share of the consumer's stomach. Higher milk prices in dairy compact regions place milk at a competitive disadvantage relative to other beverages sold in those regions. In regions without dairy compacts, milk processors will thus have the advantage of offering milk products at a more competitive price relative to other beverages.
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    Supermarket scanning data clearly shows that when the price of milk in larger-volume containers goes up, sales go down. This is not advanced economic theory, but merely common sense. The volume purchaser of milk is more likely to be a shopper who must stretch his or her food budget. Particularly for lower-income and fixed-income households, the only option available when milk prices go up is to buy less of something. Published economic studies of fluid milk sales consistently agree that there is a negative relationship between milk sales and milk prices, including studies by USDA and the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri.

Higher prices under Dairy Compacts will lead to higher milk production

    Dairy Compacts represent a step backward for dairy policy. In the 1970's, federal dairy policy was used to enhance dairy farmer incomes beyond what the market was willing to pay. This led to huge purchases of dairy products by the federal government under the dairy price support program. In fact, in 1983, nearly 13 percent of the milk produced in the United States was sold to the federal government in the form of cheese, butter and nonfat dry milk. It was not until over a decade later, in 1996, that a reduced price support level finally allowed milk prices to be more market-driven for longer than a few months. The result has been that, in two of the past three years, farm milk prices reached record highs (1996 and 1998). In fact, looking at the farm milk price so far in 1999, coupled with futures market prices from the Chicago Mercantile Exchange, we are on course for 1999 to be the year of the third-highest farm milk price on record, right behind 1998 and 1996.

    Higher milk prices under dairy compacts will inevitably lead to higher milk production. This has occurred in the New England states in just the two short years since the Northeast Interstate Dairy Compact came into existence. Once again, published economic research consistently affirms that there is a positive relationship between milk production and milk price. The Compact Commission in the Northeast has even published a proposed rule for supply management in the compact region. Supply management—just the type of flawed policy Congress has rejected in the past for the dairy industry, and in fact ended for most major program commodities like wheat and feedgrains in the 1996 Farm Bill.
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    The increased milk production which results from higher Compact milk prices must flow into dairy products other than fluid milk. After all, fluid milk consumption in the Compact region is already declining due to the higher prices. These other dairy products include cheese, butter and nonfat dry milk, which compete in a national, and increasingly international, market. Increased production of these products will lead to lower market prices for them, and ultimately to lower farm milk prices throughout the country.

    As you can see, policies such as Compacts may try to benefit one region of the country in the short run but end up creating distortions that come at the expense of dairy farmers across the entire country in the long run.

Dairy Compacts create an additional, unnecessary layer of regulation and bureaucracy.

    Establishing regional dairy compacts would erect a completely unnecessary, additional layer of regulation and bureaucracy in an already unduly complicated and over-regulated milk industry. Most of the country is already subject to federal milk marketing orders that establish the minimum price that a dairy farmer must be paid by dairy processors like Dean Foods. The regulations establishing those pricing controls are exceedingly complex, and occupy an entire volume of the Code of Federal Regulations. These existing regulations are purportedly designed to insure that dairy prices are high enough to produce an adequate supply of milk to meet the nation's needs, as required by the Agricultural Marketing Agreement Act of 1937 as amended.

    A key aspect of milk regulation under federal milk marketing orders is the coordinated system of pricing across all markets regulated by federal orders. Regional dairy compacts, however, would result in a system of milk price regulation across the United States that would be highly uncoordinated. Across the globe, experiences with government attempts at coordinated central planning in this century have failed miserably; regional dairy compacts would give the United States uncoordinated central planning. This would be nothing short of a formula for disaster.
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    The mechanism by which federal order dairy prices are established is also quite complex, involving extensive economic analyses by government and private economists, and protracted rule-making hearings at which all interested parties are invited to testify and subject to cross-examination. And after the minimum prices are established, a sizeable federal bureaucracy carries out its implementation, through the auditing of receipts and usage, the collection and distribution of proceeds, etc.

    As elaborate as is the existing system, it would pale in comparison to that which would be erected if regional dairy compacts were approved. Not only would the federal government continue to have its own extensive bureaucracy, but the regional compacts would have their own. Just as the federal government must determine the minimum prices that it requires under federal orders and have a system for auditing and insuring compliance, so would each of the regional compacts. This would not be Reinventing Government—it would be Expanding Government. Indeed, in the Northeast Interstate Dairy Compact region for the past two years dairy processors have had to pay administrative assessments to both the federal milk marketing order administrator (USDA) and to the Compact Commission.

Dairy Compacts are an unprecedented and inappropriate use of government intervention in markets.

    Using the interstate compact provisions of our Constitution to circumvent one of the fundamental reasons for the establishment of our Republic and the Constitution itself—the free flow of goods and services between and among states—is unprecedented. This interference in interstate commerce will deny consumers the benefits of competition and change the course of history for America's dairy industry.
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    As a business with operations in many states, Dean Foods is very troubled by the notion that a state or group of states would be given the right to create a mini-nation and wall itself off from competition with other states. Each member of Congress should be troubled as well. One of the main reasons why the United States has become a leading world economic power is that our nation of 260 plus million people is a single economic market driven by free market forces. If computer scientists in Silicon Valley come up with a new computer chip, they know that they can sell their product throughout the country without fear that competitors in, for example, Boston will try to keep them out of that region by erecting tariffs or other economic barriers. Conversely, if it is the computer scientists along Boston's Route 128 corridor that make a breakthrough, competing California scientists will have to respond with an even better chip—not with an effort to exclude the product from their state.

    The dairy compacts toss these well-established business norms out the window. Instead of a national market, we would have a series of regional fiefdoms, each intent on protecting the parochial interests of their dairy farmers over the interests of the nation as a whole. Indeed, dairy compact supporters openly boast of their ability to keep out lower priced products of more efficient farmers located outside the compact region.

    The United States as a nation has been a world leader in persuading other countries of the benefits of the free market and open trade. We are winning the hearts and minds of citizens across the globe because our economic prosperity has served as proof of the benefits of an open, market economy. It would be a complete flip-flop, and a true irony, if the United States were to turn its back on these principles now and adopt a system of regional milk cartels, just as more and more governments are moving out of the business of regulating their industries.
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Conclusion

    In summary, interstate dairy compacts raise prices which hurt milk sales in the short run and lead to increased milk production in the long run. These effects will, in turn, invite further government intervention in the future, either through high government costs of purchasing surplus dairy products as occurred in the 1980's or through mandatory supply management programs. Finally, Interstate Dairy Compacts are an unprecedented disruption of interstate commerce, which sets a dangerous and inappropriate precedent for other forms of economic protectionism. We strongly urge Congress to allow the Northeast Interstate Dairy Compact to expire and to oppose any further authorization of the use of interstate dairy compacts.

    Mr. GEKAS. We thank the gentleman for his statement.

    We turn to Mr. Green.

STATEMENT OF JAMES GREEN, VICE PRESIDENT AND GENERAL MANAGER, MAOLA MILK & ICE CREAM COMPANY, NEW BERN, NC

    Mr. GREEN. Thank you, Mr. Chairman.

    Since May 1, 1996, Maola has paid out almost $1.4 million in import charges on raw milk. However, there have still been times when milk was in such short supply that we had to make chocolate milk out of powdered milk. We could not get the milk as needed, even from Wisconsin. Import charges actually aren't monies paid for milk at all, but rather they are freight hauling charges billed to us when the cooperative that balances our milk supply has to bring milk into North Carolina from another State.
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    These import charges increase the price of raw milk. They increase the price of milk to our customers and, ultimately, increase the price of milk to the consumers. One recent month, we were forced to pay $23.44 per hundredweight for over 3 million pounds of milk that had to be brought in from out-of-State because of short local supply. That is a 22 percent increase over what we would have had to pay for North Carolina milk. Unfortunately, not $.10 of these additional costs has benefitted North Carolina or any other dairy farmers. It has simply helped to prosper a number of commercial freight companies that haul milk.

    Importing milk has been necessary because North Carolina is a milk-deficit State. We do not produce a sufficient volume of milk in our State to supply our own consumer needs. Most of the milk has been brought in from the Northern States, however at least a producer cooperative has been forced to bring milk all the way from New Mexico just to meet consumer demands. In 1996, the cooperative from whom we buy a portion of our milk had to import milk 9 months of the year. In 1998, we were advised they were required to import milk 11 months of the year. Obviously, the deficit situation is worsening.

    A major reason for the necessity of importing is that the population of North Carolina is increasing rapidly while local resources for milk production are decreasing. You have heard that Wisconsin has lost 40 percent of their dairy farms over the past few years. I believe USDA statistics support that, in fact, from 1988 to 1998, their milk production was only down 9 percent. At the same time, North Carolina lost 72 percent of their dairy farmers over the past 25 years and over the past 10 years our milk production was down 19 percent. And the numbers continue to shrink.

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    Dramatic variances in milk pricing, which had little to do with the law of supply and demand, have been a primary reason for the shrinking numbers. We do not advocate higher milk prices, however, we believe it to be in the best interests of North Carolina consumers to support our dairy farmers with some type of program that will stabilize the price of raw milk at a level both the dairy farmers and the consuming public can live with.

    It seems to us that contributing to the dairy farmers in North Carolina to help stabilize the entire industry makes much more sense than paying increasingly large sums of money to freight companies to stress and age milk by hauling it hundreds and thousands of miles across the Nation. We and the entire dairy industry, including the agencies who regulate us, know that the more quickly the milk is pasteurized after it leaves the farm, the better the taste and quality of the milk. Long-distance hauling can add from 12 to 36 hours to this very critical time period and does result in significant deterioration in flavor and quality. Our children need and deserve high-quality milk and, to provide it, we need a local supply.

    Some of those in opposition to the Southern Dairy Compact are stating that it is nothing more than an elaborate price fixing scheme that will drive up the cost of raw milk at every level. Currently, there is a group of several farm cooperatives who meet each month and determine the price to be paid by processors for raw milk. The Southern Dairy Compact mandates that a pricing commission be established and that it be comprised of a delegation from each member State. Every delegation is required to have at least one consumer representative as well as one dairy farmer and, by gentleman's agreement, one processor. It makes much more sense to us to have raw milk prices determined by a commission comprised of farmers, consumers, and processors, than the current method of allowing the cooperatives alone to impose the costs on the processors and, ultimately, the consumers.
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    Finally, there is the issue of competition. Recent Federal Milk Marketing Order Reform has mandated a method of pricing raw milk that will force Maola to pay much more for our milk than the large dairy conglomerate that dominates the market in our State. The Southern Dairy Compact will have the power to even the prices to all processors who are buying their milk and selling it in the same area. Without this, Maola and others in similar situations in the Southeast will likely be forced out of business, diminishing competition and increasing prices to the consuming public and to our school children.

    The Southern Dairy Compact is not a perfect document. But in our opinion, it is the best option currently available to keep milk prices down to reasonable levels, yet encourage milk production where it is needed. The compact would allow the Southern region to come together and seek resolutions to those problems that are unique to our area. The current and proposed Federal milk marketing structures do not allow for this. We support the bill for the Southern Dairy Compact and we thank you for the opportunity of presenting our views.

    [The prepared statement of Mr. Green follows:]

PREPARED STATEMENT OF JAMES GREEN, VICE PRESIDENT AND GENERAL MANAGER, MAOLA MILK & ICE CREAM COMPANY, NEW BERN, NC

    Since May 1, 1996, Maola Milk & Ice Cream Co. has paid out $1,384,804.48 in import charges on raw milk. Import charges are actually not monies paid for milk at all, but rather are freight hauling charges billed to us when the cooperative that balances our milk supply has to bring milk into North Carolina from another state. These import charges effectively increase the price of raw milk, increase the price of milk to our customers and ultimately increase the price of milk to the consumers in the marketplace. One recent month, when Class 1, North Carolina milk was priced at $19.21 per hundredweight, we were forced to pay $23.44 per hundredweight for milk brought in from out of state because of short local supply. That is 22% more, an additional $4.23 per hundredweight, for imported milk. Unfortunately, not one dime of these additional costs has benefited North Carolina or any other dairy farmers. It has simply helped to prosper a number of commercial freight companies that haul milk.
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    Importing milk has been necessary because North Carolina is a milk deficit state, that is, we do not produce a sufficient volume of milk in our state to supply our own consumer needs. Most of the import milk has been brought from New York, Pennsylvania and other Northern states, however at least one producer cooperative has been forced to bring milk all the way from New Mexico to meet consumer demands. In 1996, the cooperative from whom we buy a portion of our milk, had to import milk nine months of the year. In 1998, we are advised that they were required to import milk eleven months of the year. Obviously, our deficit situation is worsening.

    A major reason for the necessity of importing is that the population of North Carolina is increasing rapidly, while local resources for milk production are decreasing. In just 25 years, the number of dairy farms in the state have declined from 1,646 to just 470, a decrease of 72%. The numbers continue to shrink. Dramatic variances in milk pricing which had little to do with the law of supply and demand, have been a primary reason for the shrinking numbers. We believe it to be in the best interests of North Carolina consumers to support our dairy farmers with some type of program that will stabilize the price of raw milk at a level that both our dairy farmers and the consuming public can live with. It seems to us that contributing to the dairy farmers in North Carolina to help stabilize the entire industry makes much more sense than paying increasingly large sums of money to freight companies to stress and age milk by hauling it hundreds and thousands of miles across the country.

    We and the entire dairy industry, including the agencies who regulate us, know that the more quickly the milk is pasteurized after it leaves the farm, the better the taste and overall quality of the milk. Long distance hauling can add from 12 to 36 hours to this very critical time period and result in significant deterioration in flavor and quality. Our children need and deserve high quality milk and to provide it, we need a local supply.
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    It has been said that if one repeats a lie often enough, sooner or later one will start believing it to be a true statement. Some of those in opposition to the Southern Dairy Compact are stating that it is nothing more than an elaborate price fixing scheme that will drive up the cost of milk at every level. A few have stated it so many times that they actually seem to believe it. Currently, there are a group of several farm cooperatives, eight I believe, who meet each month and determine the price to be paid by processors for raw milk. They consider all the pertinent factors, then agree upon an over order premium to charge the processors. The Southern Dairy Compact mandates that a pricing commission be established and that it be comprised of a delegation from each member state. Every delegation is required to have at least one consumer representative, one dairy farmer and by gentlemen's agreement, one processor. It makes much more sense to us to have raw milk prices determined by a commission comprised of farmers, consumers and processors, that the current method of allowing the cooperatives alone to fix and impose the costs on the processors and ultimately, the consumers.

    There also are those who claim that the Northeast Compact has resulted in higher milk prices in New England. I cannot attest to that, but it seems to me that comparing the milk industry in New England with that of the Southeast is about as practical as comparing apples with locomotives. New England is a surplus area—we are a deficit area. They have a very high population density—ours is predominately rural. There are major geographical differences——all of New England would fit well within North Carolina alone. I believe that our differences make it very difficult, if not impossible to conclude that the result of a Compact in the Southeast would be the same as that of one in the Northeast.

    Finally, there is the issue of competition. Recent Federal Milk Marketing Order Reform has mandated a method of pricing raw milk that will force Maola to pay much more for milk than the large dairy conglomerate that dominates the market in our state. The Southern Dairy Compact will have the power to even the prices to all processors who are buying and selling their milk in the same area. Without this, Maola and others in similar situations in the Southeast will likely be forced out of business, diminishing competition and increasing prices to the consuming public and to our school children.
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    The Southern Dairy Compact is not a perfect document, but in our opinion it is the best option currently available to keep milk prices down to reasonable levels and encourage milk production where it is needed. The Compact would allow the Southern region to come together and seek resolution to those problems that are unique to our area. The current and proposed Federal Milk Marketing structures do not allow for this. We support the bill and encourage you to do the same.

    Mr. GEKAS. We thank the gentleman.

    We will stand in recess for the purpose of responding to the call from the Floor and we will reconvene at 2:20. We stand in recess.

    [Recess.]

    Mr. GEKAS. The hour of 2:20 having arrived, the committee will come to order and then abide by its own rules that it cannot commence the testimony until another member of the subcommittee shall appear.

    In the meantime, we want to simply notify everyone of one slight change in the program. In order to accommodate a pressing personal appointment that Mr. Covert has, the senior vice president and president of manufacturing at Kroger in Cincinnati, we are going to permit him to be the tail end of this panel, thus saving Mr. Parker from the ignominy of being the last witness. So, when the time comes, we will go from Mr. Parker to Mr. Covert and then submit the entire panel to questions that might be posed by the members.
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    We note the presence of the gentlelady from Wisconsin, who now helps us constitute a quorum. We will proceed with the testimony of Mr. Charlton, to which Mr. Canady will pay strict attention. Mr. Charlton.

STATEMENT OF SCOTT CHARLTON, VICE PRESIDENT, MANUFACTURING, PUBLIX SUPERMARKETS, INC., REPRESENTING THE FOOD MARKETING INSTITUTE, LAKELAND, FL

    Mr. CHARLTON. Well, thank you, Mr. Chairman and distinguished members of the committee. I am Scott Charlton, the vice president of manufacturing for Publix Super Markets, and I am extremely honored to have this opportunity to testify before the panel today. I am here today on behalf of Publix Super Markets and the Food Marketing Institute.

    Publix Super Markets, headquartered in Lakeland, Florida, operates in four States—Florida, Georgia, South Carolina, and Alabama—and we have an average of 10.8 million shoppers per week that we service through our stores. At Publix, we take our role as purchasing agent for the consumer very seriously. And that is why I am really here before you today. The dairy compact legislation, H.R. 1604, is before your subcommittee today. It will raise milk prices, drive down milk consumption, and create a regional price-fixing scheme that is a radical departure from other Federal programs.

    Milk prices will increase. Dairy compacts are expensive. I would like to give you a specific example of what happened in the six New England States when the Northeast Interstate Dairy Compact was created in July 1997. The Compact Commission set a floor price of $1.46 per gallon. This means that the minimum price for fluid milk in the six States for the dairy farmers was set at $1.46 per gallon. Milk processors and retailers purchased the milk at a minimum of $1.46 per gallon. There are several functions that milk processors and retailers do that add more costs before the fluid milk appears on the grocery shelf for the store shoppers. In New England, when the Compact Commission increased the milk price for farmers to $1.46 a gallon, the retail price rose about $.20 per gallon.
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    Let me put that into perspective. With the consumers that we serve, if that would have occurred in our market last year, our customers would have had to pay $19 million to $20 million additional for their milk purchases. There were some claims that retailers and milk processors should absorb all cost increases and not pass along price hikes to milk consumers. However, increased costs do ultimately get passed along to the consumer.

    It is a notable public policy goal to save small dairy farmers, however in the Northeast, small dairy farmers barely benefitted from the compact. In fact, the Northeast Dairy Compact is not slowing the rate of dairy farm loss in New England. It seems that location and demographic factors have a stronger impact than milk price on the decline of dairy farms. Furthermore, the size of the dairy compact subsidy per farm is based on how much milk each farm produces. Not only do the poor get hit with a milk tax, but small dairy farmers are overlooked because the largest, wealthiest farms, many with a net worth over $2 million, benefit the most from the compacts.

    Since the compact began, price hikes for milk have wiped out more than $4.7 million of the purchasing power of New England Food Stamp recipients. A couple of examples: participants in the Child and Adult Care Food Program and the Nutrition Program for the Elderly in the Northeast had to absorb $342,000 and $410,000 in higher milk prices, respectively, since the compact went into effect.

    Compacts will drive down milk consumption. Milk consumption in this country has been declining since 1975. Artificially higher milk prices will only encourage milk consumers to purchase other beverage alternatives. According to economists, a 10 percent increase in retail price of milk can lead to as much as an 8 percent decline in consumption. We just finished a year in 1998 where we experienced some of the highest milk prices, and that being raw milk prices, for processing that we have ever seen. And, looking at the chart that Senator Landrieu from Louisiana presented, I draw one note to that and that is that it is a USDA price spread chart that really shows only one portion of the picture and that being that it is only tracking homogenized gallon and half-gallon milk and not the rest of the items that make up the category.
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    There is unprecedented regional price fixing with compacts. The creation of dairy compacts by Congress is unprecedented. Dairy compacts are regional price-fixing schemes that deny consumers the benefit of low-cost milk from outside the region by attracting higher producers. Prior to the Northeast Compact, the New England and Mid-Atlantic retail milk prices were virtually identical. Once the compact started, the New England retail milk prices shot up and stayed up while Mid-Atlantic retail milk prices stayed lower. And I have attached a chart to show that.

    [The information referred to follows:]

63851l.eps

    Mr. CHARLTON. Mr. Chairman and members of the subcommittee, I urge you to oppose H.R. 1604 and any other efforts to create a dairy cartel. Consumers of milk deserve better than that. So do the small dairy farmers that the cartels are intended to help. Thank you.

    [The prepared statement of Mr. Charlton follows:]

PREPARED STATEMENT OF SCOTT CHARLTON, VICE PRESIDENT, MANUFACTURING, PUBLIX SUPERMARKETS, INC., REPRESENTING THE FOOD MARKETING INSTITUTE, LAKELAND, FL

    Mr. Chairman and Distinguished Members of the Subcommittee . . .

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    I am Scott Charlton, Vice President for Manufacturing for Publix Super Markets. I am extremely honored to have the opportunity to testify before this panel today. I am here today on behalf of Publix Super Markets and the Food Marketing Institute.

    Publix Super Markets, headquartered in Lakeland, Florida, operates in four states—Florida, Georgia, South Carolina and Alabama and we have an average of 10.8 million shoppers in our stores each week.

    The Food Marketing Institute (FMI) is a nonprofit association conducting programs in research, education, industry relations and public affairs on behalf of its 1,500 members including their subsidiaries—food retailers and wholesalers and their customers in the United States and around the world. FMI's domestic member companies operate approximately 21,000 retail food stores with a combined annual sales volume of $225 billion—more than half of all grocery store sales in the United States. FMI's retail membership is composed of large multi-store chains, small regional firms and independent supermarkets. Its international membership includes 200 members from 60 countries.

    At Publix we take our role as the purchasing agent for the consumer very seriously. And that is why I am here before you today.

    The dairy compact legislation (H.R. 1604) before your subcommittee today will raise milk prices, drive down milk consumption, and create a regional price-fixing scheme that is a radical departure from other federal farm programs.

Milk Prices Will Increase
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    Dairy compacts are expensive. I would like to give you a specific example of what happened in the six New England states when the Northeast Interstate Dairy Compact was created in July 1997. The Compact Commission set a floor price of $1.46 per gallon. This means that the minimum price for fluid milk in the six states for the dairy farmers was set at $1.46 per gallon. Milk processors and retailers purchase the milk at a minimum of $1.46 per gallon. There are several functions that milk processors and retailers do that add more costs (i.e. process, bottle, and transport) before the fluid milk appears on the grocery shelf for store shoppers.

    In New England, when the compact commission increased the milk price for farmers to $1.46 per gallon, the retail price rose about $0.20 per gallon. There were some claims that retailers and milk processors should absorb all cost increases and not pass along price hikes to milk consumers. However, increased costs do ultimately get passed along to consumers. Milk is not exception to this economic rule. It is a noble public policy goal to save small dairy farmers. However, in the Northeast, small dairy farms barely benefited from the compact. In fact, the Northeast Dairy Compact is not slowing the rate of dairy farm loss in New England. It seems that location and demographic factors have a stronger impact than milk prices on the decline of dairy farms. Furthermore, the size of the dairy compact subsidy per farm is based on how much milk each farm produces. Not only do the poor get hit with a milk tax but small dairy farmers are overlooked because the largest, wealthiest farms—many with a net worth well over $2 million—benefit the most from the Compact.

    Since the Compact began, price hikes for milk have wiped out more than $4.7 million of the purchasing power of New England food stamp recipients. Participants in the Child and Adult Care Food Program and the Nutrition Program for the Elderly in the Northeast have had to absorb $342,000 and $410,000 in higher milk prices, respectively, since the Compact went into effect.
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    Food stamp recipients in dairy compact states could lose hundreds of millions of dollars in food purchasing power. Milk is a staple in the U. S. Department of Agriculture's ''thrifty food plan'' for food stamp recipients. For a family of five living according to the plan, the Compact could add about $120 a year to their food budget or force them to substitute cheaper, less nutritious beverages. The timing could not be worse as many low-income families are trying to move from welfare to self-sufficiency.

    The Northeast Dairy Compact Commission has granted two exemptions to two federal child nutrition programs: the supplemental feeding program for Women, Infants and Children (WIC) and the National School Lunch and Breakfast Programs. School meals programs, however, were not exempted until the Compact had cost them $1.75 million in higher milk prices. Moreover, the exemption lasts only until the end of the 1998–1999 school year. The current exemptions do not cover food stamp recipients and other essential child and elderly nutrition programs.

Compacts Will Drive Down Milk Consumption

    Milk consumption in this country has been declining since 1975. Artificially higher milk prices will only encourage milk consumers to purchase other beverage alternatives.

    According to economists', a 10% increase in the retail price of milk can lead to as much as an 8% decline in milk consumption.

Unprecedented Regional Price Fixing
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    The creation of dairy compacts by Congress is unprecedented. Dairy compacts are regional price-fixing schemes that denying consumers the benefits of lower-cost milk from outside the region by protecting high-cost producers. Prior to the Northeast Compact, New England and Mid-Atlantic retail milk prices were virtually identical. Once the Compact started, New England retail milk prices shot up and stayed up, while Mid-Atlantic retail milk prices stayed much lower. I have attached a chart so you can see the impact.

    The Northeast Interstate Dairy Compact is the only regional compact that has ever allowed a group of states to band together to fix product prices. This was never the intent of our founders who wrote the Constitution. Previous regional compacts have permitted states to work together in cooperative ventures such as transportation, forest fire protection and fisheries projects.

    Mr. Chairman and members of the subcommittee, I urge you to oppose H.R. 1604 or any other efforts to create dairy cartels. Consumers of milk deserve better than that. So do small dairy farmers that the cartels are intended to help.

    Thank you again for the opportunity to testify. I would be happy to answer any questions you may have.

    Mr. GEKAS. We thank you, Mr. Charlton.

    And we turn to Mr. Parker. Five minutes.

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STATEMENT OF CHARLES PARKER, GENERAL MANAGER AND CHIEF OPERATING OFFICER, GOLD STAR DAIRY, LITTLE ROCK, AR

    Mr. PARKER. Mr. Chairman and members of the subcommittee, thank you so much for the invitation to testify here today for Gold Star Dairy.

    My name is Charles Parker. I am with Gold Star Dairy. We are owned by and operated by Affiliated Foods Southwest in Little Rock, Arkansas. Affiliated Foods Southwest is a retailer-owned grocery cooperative located in Little Rock and services member retailers throughout Arkansas, Texas, Louisiana, Mississippi, and Oklahoma.

    Gold Star Dairy began operations in 1980 for the purpose of supplying affiliated member retailers with quality milk at a competitive price. Since 1980, Gold Star has grown to process over 200 million pounds a year. We operate and service wholesale grocery companies only. We sell milk in Florida, Alabama, Texas, Mississippi, and Arkansas. For 19 years, the quality of our milk has been noted as being some of the highest quality milk on the market to date.

    Our success and our customer satisfaction are directly related to three issues, these being quality, price, and availability. One of the major problems facing our facility today is a shortage of a local supply of raw milk. Arkansas is a deficit milk producing State and we are constantly having raw milk shipped in from Missouri, Texas, Oklahoma, and even as far away as New Mexico. This causes the price of milk to increase because of excess freight charges on inbound shipments.
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    The shelf life of milk begins when it is taken from the cow. Shipping milk over long distances allows for temperature variations. When the temperature of raw milk reaches 40 degrees, the bacteria count multiplies rapidly. This week before last, we imported three loads of milk in order to have enough milk for our facility to fulfill our needs. Out of the three, we had to turn two down because of bacteria count and temperature.

    We must find a solution to this shortage problem in order to supply our customers with a quality product. In 1992, there were 866 dairy farms in Arkansas. Today, the number of dairy farms in Arkansas is 464. This is over a 46 percent decrease in producers from 1992 to 1999.

    The new dairy order reform established by the Department of Agriculture is proposed to take effect in October of this year. The approach used in this reform to solve the problem of milk shortages is to pay increased transportation costs in order to supply the deficit markets. This would obviously increase milk prices for all the parties involved, when the real issue at hand is to increase the local supply to obtain quality product.

    Another issue facing the producer, processor, and consumer is the price volatility of milk today. For example, it has been noted before by other people that the February BFP dropped $6.00 a hundredweight. Well, I doubt very much of that $6.00 was reflected at retail level. Yet, a dairy producer, his feed cost, his veterinarian bills, his labor, his payments all remain status quo. A dairy producer cannot stay in business with that kind of cash-flow fluctuation. No other business, I doubt, could survive that kind of cash-flow implication. We must also be concerned about the consumer and how price fluctuations affect the quality and availability needed to meet their demands. During times of large price decreases, the consumer may or may not see that price decline.
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    A dairy compact should ensure that retail pricing for fluid milk would not increase disproportionately to farm milk prices. The compact would also benefit the consumer, providing for their active representation of consumers on the compact commission. The formation of this compact would take the control of pricing out of the hands of dairy co-ops and allow for equal participation in each State in the pricing of raw milk. Should the Southern Dairy Compact not be approved and the Federal Order Reform that has been mandated and approved will eliminate competition and force higher pricing. The consumer and the producer of this area will both be adversely affected if there is not a local supply of quality fresh milk.

    It is my testimony that I strongly recommend the urgent implementation of a compact for the survival of the dairy farmer and the dairy processor in the Southeast. A consistent local supply of quality milk is necessary for the consumer to be assured of a fair price without sacrificing any quality. Thank you.

    [The prepared statement of Mr. Parker follows:]

PREPARED STATEMENT OF CHARLES PARKER, GENERAL MANAGER AND CHIEF OPERATING OFFICER, GOLD STAR DAIRY, LITTLE ROCK, AR

    Gold Star Dairy is owned and operated by Affiliated Foods Southwest, Inc. Affiliated Foods Southwest, Inc. is a retailer owned grocery cooperative located in Little Rock, Arkansas and supplies member retailers throughout Arkansas, Texas, Louisiana, Mississippi, Tennessee and Oklahoma. Gold Star began operations in Little Rock in 1980 for the purpose of supplying Affiliated's member retailers with quality milk at a competitive price and to allow an alternative of purchasing milk from some of the larger milk processors. Since 1980 Gold Star has grown to process over 200 million pounds of raw milk annually servicing wholesale grocery companies in Florida, Alabama, Texas, Mississippi and Arkansas. We are a high volume low cost plant and target only wholesale grocery companies. Our philosophy allows us to deliver a very high quality product to our customers at a competitive price. For 19 years the quality of our milk has been the highest quality milk on the market today and we are able to deliver this product to our customers at a competitive price by shipping trailer load quantities only and avoiding the overhead associated with direct store deliveries.
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    Affiliated Foods Southwest, Inc. or Gold Star Dairy does not operate under the benefit of a federal grant, contract or subcontract and has not received any such grants or contracts.

    Affiliated Foods Southwest, Inc. recently joined into a Partnership in ARK/TENN Dairy Research Facility. Located in Conway County on Wolverton Mountain, ARK/TENN is researching the effects climate, feed ratios and other factors have on milk production. We currently have over 1,000 head of cattle and plan to expand to 3,200. Currently we are producing approximately 850,000lbs of raw milk monthly. This venture was pursued in order to guarantee a fresh quality raw milk supply and provide research that will enable the Arkansas Dairy Farmer to remain viable and also to contribute to the deficit milk production situation in our region.

    As you can see, over the years Gold Star Dairy has been successful with processing and marketing fluid milk by establishing strict quality controls and at the same time keeping the ultimate consumers interest in mind by providing this product at a low price. Our success and our customers satisfaction is directly correlated to 3 issues; the quality of our raw milk, the price of raw milk and its availability.

    These three issues are the biggest concerns facing all three parties involved in milk production and consumption i.e. (the producer, the processor, and the consumer). For example, this past March the price of raw milk decreased $6 per cwt. (hundred weight) from the February price. There has to be some method of establishing a more consistent price in order to keep the dairy farmer in business. Not many if any dairy farmers can stand to loose this much revenue (30%) from one month to the next. The consumer on the other hand may or may not see this price decrease passed through at store level. A problem also exists with a consistent quality milk supply. We are in a deficit milk producing state (Arkansas) and are constantly having raw milk shipped in from other states (Missouri, Texas, Oklahoma and even New Mexico). This causes the price of milk to increase because of excess freight charges on inbound shipments.
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    This testimony will address these issues in detail as they relate to the producer, the processor and consumer and how the formation of the South East Dairy Compact can eliminate or ease the pressures of quality, price volatility and a shortage in milk supply. Milk Production in the states of Arkansas, Louisiana, Mississippi, Tennessee, Alabama, Georgia, Florida, North Carolina and South Carolina is considerably less than required to supply fluid markets in these states. Regional production is decreasing while consumption increases and supplemental supplies are being drawn from farther and farther away. Missouri, Kentucky and Tennessee, which have traditionally provided supplemental supplies, have lost 14–18% of their production since 1995. Texas now produces less than its own fluid needs. The loss of production in Texas has occurred primarily in East Texas, leaving remaining supplies farther west. For Arkansas, Louisiana, Mississippi and Alabama this means there is less supplemental milk available, further away and more likely to be needed locally.

    In 1992 there were 866 commercial dairy farms (producers) in Arkansas. Today the number of dairy farms in Arkansas is 464. This is over a 46% decrease in the number of producers. In Mississippi there were 3,967 dairy farms in 1992 compared to 2,400 today. For Mississippi this is over a 39% decrease. In Texas there were 2,108 dairy farms compared to 1,314 today. This is a 38% decrease in the number of commercial dairy farms. Nationally there has been a decrease of 24% in the number of dairy farms since Arkansas Grade A milk pooled on federal orders in December 1997 was 40.3 million pounds, which was down 9.6% from 1996. In 1996 the Arkansas pooled milk on federal orders was down 18.8% from 1995.

    This problem of milk shortage in Arkansas causes milk prices to be very inconsistent because of the transportation cost associated with bringing milk in to supply the needs of my customers.
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    I would like to address milk supply and how a shortage of milk in my geographical area affects the producer, processor, and the consumer and how we feel the Compact can help these problems.

 PRODUCER—We feel the greatest asset the Compact could offer to the consumer is the levelization of pricing. The producer would have some gauge where he is able to predict cash flow and operate his business like any other business.

 PROCESSOR—A shortage of raw milk means higher cost and lower quality of milk. Transportation cost force a higher price while lower quality is seen when shipping milk long distances. Temperature variations cause increased bacteria. Often times when milk arrives from other states, the temperature level has remained higher than acceptable for a period of time forcing our plant to refuse the load because it is unfit to process. Transporting milk for an extended period of time deteriorates the shelf life causing a quality issue. This causes the processor to scramble to find an adequate supply of milk to fill pending orders. All of these factors yield a higher cost. We must keep an ample local supply of milk to protect the consumer.

 CONSUMER—The consumer also bears an additional expense and sacrifices quality when a shortage of raw milk occurs. The additional cost paid by the processor is passed onto the consumer resulting in a much higher cost at retail than if an adequate milk supply was available at a local level.

    A dairy compact should ensure that retail prices for fluid milk will not increase disproportionately to farm milk prices. The compact by encouraging price stability lessens fluctuations that tend to widen the gap between farm prices and retail prices. A dairy compact should also provide a safety net for dairy farmers by helping to maintain a stable price for fluid milk during times of volatile swings in farm milk prices as have been experienced during the past several years. As in any business, stable prices give farmers a better opportunity to plan for the future. Stable prices also help dairy farmers to recover their production cost and keep their dairy farms in operation. This in turn would help local rural economies by supporting related agricultural businesses including feed, seed, fertilizer, etc. A dairy producer with debt to be serviced is not able to borrow money when the price of his product has dropped 30% as mentioned earlier in the March 1999 example. The producer in this case is unable to meet cash flow and his business suffers.
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    A reliable local supply of milk and stability in pricing is essential to the viability of a processor. The consistency of these factors will enable sales forecasting to have meaning and cash flow to be predictable. I must be able to accurately predict my plant's needs to remain competitive and to continually supply my product to my customers. In order to be effective in my business I need the assurance that a quality milk supply is available and that the price will render my product competitive.

    The new Dairy Order Reform established by the Department of Agriculture is proposed to take effect in October of this year. The approach used in this reform to solve the problem of milk shortages is to pay increased transportation cost in order to supply deficit milk production areas. This would obviously increase milk prices for all parties involved, when the real issue at hand is to increase the local supply of milk. The Dairy Compact should enable each state to actively participate in the right direction of helping local farmers produce more milk and allowing for the real issue to be addressed at the local level rather than a quick fix which will increase the cost of milk to the processor and consumer.

    The federal milk marketing order pricing system does not fully account for regional differences in the cost of producing milk. Additionally, the federal milk marketing order system establishes only minimum prices for milk. Since milk now almost always crosses state lines to get to markets, the courts have ruled that individual states do not have the authority to regulate milk prices under the interstate commerce clause of the U.S. Constitution. Congress may, however, delegate its regulatory authority over interstate commerce to regional groupings of states through this compact. Entering into this Compact is thus the means for states to obtain from Congress the regulatory authority over their region's interstates markets for milk. States have recognized that they must work together through a Dairy Compact if they are to maintain their dairy farms.
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    The dairy compact authorizes an interstate Compact Commission to take such steps as necessary to assure consumers have an adequate local supply of fresh fluid milk and to assure the continued viability of dairy farming within the region of the participating states in this compact.

    Since the Compact Commission considers local market conditions in pricing milk to satisfy local demand and keep dairy farming economically feasible, it will benefit both farmers and consumers through stabilized prices.

    The Compact Commission would have the authority to regulate the farm price of Class I (fluid) milk. It may establish price regulation by way of a formal rulemaking process. The Commission would take formal testimony to assess the price necessary to yield a reasonable return to the dairy producer. Equally important, the commission takes into account the purchasing power of the public. Any fluid milk price change proposed by the Commission is subject to a two-thirds approval vote by the participating state delegations, each having one vote, as well as a dairy producer referendum. All fluid milk consumed in the Compact is equally priced in each area. This would eliminate the need for Over Order Premiums charged to processors by dairy co-operatives, which currently creates numerous pricing structures for a relatively small geographical area.

    One of my major concerns lies in the fact that at the current time my plant facility is paying a different price for milk than other processing plants in the southeast. This situation makes it virtually impossible to compete in locations where the price has fluctuated. This is mainly due to the fact that I am paying variable Over Order Premiums for milk shipped into my plant. With the formation of the Dairy Compact the Commission would set a price that a processing plant in the regulated area must pay for milk, no matter where the producer of that milk is located. Additionally, processors not located in the compact regulated area, but with sales in the regulated area, must pay its producer-suppliers the compact-designated price for the percentage of it's sales in the regulated area.
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    It is the mission of the Compact Commission to set a milk price at the right level to adequately supply a local market without creating an unnecessary surplus production. Additionally, it is not in a dairy farmer's interest to over-produce for the market because the compact price only applies to the percentage of his milk that goes for fluid milk sales. If the milk supply in a regulated area increases without a corresponding increase in fluid milk sales, the fluid milk utilization rate declines and the farmer receives the compact price for a lower percentage of his milk. This is why the creation of a Compact would not create a milk surplus.

    All dairy farmers whose milk is sold in the regulated area would benefit based on the percentage of their milk that is sold to the public as fluid milk. Everyone benefits equally based on the amount of milk they sell that is marketed to the public as beverage milk.

    The dairy compact would also benefit the consumer by providing for the active representation of consumers on the Compact Commission. Each state law requires the Governor to appoint at least one consumer representative to the compact Commission. This process would ensure proper representation of all interest. The compact would also provide states the opportunity to work closely together on the pricing of fluid milk, therefore, returning more of the power to states in determining fair prices and locally produced supplies of fresh milk. This would take the control of pricing out of the hands of Dairy Co-ops and allow for equal participation from each state in the pricing of raw milk. Commission members will be made up of all parties involved in the production, processing, and consumption of raw milk. In order for the Compact to be fair to all parties involved, the delegation from each state should be made up of producers, consumers and a variety of processors. The power of the delegation must be spread in a way to eliminate total control by one or more large processors.
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    Should the Southern Dairy Compact not be approved, the Federal Order Reform that has already been mandated and approved will eliminate competition and force higher milk cost in the market place. The consumer and the producer of this area will both be adversely affected if there is not a local supply of quality fresh milk.

    It is my testimony that I strongly recommend the urgent implementation of a Compact for the survival of the dairy farmer and the dairy processor in the southeast. A consistent local supply of quality milk is necessary for the consumer to be assured of a fair price without sacrificing any quality standards.

    Mr. GEKAS. And we thank you, Mr. Parker.

    Let the record indicate that the gentleman from Virginia, Mr. Goodlatte, a member of the Judiciary Committee, has chosen to attend this hearing and is welcome to audit its proceedings.

    The Chair now turns to Mr. Covert, who is waiting—who is the senior vice president, president of manufacturing of the Kroger supermarkets in Cincinnati, Ohio. He is a constituent of our colleague on the Judiciary Committee, Mr. Chabot, who could not attend these proceedings here today. Mr. Covert is senior vice president, president of manufacturing at Kroger, which is responsible for food processing facilities. He joined Kroger in 1996 and was promoted to senior vice president in May of this year. Prior to joining Kroger, Mr. Covert worked for Proctor and Gamble for more than 20 years. He received his B.S. in chemical engineering from Case Western Reserve University.
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    Mr. Covert.

STATEMENT OF GEOFFREY COVERT, SENIOR VICE PRESIDENT AND PRESIDENT, MANUFACTURING, THE KROGER CO., CINCINNATI, OH

    Mr. COVERT. Mr. Chairman and distinguished members of the subcommittee, thanks for squeezing me into the agenda this afternoon. I am glad to be here. I am the senior vice president, president of manufacturing of Kroger and I am glad to be here this afternoon.

    Kroger is the Nation's largest grocery retailer, with the recent merger of the Fred Meyer stores with Kroger. We operate around 2,200 food stores in 31 States and we recently completed the merger with Fred Meyer of Portland, Oregon. In 1998, the combined Kroger and Fred Meyer stores had sales of about $43 billion. To put that in perspective, $.10 of every food $1.00 spent in the United States to be eaten at home is purchased in one of our stores.

    Our food stores are known by such familiar names as Kroger, Ralphs, Fred Meyer, Fry's, Smith's, Dillon, King Soopers, City Markets, and QFC or Quality Food Centers. We also operate 800 convenience stores and 44 food and dairy manufacturing facilities and employ about 300,000 people in the U.S. In 1999, Kroger customers purchased over 500 million gallons of milk in our stores.

    The Kroger Company is very concerned about the proposed dairy compact legislation, H.R. 1604. The bill would make the current Northeast Dairy Compact permanent and authorize a Southern compact. Milk is a wholesome food that provides essential nutrition for children and adults. In our opinion, dairy compacts hurt consumers who drink milk, especially lower income individuals and families.
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    Our opinion is based upon the experience of the Northeast Interstate Dairy Compact that was created in July 1997. Since then, the Northeast region has seen four effects. First, milk prices have gone up. Second, milk demand has declined. Third, nutrition programs have been impacted. And, fourth, local dairy farmers are still leaving the dairy farms.

    The milk pricing issue: In the Northeast the Compact Commission set a floor price of $1.46 per gallon for dairy farmers. This caused the retail price for fluid milk to jump about $.20 a gallon. Consumers of milk in the six New England States found themselves paying a milk tax, in essence. Even our government's own Office of Management and Budget says, and I quote, ''Some economic benefits expected by compact supporters, including lower retail prices through stable, regulated producer prices, have not been proven so far.''

    The second area I want to talk about is milk demand declining because of the compact. As a result of higher milk prices, consumption of fluid milk in the Northeast has declined. A December 1997 study by A.C. Nielsen Advanced Analytics found that a 5 percent increase in a retail price—roughly the same increase caused by the compact in the last 14 months—corresponds to a 2 percent to 4 percent decrease in milk sales. The Nielsen analysis simply confirms textbook economic expectations that higher prices lead to decreased milk consumption. Higher prices encourage milk consumers to purchase other beverages. In fact, according to economists, a 10 percent increase in the retail price of milk can lead to as much as an 8 percent decline in milk consumption.

    The next area I want to talk about is the impact on the nutritional programs with the USDA. Because of the higher fluid milk prices, the Northeast Dairy Compact Commission exempted two Federal child nutrition programs from the compact price premiums: the Supplemental Feeding Program for Women, Infants, and Children, or WIC program, and the National School Lunch and Breakfast programs. However, until the school meals program exemption was granted, schools paid an additional $1.75 million in higher milk prices due to the compact.
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    The exemptions do not cover Food Stamp recipients and other essential child and elderly government nutrition programs. According to these figures obtained from the USDA, since the compact began, its price hikes have wiped out more than $4.7 million of purchasing power of New England Food Stamp recipients. New England States' Child and Adult Food Care Program and the Nutrition Program for the Elderly have had to absorb nearly $500,000 in higher milk prices since the compact went into effect.

    If Congress approves the proposed compact legislation, these kinds of impacts on those who depend most upon milk as a low-cost, accessible, nutritious food are likely to increase. Among our customers, milk is the number two beverage of choice. Soda pop is leading the way. We sell a lot of soda, but I think we all readily agree that it is not a nutritional food.

    The relationship between retail prices and purchasing by customer is seen in our own experience. Milk is an elastic commodity. When milk prices increase, sales decline. For example, the recent history, in January through March 1999, we experienced record high raw milk costs. As a result of the corresponding retail price increases, which we passed on to consumers, milk sales declined 5 percent to 6 percent during that period.

    Local dairy farmers are still leaving the farm. A goal of the Northeast Dairy Compact was to prevent the loss of the local dairy farms. Despite the higher prices to farmers during the first year of the compact, the rate of dairy farm loss in New England was 41 percent higher than the rate of loss of commercial dairy farms in the previous 2 years. If the regional cartels are created around the country, milk prices are very likely to increase. Excess supply will result, which will ultimately hurt the dairy farmer the compacts are purporting to help.
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    In summary, Kroger believes dairy compacts will hurt both consumers and dairy farmers. They create a hidden tax on customers and consumers. This tax especially hurts lower income families who depend upon milk as a quick, easy, low-cost, highly nutritional food. Dairy farmers are also hurt by compacts because they lead to artificially inflated wholesale prices, which in turn creates excess supply and lower demand. Kroger strongly urges the subcommittee to continue the pro-consumer reform the dairy industry began with the 1996 fair farm bill. The Northeast Compact should sunset and additional regional dairy compacts should not be authorized. Thank you.

    [The prepared statement of Mr. Covert follows:]

PREPARED STATEMENT OF GEOFFREY COVERT, SENIOR VICE PRESIDENT AND PRESIDENT, MANUFACTURING, THE KROGER CO., CINCINNATI, OH

    Mr. Chairman and Distinguished Members of the Subcommittee:

    I am Geoff Covert, Senior Vice President and President of Manufacturing of The Kroger Co. I am honored to have the opportunity to testify before this panel.

    Kroger is the nation's largest grocery retailer. We operate 2,200 food stores in 31 states. We recently completed our merger with Fred Meyer, Inc. of Portland, Oregon. In 1998, the combined Kroger and Fred Meyer stores had sales of $43 billion. To put that in perspective, 10 cents of every food dollar spent on food to be eaten at home was spent in a Kroger store.
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    Our food stores are known by such familiar names as Kroger, Ralphs, Fred Meyer, Fry's, Smith's, Dillon, King Soopers, City Markets and QFC. We also operate 800 convenience stores and 43 grocery and dairy manufacturing facilities.

    In 1998 Kroger customers (excluding Fred Meyer, Inc. stores) purchased 289 million gallons of milk.

    The Kroger Co. is very concerned about the proposed dairy compact legislation (H.R. 1604). The bill would make the current Northeast Dairy Compact permanent and authorize a southern compact.

    Milk is a wholesome food that provides essential nutrition for children and adults. In our opinion, dairy compacts hurt consumers who drink milk, especially lower income individuals and families.

    Our opinion is based upon the experience of the Northeast Interstate Dairy Compact that was created in July 1997.

    Since then, the northeast region has seen:

 milk prices go up,

 milk demand decline,

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 nutrition programs impacted, and

 local dairy farmers still leaving the farm.

Milk Prices Go Up

    In the Northeast, the Compact Commission set a floor price of $1.46 per gallon for dairy farmers. This caused the retail price for fluid milk to jump about $0.20 per gallon. Consumers of milk in the six New England states found themselves paying a ''milk tax.'' Even our government's own Office of Management and Budget (OMB) says ''Some economic benefits expected by compact supporters, including lower retail prices through stable, regulated producer prices, have not been proven so far.''

Milk Demand Declined

    As a result of higher milk prices, consumption of fluid milk in the Northeast has declined. A December 1997 study by A.C. Nielsen Advanced Analytics found that a 5% increase in retail price—roughly the same increase caused by the Compact in its first 14 months—corresponds to a 2% to 4% decrease in milk sales. The Nielsen analysis simply confirms textbook economic expectations that higher prices lead to decreased milk consumption. Higher prices encourage milk consumers to purchase other beverages. In fact, according to economists, a 10% increase in the retail price of milk can lead to as much as an 8% decline in milk consumption.

USDA Nutrition Programs Impacted

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    Because of the higher fluid milk prices, the Northeast Dairy Compact Commission exempted two federal child nutrition programs from the Compact price premiums—the supplemental feeding program for Women, Infants and Children (WIC) and the National School Lunch and Breakfast programs. However, until the school meals programs' exemption was granted, schools paid an additional $1.75 million in higher milk prices.

    The exemptions do not cover food stamp recipients and other essential government nutrition programs for children and the elderly. According to the figures obtained from USDA, since the Compact began its price hikes have wiped out more than $4.7 million of the purchasing power of New England food stamp recipients. New England states' Child and Adult Care Food Program and the Nutrition Program for the Elderly have had to absorb nearly one-half million dollars in higher milk prices since the Compact went into effect.

    If Congress approves the proposed compact legislation, those who depend most upon milk as a low-cost, accessible nutritious food will continue to feel the impact.

    Among our customers, milk is the number 2 beverage choice, with soda pop leading the way. We sell a lot of soda, but I would readily concede it is not a nutritional food.

    The relationship between retail prices and customer purchases is seen in our own experience. Milk is an elastic commodity. When milk prices increase, sales decline. For example, in January through March of 1999, we experienced record high raw milk costs. As a result of the corresponding retail cost increases, milk sales declined 5–6%.

Local Dairy Farmers Still Leaving the Farm
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    A goal of the Northeast Dairy Compact was to prevent the loss of local dairy farms. Despite higher prices to farmers, during the first year of the Compact the rate of dairy farm loss in New England was 41% higher than the rate of loss of commercial dairy farms in the previous two years, according to an annual dairy farm survey by the American Farm Bureau Federation.

    If regional dairy cartels are created around the country, milk prices are very likely to increase. Excess supply will result, which will ultimately hurt the dairy farmer the Compacts are purporting to help.

Summary

    In summary, Kroger believes dairy compacts hurt both consumers and dairy farmers. They create a hidden tax on consumers. This tax especially hurts lower income families who depend upon milk as a quick, easy, low cost, highly nutritional food. Dairy farmers also are hurt by compacts because they lead to artificially inflated wholesale prices, which in turn creates excess supply and lower demand.

    Kroger strongly urges this subcommittee to continue the pro-consumer reform of the dairy industry that began with the 1996 Farm Bill. The Northeastern Compact should sunset and additional regional dairy compacts should not be authorized.

    I appreciate this opportunity to be with you today and I would be happy to try to answer your questions.
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    Mr. GEKAS. The time of the gentleman has expired. We thank you, Mr. Covert.

    The Chair yields itself 5 minutes before turning to the lady from Wisconsin. Mr. Kopp, did the Farm Bureau actually vote through its delegateship to support the compact?

    Mr. KOPP. No, that was the Dairy Committee's recommendation.

    Mr. GEKAS. To whom?

    Mr. KOPP. To the Farm Bureau to go along with the dairy—to support the dairy compact.

    Mr. GEKAS. And then you worked with the Pennsylvania legislature on that subject?

    Mr. KOPP. Correct.

    Mr. GEKAS. Yes.

    Mr. KOPP. And they, today, they just finally approved it. It was voted on today. There were some problems. It went back to the legislators and it was approved today. It is waiting for the Governor to sign it.
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    Mr. GEKAS. All right. Mr. Corbett, you mentioned as part of your testimony that, as did others in different ways, that the price being lifted because of the compact would result in lower sales, as Mr. Covert has said. I think Mr. Corbett said it. What impact does that have—I am not sure—on the non-fluid milk products and their prices?

    Mr. CORBETT. On non-fluid dairy products?

    Mr. GEKAS. Yes, that is for the products other than fluid milk. Cheese, et cetera.

    Mr. CORBETT. Well, the compact has no direct response. The opportunity, if everything is held constant—in other words, we don't have weather-related demands or factors that are inherent—tends to lower the price of all those commodities because too much milk is produced. It has no other form to go into other than to storable commodities—butter, powder, and cheese—and it has a tendency, over time, to lower the cost of those.

    Mr. GEKAS. Well, then, isn't the consumer, by an ironic twist, benefitted by the fact that the compact, although in your view artificially creating these higher prices, aren't they, left-handedly, the consumer is benefitted by a lower price for the other products?

    Mr. CORBETT. That is assuming that that lower price is passed on at retail or wholesale. And, two, the rate of consumption. I think fluid milk has always been held out that, for low-income families and for everyone in general, the consumption is a nutritionally beneficial type situation. For a long time in this country, the largest use of fluid milk was in the fluid form. And so the fact that some of these other products may or may not enjoy a lower price at retail because of this I don't think helps the consumer in terms of the higher price they have to pay on the fluid milk at retail.
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    Mr. GEKAS. The Chair reserves the balance of its time and now yields to the lady from Wisconsin for 5 minutes of questioning.

    Ms. BALDWIN. Thank you, Mr. Chairman. I have listened and learned a great deal with the first two panels. As I have studied a lot of the issues that have come up, there are certainly major regional inequities that have a historic underpinning. But many of the conditions that were present back in the 1930's are no longer present today. It is my belief that a lot of the regional inequities that continue to this day have a lot more to do with politics than anything else. That the relative sparse population of the Midwest doesn't give the sort of political voice that we have in other areas of the country. And it is an issue that hasn't really come up yet in the course of this hearing.

    But if somebody from the Midwest wants to have an impact on improving the fairness for especially small-sized dairy farm families across the Nation, one is going to have to appeal to other Members of Congress on the basis of fundamental fairness. I want to especially ask the four farmers who have addressed this today to remove yourself from the issue of compacts or no compacts, but talk to me and list if you can, quite simply, the values and the goals that you are trying to protect by either advocating for or against the compact system. Saving the family farm, guarding against fluctuations in prices.

    I would like to hear each of you quickly tell me what core goals that you have that you would like to see enunciated in a policy that, frankly, I hope will be more fair to farmers everywhere. Let us start with Mr. Kopp and move across.

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    Mr. KOPP. Well, I think the problem that we face is the large fluctuations in price. We cannot really get a satisfactory business plan of what our income is going to be. We know what our costs are going to be. And we always have to be dealing with the big fluctuation in price. And I think we need to have something. I don't think we need to have government intervention where they set a floor on our price. I think that was the thing that was removed in the last Farm Bill and I think that was a good idea. And I think we need to have something where something does kick in and does level off the price of milk, that doesn't let it drop that $6.00.

    I don't think there is anybody in here that can take a $6.00 cut in their hourly wage per week like we took in a month. I mean, that is what we are dealing with and I think there is the real problem in the pricing of milk.

    Ms. BALDWIN. Thank you. Mr. Krug.

    Mr. KRUG. Yes, thank you. As I listened to the other panelists, I hear the same kind of goals. You know, survival of the family farms; eliminate or reduce the price volatility, for example. But we are going about it in different ways and we are doing it on a regional basis, pitting region against region. And this is really not a—you know, we talk about the politics and that goes back to the Farm Bill, the no pricing reform. This is not even a partisan issue; it is a regional issue. And so, basically, we have the same concerns, the same goals, and objectives but we are going about it in different ways. The compacts only add to pitting region against region.

    Ms. BALDWIN. Thank you. Mr. Simmons.
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    Mr. SIMMONS. Okay. I guess I see things from a little different perspective than what some other people do. I see that when the three different groups that milk pricing touches, all of them having a say in it, you know, it doesn't leave any of them out, where the system that we have today, it leaves the two on each end out. And that is critical to me. If we don't do that—and I think that if the three groups get together, we can put an end to this fluctuation thing that we have. And I don't see it as pitting one region against the other. I think it says this can work and we will work out a way to do it for everybody. And that is what I see. I don't see a gate closing in front of anybody. I think it opens the gate for a lot of people.

    Ms. BALDWIN. Mr. Bok.

    Mr. GEKAS. We extend to the lady another minute to elicit a response.

    Ms. BALDWIN. Thank you, Mr. Chairman.

    Mr. BOK. I guess if I would have one goal in mind that I would like to see happen in my industry, it would be unification in our industry. I think when I go to my Congressman and my Senators from my State and I talk to them about dairy policy, I am reminded constantly that if our industry would get all leaning in the same direction and get together, we could get something done and we could have a more equitable industry.

    I see things like the whole Federal Order System, which was in place long before I was born—not that long, but sometime before I was born—has divided our industry continually. Our co-op used to be a national co-op and at that time it was divided because we were in different regions of the country dealing with these kinds of problems. I think the compact issue has done the same thing and will continue to compound that situation. I think we need to find an equitable way to price our milk without these inequities involved and I think, at that point, we can be united as an industry.
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    Mr. GEKAS. The gentleman from Massachusetts is recognized if he wishes to pose any questions.

    Mr. DELAHUNT. I guess I would—I thank the chairman. I posed the question earlier to Mr. Graves from Vermont and Governor Thompson about whether it is working? And whether, presumably, its goal is to save the family farm? I hope that is doable. I hope it is feasible. Because I really do believe that there is more to a sense of community. We were all on the Floor in the past several days talking about the tragedy that occurred in Colorado, and I think there is a consensus that this sense of community is important to all of us. And, you know, this is a piece of that in a remote way, maybe. But is this, you know, is this the answer? Are we going to be able to, by using this particular mechanism, save the family farmer?

    I was, earlier, teasing my friend from Arkansas, but I have the same problem up in New England with the small fishing family. Very, very serious problem. And what is occurring there is that the fisherman who goes out on a daily basis is finding it more and more difficult and the large corporate trawlers are coming in and there are the certain economies, obviously, that are attendant to that new way of farming the seabeds, if you will, that makes it more and more difficult.

    And those who live in the coastal districts of New England are doing everything we can to preserve a way of life. I mean, there is more about community than simply what is the most economically efficient way to do something. Community is not only about dollars and cents, it is about culture. And I transpose my sense of what is happening to those fishing families in New England to what is occurring with dairy farmers, not just in New England. But farmers, no matter what they may produce, all over the country. But is this the right way to do it? Any comments?
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    Mr. CORBETT. Well, consolidation is obviously occurring in the industry, Mr. Congressman, and I am not sure that any government program can reverse that. I mean, we are losing processing companies at about the rate as that we are losing dairy farmers. And we empathize with the loss of dairy farmers, but the fact is last month we produced more milk in this country for the month than we ever have in the history of the United States. So there is milk being produced.

    As we speak, 60 miles south of Chicago, there is a dairy going in that, when completed—it is occurring in Indiana, but 60 miles of Chicago—when completed next summer, it will milk 18,000 cows. Maybe it is the definition of family farms. It is not doing this in response to a compact or to any government program, it is a business decision.

    Mr. DELAHUNT. Right.

    Mr. CORBETT. This isn't a corporation. These are four young men in their mid-30's that are investing $100 million in a facility that is going to milk 18,000 cows. 50 miles to the north, there is a 3,000 cow farm that just went in that is driven by the business of dairy farming and the returns from dairy farming, not by some government program.

    It is difficult for me to see how we can create a program at any level of the economy that is going to stop consolidation. It is occurring in the supermarket business. It is occurring in processing and the farmers. I don't think that is the answer.

    Mr. DELAHUNT. Thank you. Anyone else wish to comment? Mr. Krug.
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    Mr. KRUG. Yes. Your question concerned is it working as far as preserving family farms, helping, slowing down the exit. It is truly not working. In my statement—I don't believe you were here for that—but I had a paragraph in regards to that that says that in the New England Order, according to statistics prepared by the New England Order administrator, the rate of decline of small family farms has actually increased since the inception of the Northeast Dairy Compact while the number of large firms has grown at an accelerated rate.

    I only had this copy. I would be willing to present it for the record if that is possible.

    Mr. GEKAS. We will direct staff to create a photocopy as quickly as possible of this item and we will include it in the record and return the original to Mr. Krug.

    [The information referred to follows:]

63851n.eps

    Mr. DELAHUNT. Thank you. And my own, without much reflection, is you are exactly right. These are forces that are powerful. They are predicated on business decisions that are going to occur. And what we have, it would appear, is an outdated mechanism that isn't working.

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    Mr. GEKAS. We extend to the gentleman an additional 1.5 minutes to conclude the questioning.

    Mr. DELAHUNT. Thank you, Mr. Chairman.

    So, you know, I guess what I am saying is what is the answer? Should we begin dismantling this entire approach and just return to an unfettered market?

    Mr. CORBETT. This last year, we have experienced the highest milk prices in history and I would contend they were driven by market forces, not government forces. So market conditions can allow a high price. Can they also allow a low price? Certainly they can. That is the actions of a market. Over time, we still remain convinced that is the best determiner of price.

    Mr. DELAHUNT. A free market.

    Mr. CORBETT. A free market.

    Mr. DELAHUNT. Of course, that also would include—and there is a caveat there—that that market be truly free and that we don't find ourselves in a situation where we consolidated to the point where we don't have free competition. And I believe and suggest that is happening just about in every segment of our economy. But that is a whole other issue. That isn't just about farming. That is about financial services and health care and everything else because then there really is no choice. And this is what is concerning me because there will come a point in time when, if there are only one or two major milk producers, you can bet that those prices will be high.
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    Mr. GEKAS. We thank the gentleman and the time of the gentleman has expired. The Chair yields the balance of its own time to the gentleman from Arkansas, Mr. Hutchinson.

    Mr. HUTCHINSON. I thank the chairman. You have been very courteous in extending to me, a member of the Judiciary Committee but not a member of this panel, certain privileges so I can make inquiry. And I want to thank each of the panelists. I was not here through all of the testimony, but I have read your testimony. I want to express my deep appreciation for your presentations today. I am grateful for the questions from the gentlelady from Wisconsin who asked about how this is impacting the farmers, you know, even though you might have different perspectives.

    I want to welcome Mr. Parker, of course, from Arkansas here today and I enjoyed reading your testimony and thank you for being here. There is one statement that you made in your testimony that I wanted you to elaborate on. You indicated that, should the Southern Dairy Compact not be approved, the Federal Order Reform that has already been mandated and approved, will eliminate competition and force higher milk costs in the marketplace. And I was just wondering if you could comment and elaborate as to what brought you to that conclusion.

    Mr. PARKER. I would be delighted to, Congressman. And thank you for inviting me.

    We are in a particular market of the new order that Little Rock is really being discriminated against according to some of the other market areas and prices we will have to pay for raw milk. I also have a competitor in Memphis that is being discriminated against even more because of the way they have redrawn that order. It will literally be impossible for that man to operate and be competitive in his market. People within 70 miles of his plant can bring milk in there cheaper, $.25 a gallon cheaper, than he can produce because he can't buy cheap enough.
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    I don't think this is an issue of saving the small dairy farmer. A small dairy farmer is no different from a small grocery chain or an independent grocery. We fight the same thing trying to get our independent groceries to survive. I think it is an issue of trying to take a $.55 a gallon decrease in milk out of the market and you stabilize this for the consumer, for the processor, and for the producer.

    I price my milk on a formula base so the $.52 or $.55 decrease I pass along. But I will assure you that the supermarket didn't pass that $.52 or $.55 decrease through. It just didn't happen, probably because they feel like next month it decreased so much it has got to go back up some, which it did. So they just say that, but for 30 days that consumer didn't get that advantage and that producer lost it.

    Mr. HUTCHINSON. Under the present Federal Order Reform, you have a Washington, D.C., agency setting the price structure across the Nation. I think what you are saying is that it is not working well in Memphis, in Little Rock, perhaps in other areas.

    Mr. PARKER. That is right.

    Mr. HUTCHINSON. And that a compact would bring some reasonable influences to bear?

    Mr. PARKER. Yes, sir.

    Mr. HUTCHINSON. Now one thing we all are concerned about is prices to the consumers. The compacts, as authorized in this legislation, would have a consumer representative.
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    Mr. PARKER. Yes, sir.

    Mr. HUTCHINSON. Is it in your interests to raise the price too high for the consumer so as you are not competitive with other areas?

    Mr. PARKER. If my volume decreases, my profit will reflect that quicker than if I stay competitive and move that same quantity of milk.

    Mr. HUTCHINSON. Mr. Chairman, could I have permission to enter some things in the record that people have submitted to me?

    Mr. GEKAS. Through the Chair and my own signature, I will accept and enter into the record without objection any documents or statements that you might have.

    Mr. HUTCHINSON. I wanted to present to you a statement from Congressman Boehlert, who asked that his comments be inserted into the record.

    [The prepared statement of Mr. Boehlert follows:]

PREPARED STATEMENT OF HON. SHERWOOD BOEHLERT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

    Dear Mr. Chairman and Members of the Committee:
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    As an original co-sponsor and strong supporter of H.R. 1604, I am pleased to submit this testimony in support of this legislation.

    H.R. 1604 gives states the opportunity to band together to set a reasonable minimum price for fluid milk in their region. Specifically, this bill would extend the authorization of the Northeast Interstate Dairy Compact; allow states such as New York to join the Northeast compact; and authorize a Southern compact. Regional dairy compacts are necessary to help stabilize wide swings in milk prices which hurt farmers and consumers. The Northeast Interstate Dairy Compact has worked well in the New England states over the last 2 years. Many states have now passed the necessary state legislation to enter into regional dairy compacts and are now asking for Congress' consent. H.R. 1604 will give that consent and afford states the opportunity to enter into regional dairy compacts to preserve agriculture, maintain their rural communities and landscapes, and help farmers and consumers alike.

    I think it is important that I take this opportunity to counter some of the arguments commonly offered by opponents of dairy compacts. Dairy compacts are not a case of dairy farmers trying to reap great profits at the expense of consumers. Farmers aren't going to get rich; they are asking for the chance to get a fair price for their milk, a price based on local costs and conditions that more accurately reflects what it costs them to produce it.

    Opponents of dairy compacts often argue that any increase in the price a farmer receives for raw milk will mean a direct and automatic increase in the price that consumers must pay for a gallon of milk in a grocery store. That's not the case. There are a lot of steps between the farmer and the consumer who buys a gallon of milk in the neighborhood grocery store. Generally speaking, dairy farmers produce raw milk and sell it, not to consumers, but to dairy processors. Dairy processors are large businesses that take raw milk and turn it into drinking milk, cheese, yogurt, ice cream, butter, etc., which they then sell to grocery stores and convenience stores. The grocery stores and convenience stores then decide how much the consumer pays for a gallon of milk, not the dairy farmer.
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    When the grocery stores and convenience stores decide what price to charge for milk, this decision is not based solely on the price that was paid to the dairy farmers for the raw milk. In fact, I would suggest that there are many factors that can influence the consumer price for milk that have nothing to do with the farm price for milk. For example, because milk is a staple product in the diets of many consumers, a grocery store may choose to run a special sale price for milk in order to get more customers to come to the store. Naturally, the grocery store is hoping that, while the consumer is in the store to buy milk, he or she will also buy other items. Of course, this can also work the other way for consumers. A grocery store may choose to price milk a little higher because it is a staple product that most people purchase when they come to the grocery store and the grocery store wants to ensure a certain level of income for its operations. Neither of these retail pricing scenarios is directly related to the price that processors are paying dairy farmers for raw milk.

    Opponents of dairy compacts also point to the more than $40 million in payments made by the Northeast dairy compact to farmers from July 1997 to July 1998 and suggest that this money came directly from consumers' pockets. The money didn't come from consumers paying farmers. The money for the compact payments came from the dairy processors. Of course, it is a group composed of dairy processors that is the main lobbying force fighting H.R. 1604. Despite the rhetoric being used, I would suggest that this lobbying effort is not being done on behalf of consumers. Rather, this lobbying effort is motivated by dairy processors' concern for their own profit margins.

    Another argument against the compact is that it somehow allows dairy farmers, and dairy farmers alone, to decide what price they should receive for fluid milk. Again, that's not the case. Under the Northeast Compact, milk pricing decisions are made by a commission consisting of representatives from each of the states in the compact. The commission members are not all dairy farmers; they are consumers, processors, retailers, state officials as well as dairy farmers. H.R. 1604 would give dairy farmers the opportunity to sit at the table with these other represented groups to decide a fair minimum price for fluid milk in their region, but the commission members have to work together and agree on any pricing decision. Under the Northeast Compact, the Women, Infants and Children program and school lunch and breakfast programs are reimbursed for any additional costs which result from the compact. The interests of consumers are well represented.
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    It is true that the price of a gallon of milk could go up a few pennies in states that join a compact, but there is no real evidence to support the claims that consumers will face an increase in milk prices of more than 20 cents per gallon. Some supermarkets and convenience store chains did initially raise their price of milk to the consumer when the Northeast Interstate Dairy Compact went into effect in New England in July of 1997, but after six months of the Compact being in operation, an analysis by the Office of Management and Budget showed that retail milk prices in New England averaged 5 cents per gallon less than the national average for fluid milk.

    If we don't take action to help our farmers get a fair price for their milk and we let our dairy farmers go out of business, consumers in New York and across the country will end up paying more for fluid milk—milk production will be concentrated in the hands of a few and milk will have to be hauled longer and longer distances before it reaches the grocery stores in our communities. Transporting milk long distances costs money and, while technology for transporting milk has improved, drinking milk is highly perishable and the shelf life of milk will be impacted.

    While compacts won't save every small, family dairy farm in the states which choose to join a compact, it can help. Dairy compacts will give many of our family farmers a fighting chance. The Northeast Interstate Dairy Compact is making a difference for farmers in New England. The rate at which farms are being lost in New England is slowing and some states are starting to see gains. In the long run, it's also good for consumers because it assures a local supply of fresh milk at a reasonable price. Rural communities, economies, and landscapes depend on dairy farmers and so do consumers.
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    Mr. Chairman, I urge you and the Members of the Committee to support H.R. 1604.

    Mr. HUTCHINSON. I also have a letter from Governor Mike Huckabee supportive of the dairy compact.

    [The information referred to follows:]


State of Arkansas,
Office of the Governor,
Little Rock, AR, February 4, 1999.
Hon. ASA HUTCHINSON,
House of Representatives, Washington, DC.

    DEAR REPRESENTATIVE HUTCHINSON: The Southern Dairy Compact initiative is underway to establish a stable interstate milk pricing system for Arkansas and the Southeast Region. Its purpose is to ensure the continued viability of dairy farming in the South and to assure consumers of an ample local supply of pure and wholesome milk.

    Based on the information that we have received, we believe this initiative offers the best opportunity to preserve the family dairy farms in our state and the Southeast. Records reflect a great loss of dairy farms in the Southeast along with a corresponding deficit of locally produced milk. As our population continues to increase and the need for dairy products increases, more milk is being shipped into our area at a higher cost to our consumers.

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    I call upon your help in supporting the ratification of the Southern Dairy Compact. Your help is needed in protecting the remaining dairies and in giving strong support to this initiative.

Sincerely yours,
Mike Huckabee, Governor.


    Mr. HUTCHINSON. And a letter from Jack Gibson of the Arkansas Livestock and Poultry Commission.

    [The information referred to follows:]


Arkansas Livestock and
Poultry Commission,
Little Rock, AR, April 21, 1999.
Hon. ASA HUTCHINSON,
House of Representatives, Washington, DC.

    DEAR CONGRESSMAN HUTCHINSON: Please accept on behalf of the Arkansas dairy industry and the Arkansas Livestock and Poultry Commission, our sincere appreciation for your willingness to take the lead in seeking ratification of the Southern Dairy Compact. Arkansas' House and Senate passed legislation in 1997 without a dissenting vote to allow the state to join the Southern Compact should the U.S. Congress authorize it.

    As you are aware, many in our Nation's dairy industry are beset by critical financial conditions. It is imperative that action be taken to salvage the dairy industry in Arkansas as well as the Nation. In Arkansas and other southern states, the dairy farmer and the supporting agriculture industry are being driven into bankruptcy at alarming rates. Arkansas alone has seen a 43% reduction in the number of dairy farms during the past ten (10) years. More than 20,000 dairy farms in the southern states have been lost between 1990 and 1997 according to USDA statistics. We need stability in the dairy industry if our agri-business basis is to survive. Without stability in the market place, we are in jeopardy of depriving the public of an adequate supply of locally produced dairy products. The dairy industry in the south strongly believes that a compact would be the vehicle to provide the marketing tools necessary in securing a healthy dairy industry for the region. The compact would benefit producers, retailers and consumers.
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    A large dairy constituency is represented in your congressional district and they would be pleased and supportive of you being the leader in the pursuit of this important legislation. Your leadership role will be looked upon by the dairy industry in Arkansas and the southern region with great favor and appreciation as you strive to save the industry from further collapse.

    Please let me know if I can be of assistance concerning this matter.

Sincerely,
Jack Gibson, Executive Director.


    Mr. HUTCHINSON. And a separate statement from John Bunting, a New York dairy farmer. And various people have asked these to be inserted into the record. I would like to submit them to you.

    [The prepared statement of Mr. Bunting follows:]

PREPARED STATEMENT OF JOHN BUNTING, DAIRY FARMER, TREADWELL, NY

    Few understand the milk pricing system. ''Why should one area of the country be singled out for special treatment on milk pricing?'' can seem to be a legitimate question. Detractors often refer to the Dairy Compact as anti-market. Even a little light dispels those and other myths.
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    All milk is priced to farmers from a reference price known as Basic Formula Price (BFP). The BFP is almost entirely influenced by the wholesale price survey of unbranded cheddar type cheese commonly called American type cheese. There is no information in this survey, which is taken from the East.

    Even if you disregard what many feel has been proven to be a system which can be, and has been manipulated, is this a market driven system for fluid milk? More particularly is it a market driven system for fluid milk in the existing and proposed Dairy Compact regions? The answer to that is no. It bears no relationship to supply and demand for fluid milk and therefore should be replaced.

    The following table looks at a recent six-year period:

Table 1

    True markets are essentially an exchange of information. No system which ignores vital information is an honest market. Obviously, there is a need for an honest alternative to the existing cheese based pricing system. The Dairy Compact's focus is on gathering full and complete information to determine a price for regional fluid milk.

    Ill informed opponents also say higher prices in the Compact region have generated a surplus. There is no data to support that conclusion. According to USDA figures, 30 out of 50 states increased production in 1998. Wisconsin produced 4.75 times the increase that Vermont did. Idaho nearly 5.5 times. In fact, the largest increases were generated in areas with low milk prices. There is a good reason for this. Farmers do not set the price of their milk. In order to stay in business when the price is low they must compensate with increased volume.
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    It is difficult to draw any price and production conclusions from overall data as the following table illustrates:

Table 2

    The National increase in milk production is primarily a result of a frontier mentality with resulting boom followed by bust. In the early 80's, Texas was the place that attracted cows, and capital and cheese plants sprung up. Now Texas is experiencing a wrenching crash. Farms are failing at unprecedented rates and cheese plants built hardly a decade ago are closed. Idaho is now the place.

    There are obvious regional differences in the total cost of milk production as shown below:

Table 3



    For May 1999 the BFP is $11.26. If two dollars were added to that, only one region could produce milk at that price. Is it reasonable to think that all the milk for all the country could be produced in one region? Absolutely not. Nor is it reasonable from an historical perspective to think we can count on Idaho remaining viable under the current pricing system. This is a race to the bottom. Within five years it could be Idaho competing with milk from the grassy plains of Argentina. Will fluid milk from Argentina cost less?

    Has the consumer benefited from the torture applied to dairy farmers by the current pricing system? The following table gives the answer:

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Table 4

    The average price to the farm hardly moved while the prices to consumers regularly increased. The sole beneficiaries have been those in the middle. While it is easy for the lobbyist to fax a nearly complete editorial to the media claiming great defense of the consumer, mostly the media has not looked at the data. It is equally easy for the lobbyist to fax sound bite to politicians. Corporate vested interest may have the same legal rights as people but, they are not people. Representatives are in Washington and in State capitals to represent people.

    All of the data presented here is from United States Department of Agriculture sources. From these facts independent conclusions can be reached. The public interest has not been served well by the cheese based pricing scheme.

    People have had the long distant tomato for some time. They are intelligent enough to know that the milk equivalent of the long distant tomato will be no better. The more people know about the Dairy Compact, the more likely they are to be supportive. The Dairy Compact is the only viable alternative to a rigged system.

    Continued viability of dairy farming in the Compact regions is the only way to assure consumers, most of whom are urban, an adequate local supply of pure and wholesome milk. In a recent court case in which the Compact was upheld, the Judge stated, ''In reaching his decision, the Secretary (of Agriculture) emphasized the importance of taking, 'reasonable measures to preserve small family farms,' noting that, 'America still wants and needs the family farm.' '' The record indicates that 1998 saw the smallest percentage loss of farm numbers in the Northeast that has been seen in many years. The Dairy Compact legislation should be passed.

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    Mr. GEKAS. I will adopt them as the documents of the Chair and enter them into the record without objection. And add to it, to that request, several other documents which will be itemized by staff and included in the record.

    [The information referred to follows:]


June 17, 1999.
Hon. GEORGE W. GEKAS, Chairman,
Subcommittee on Commercial and
Administrative Law,
Committee on the Judiciary,
House of Representatives, Washington, DC.

    DEAR CHAIRMAN GEKAS: Thank you for holding a hearing on two pieces of legislation which will greatly affect the dairy farmers of my state, H.R. 1604 to renew the Northeast Dairy Compact and H.R. 744, to terminate the Northeast Dairy Compact. I write in strong support of H.R. 1604 to renew the NE Dairy Compact and urge the Committees prompt support of this proposal.

    The Compact has been good to both the producers and consumers in Connecticut. It has stemmed the decline of family farms and increased the income of farmers without increasing the price of milk. Its renewal is crucial to the preservation of our dairy industry and our environment. Connecticut as other New England States has seen a steady decline in dairy farms in recent decades. In 1980 Connecticut was home to 663 diary farms which, a decade later, had declined to 356 and a sad 252 by 1998. This year in place of what had become an annual 10% loss of farms, two new farms were founded and are doing well.
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    The prior year declines were caused by an increase in expenses paid by dairy farmers without an increase in the price paid to them by producers. Until enactment of the Dairy Compact, many Northeast farmers were still earning what they had earned in 1980.

    With the Compact, farmer income has increased 6% and yet, consumer prices despite all of the dire predictions to the contrary have not increased. In fact, in July, 1997 when the Dairy Compact began, the price for a gallon of milk was $2.87. This past December, the price per gallon of milk was $2.81, a 6 cent decrease. The Dairy Compact has been critical to stabilizing prices and improving farm income and without it, we would certainly be losing more of our dairy farmers leaving consumers vulnerable to higher costs and spoilage caused by shipping the milk in from other regions.

    Passage of H.R. 1604 is critical to the farmers of my state and all of those concerned about their well-being and the maintenance of their lands. If you and your staff has any questions about the Compact or would like additional information on how Connecticut would be impacted by the loss of the Compact, please don't hesitate to ask me or my agriculture aid, Michele Nellenbach. I urge you to support this legislation and pass it out of your subcommittee.

    Thank you for your attention.

Very truly yours,

Nancy L. Johnson.
PREPARED STATEMENT OF HON. NANCY LARRAINE HOFFMANN, A STATE SENATOR FROM THE 48TH DISTRICT OF NEW YORK
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    I am New York State Senator Nancy Larraine Hoffmann, representing the 48th District and Chairwoman of the New York State Senate Agriculture Committee. Our State ranks third in milk production of the United States. Our largest industry is agriculture and dairy is the largest segment of that. Inclusion in the Diary Compact is extremely important to the welfare of our people and to the economy of our State.

    The average family of four consumes about one hundred gallons of milk per year. Although milk prices remain less in the New England Compact area than in New York State, it has been estimated that the Dairy Compact might cause an increase of four cents per gallon, or $4 per year for the average family. If four cents per gallon seems like a large increase, just think about the small dishes near almost every cash register where customers toss their unwanted pennies.

    The real issue being addressed in these arguments is far different than many who expound on it would have you believe. What is truly at issue here is that the Dairy Compact will, for the first time in history, allow dairy farmers to come to the bargaining table and take part in setting a fair price for their product.

    Milk is too perishable to be bargained with. All dealers know that by law, every producer's milk must leave the farm every second day.

    Just to give you an example, suppose each of you is sitting here today with an ice cream cone. It cost you two dollars to make that ice cream, but it is an extremely hot day and it is just now dripping pretty rapidly down your arm and off your elbow onto the rug. A very well-to-do fellow happens to come by and notice the cone you are holding. What a coincidence! He just happens to own a big freezer right around the corner. He offers you ten cents for the ice cream cone.
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    Now, what are you going to do? You have huge bank payment son the ice cream machine and you cannot even sell that if there is no profit to be made with it.

    You decide to shop around and ask what others will pay you.

    How unusual—they all quote the exact same ten cent figure. Would you continue to sit there with your ice cream and refuse the ten cents while it melts, or take the ten cents and hope he will offer you more next month? Or, at the very least, you can hope and pray that the cost of the ingredients will drop next month.

    All our dairy farmers really want is the ability to be recognized as equals. They are not even asking for a majority vote. They just want to sit down as reasonable people with the milk dealers, representatives of government feeding programs, and the consumers who buy their milk and be treated fairly.

    Of course, handlers and processors will fight ''Tooth and nail'' to avoid having to sit down with the producers and others to arrive at a fair price. Whatever is going on here? Until now the farmer has been forced to take whatever he was offered.

    Of course, handlers and processors will send out reams and reams of misinformation in hopes of maintaining their empires.

    Of course, handlers and processors will pay public relations firms enormous amounts of money to publish full page ads in the Congressional Daily showing a child saying, ''Mommy, I need my lunch money and don't forget the milk tax,'' even though they know full well that the WIC program and school milk are exempt from any increase in price due to the Dairy Compact.
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    The Northeast Dairy Compact is working well. Consumers are not complaining. Our fellow citizens have a reputation for caring about unfairness. Every time we read about hardship, our people come to the rescue without even being asked. That's what makes our country so great. If those same people realized that four cents extra for each gallon of milk would make life a little better for the producers of our wonderful selection of dairy products, they would be more than glad to help.

    Farm families understand that the Government will no longer set the price of milk. They desperately need some way to be a part of filling that void. If you take a drive through the countryside you will notice how our farms are deteriorating. Farms can no longer operate with such low profit margins. All our dairy farmers are asking is to have some say in the marketing of their product. They have no way of setting the price of the inputs needed to product milk; and they have no say at all in what they will receive for it. How many businesses have you ever known that have been forced to operate in this manner?

    Dairy farmers don't want a handout. They just want a chance to help themselves and stay in business.

    If we want to maintain a supply of fresh milk and high quality dairy products for our men, women and children, we cannot do so with imports. Please let me remind you that when the United States becomes dependent on other countries for our food supply, we will have given up our freedom.

    Thank you.
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PREPARED STATEMENT OF HON. BERNARD SANDERS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VERMONT

    Mr. Chairman, thank you for this opportunity to express my strong support for H.R. 1604, The Dairy Producers and Consumers Protection Act. H.R. 1604 would permanently extend Congress' consent for the Northeast Dairy Compact, which is currently scheduled to sunset in October of this year. The Northeast Dairy Compact has provided the people of New England with a means to stabilize the price of milk for farmers and consumers, and is vital to family farmers throughout New England and the Mid-Atlantic States.

    The purpose of the Compact was to create a commission charged with preserving the viability of dairy farming in the six New England states, to ensure an adequate, local supply of milk for consumers in the region, and to promote stable milk prices for farms and consumers. Congress consented to the Northeast Interstate Dairy Compact in 1996. Since its inception, the Northeast Dairy Compact has increased the income of dairy farmers in New England by some $52 million—$13,000 per farm. The Compact has created this additional income at no cost to the Federal Government. The Northeast Dairy Compact has been so successful in New England that the states of New York, New Jersey and other Mid-Atlantic States now want to join.

    In addition, thirteen southern states—Alabama, Arkansas, Georgia, Kansas, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Virginia, and West Virginia—have approved legislation to join a Southern Dairy Compact. H.R. 1604 would grant congressional approval of the Southern Dairy Compact as well.

    Mr. Chairman, the Northeast and Southern Dairy Compacts deserve our support. The survival of family dairy farming is critical to rural economies, to the environment, to consumers, and to the very character of small communities in Vermont and throughout America. The family dairy farmer's ability to provide a stable, local supply of milk is important to the health, welfare, and integrity of Vermont and the nation.
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    My home state of Vermont relies on the family dairy farm as a mainstay for its tourism industry, economy, and culture. In Vermont and in rural communities across the country, the loss of small dairy farms destroys our state character, our rural economy and the commitment to family and hard work that are deeply rooted in the family farm. It is critical that our small dairy farms survive. An essential part of ensuring the survival of the small dairy farm is the survival of the Northeast Interstate Dairy Compact.

    The Northeast Dairy Compact is not only good for farmers; it's good for consumers too. The Compact has demonstrated its ability to stabilize consumer milk prices in New England—creating lower milk prices for consumers. In 1998, OMB reported that during the first six months under the Compact, consumer milk prices in New England were five cents lower per gallon than retail prices in the rest of the nation. Another study found that US fluid milk sales were down by 1.8% from 1997 to 1998, but sales in New England were down by only 0.7% during the same period.

    Moreover, the Northeast Dairy Compact commission has implemented specific measures to ensure the affordability of milk. The commission has put in place reserves to reimburse the school lunch programs and the Women, Infants, and Children supplemental assistance program (''WIC'') for any price impacts on those programs.

    In the long run, the only way to maintain low retail prices for dairy products is by keeping family farms in business. American consumers know how important it is to preserve family farms and avoid putting control of our food supply into the hands of a few giant agri-business corporations. But preserving the family farm is not just about food; in Vermont; it's about protecting the environment, our rural economy, and our way of life
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    Family dairy farmers form the backbone of small communities throughout Vermont. Each time we lose another farm, the cohesiveness of their community is weakened. At a time when there is so much debate about a return to values, the loss of family farms is particularly troubling. Family farmers embody the values of hard-work, stewardship of the land, and neighbor helping neighbor. To see that destroyed is a tragedy even beyond the devastating economic impact that the decline of family farming causes.

    Mr. Chairman, the Northeast Dairy Compact is good for farmers, good for consumers, good for rural communities, and good for the nation. Vermont, the other northeastern states, and the southern states deserve this Congress' support for their regional efforts to preserve family dairy farming in America. Thank you.

PREPARED STATEMENT OF HON. JOHN E. SWEENEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

    I would like to thank the Subcommittee and Chairman Gekas for holding this hearing and for providing this opportunity to testify in support of the H.R.1604, legislation to reauthorize the Northeast Dairy Compact and authorize the Southern Compact. This legislation would give the authority to Compact states to work together with their neighbors, through the constitutionally-provided right to form compacts, and provide much-needed stability to volatile dairy markets for fluid milk.

    The Dairy Compact is a topic of particular importance to me and those I represent in New York State. I have been personally involved in this fight for equitable pay to dairy farmers since my days as a commissioner to Governor George Pataki. The Dairy Compact is important to me for the simple reason that my home state of New York ranks third in the nation in milk production with an impressive 8,600 dairy farms that generate over $1.5 billion in milk receipts annually. This most important industry also supplies the state with some 80,000 jobs while, at the same time, providing a reliable source of quality fresh milk for consumers all over the Northeastern United States. These two factors clearly illustrate the important role of dairy farmers in the New York State economy.
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    Despite the prominent role of this industry, our dairy farmers are in a precarious position. It is important to understand that the product they provide sets them apart from other agricultural producers. As providers of a very perishable product, dairy farmers lose the ability to ride out or boycott unattractive dairy markets. Dairy producers cannot turn off the faucet on the cow when the price goes south and cannot withhold raw milk from the market in order to bargain for a higher price. This places them at the mercy of the volatile dairy market, which just this spring saw a 40 percent drop in the price farmers receive for fluid milk, an unprecedented plunge. Imagine what a terrifying experience it is to have 40 percent of your income taken away while your bills and expenses remained fixed. After all, no matter how much you receive for your milk, fields still have to be planted, cows fed, and mortgages payed. It is no wonder that independent dairy farmers are losing their farms at an alarming rate in New York State, as well as in many other regions of the country.

    Aside from the perishable nature of raw milk, there are other more ominous forces that work against our dairy farmers. Rapid consolidation in the dairy industry is putting market power in the hands of a very few. I would only direct you to the problems we now have with market concentration in the poultry, beef, and pork industries and contend that dairy is headed down that same road if we do nothing to prevent it.

    The Dairy Compact is a move in the right direction towards protecting our dairy farmers from these uncompromising markets. It is a solid plan that will provide a safety net for farmers in their time of need. The Compact provides money to farmers when Federal pricing levels drop dangerously low, making the Dairy Compact is a responsive system. Better yet, this peace of mind for our farmers will cost taxpayers nothing as the Compact is funded entirely by the dairy industry.
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    The Dairy Compact also brings stability to milk markets that consumers readily embrace. Opponents of the Dairy Compact make the argument that the compact agreement translates into a ''milk tax'' that increases the price of milk for consumers. This is a deceptive and very much false argument. In reality, the increase in milk prices would only amount to pennies and in the long run save consumers money by stabilizing the volatile milk market.

    The most taxing phenomenon to consumers has been the constant ratchet affect on store prices when wholesale prices fluctuate widely. When farm-level milk prices rise, retail prices follow closely to match the increased cost of raw milk. However when farm prices drop, as they did by 40 percent this past spring, you did not see consumer prices drop one dime in the stores. This yearly cycle has drastically increased retail prices, while eroding the farm share of the consumer dollar. It is also important to note that any increase in price due to the Compact goes, not to bottlers or supermarkets, but to the dairy farmers themselves. Retailers have the choice to absorb the Compact premium into the deep margins that they have steadily grown over the years. It is not surprising that most retailers, when given the opportunity, choose to pad their profits by charging more to the consumer.

    The farm share of the consumer dollar is at an all-time low and both farmers and consumers are being hurt. A recent poll of New York consumers found that 68 percent of respondents were willing to pay more for their milk if they knew that the additional money went directly to farmers. Informed consumers recognize the price squeeze being put on dairy farmers and consumers by retailers due to wildly fluctuating prices.

    Indeed, aside from the consumers of New York who have clearly indicated their willingness to help the dairy farmers, it is important and encouraging to note the widespread support for the Dairy Compact that includes environmental groups, twenty states in the Northeast and Southeast that have passed or are considering legislation, and cosponsorship from 164 Members in the House and 39 Senators.
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    The Compact also enjoys strong urban support in New York, including the Liberal Party in New York City, which supports the Compact on the basis of long term food security—the ability of the state to produce a safe, affordable and local supply of milk for its state's population.

    Even with this outpouring of support, the Dairy Compact still has a long journey ahead of it. The support and cooperation witnessed between the diverse groups listed above continues to grow. It is only through this high level of commitment that we can successfully save and make sustainable this honorable way of life. Our states have asked us in Congress to grant them the ability to help their farmers through Compacts. Let us help them.

    The Northeast Dairy Compact has proven to be an effective model, and has countered every criticism put forth by its detractors. It is time to extend this important model so that more of our states may take action in support of their dairy farmers.

    The last point I would like to make addresses the importance of the federal milk marketing order program as an important base of support for the dairy industry—a base that enjoys broad, bipartisan support in Congress. Unfortunately, the Department of Agriculture, through its implementation of the 1996 farm bill reforms, has determined that the best way to assist the dairy industry is to reduce dairy farm income in every major milk producing region of the country. This defies common sense! A strong base in the form of a continued federal milk marketing order system is crucial to our dairy farmers nationwide—and the Dairy Compact is a constructive supplement to that program.

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    I thank you again for this opportunity to testify and I urge the Subcommittee to act on this crucial legislation.

PREPARED STATEMENT OF HON. DAVID R. OBEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN

    Mr. Chairman and Members of the Subcommittee:

    I am a sponsor, with Mr. Sensenbrenner, of one of the bills you have under review today, H.R. 744, which rescinds congressional consent to the Northeast Interstate Dairy Compact entered into among the States of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont.

    The Northeast Dairy Compact is truly an abomination. It has never been voted on by the House of Representatives. The one vote that was taken in Congress, was taken by the U.S. Senate, and that was a vote to kill the Compact. Despite that, it still lives and we are threatened with its expansion from the current 6 states to perhaps as many as 27 states stretching from Maine to Florida and from Oklahoma to Virginia.

    How does the compact work? It's very simple. It fixes the price that consumers must pay at an artificially high level. According to the Consumer Federation of America, consumers in the compact states pay about 23 cents extra per gallon of milk.

    Any time you artificially increase the price that consumers must pay, you run the risk that someone will come in with a cheaper product and undercut you. For example, Canadian dairy farmers receive far more for their milk than farmers in the United States receive. That ought to create opportunities for lower-priced American dairy products. However, American dairy products are, in large part, shut out of the Canadian market by a system of very high tariffs, as much as 300%.
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    The Northeast Dairy Compact works in exactly the same way. It imposes tariffs on cheaper milk from other states by imposing on them the ''compact price'' of $16.94. Wisconsin dairy farmers can produce milk more cheaply than that, and far more cheaply than dairy farmers in the northeast. For example, the most recent USDA monthly announcement of the cost of production for dairy farmers shows that total cash expenses in the Upper Midwest were 77 cents per hundredweight below that of farmers in the northeast and $1.40 per hundredweight below that of dairy farmers in the southeast. That means that even with transportation costs, our milk produced in the Upper Midwest would be competitive in the compact region. However, the compact mandates that a tariff be imposed on this milk to make the price of milk from Wisconsin equal the compact price, effectively eliminating any competitive advantage farmers in Wisconsin might have.

    That is absolutely absurd. We are being told that we should be tearing down trade barriers internationally. Yet with these dairy compacts we are encouraging the enactment of trade barriers internally between regions within the United States.

    That is not all. By subsidizing the price that farmers within the compact region receive for their milk, the compact encourages more milk production. Where does that surplus milk go? It is turned into cheese. That means that because of the compact there is more cheese on the market and farmers in Wisconsin and elsewhere outside the compact region, who rely on the free market for their price, consequently receive less for their milk that goes to make cheese.

    So, for farmers in places like the Upper Midwest, there is a double-whammy. First, we get blocked out from selling our product into the compact region through compact ''tariffs''. And, second, the operation of the compact serves to depress the price we receive in selling our product on the free market.
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    The current compact is relatively small and its impact correspondingly relatively small. But, if it is reauthorized, or Congress allows it to expand, the impact will be devastating to the dairy industry in the Upper Midwest. That is wrong. Wisconsin dairy farmers should not be penalized for being competitive. This is protectionism which hurts Americans—it hurts American farmers and it hurts American consumers.

    I urge you to oppose any proposal to extend or expand dairy compacts.

PREPARED STATEMENT OF HON. RON KIND, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF WISCONSIN

    I appreciate the opportunity to comment on the issue of dairy compacts and their impact upon the nation's dairy industry. I am pleased that Wayne Bok and David Krug, two Upper Midwest dairy farmers and leaders, are testifying in opposition to compacts.

    My congressional district is one of the largest dairy producing regions in the nation. The economic prosperity of every community and enterprise, large or small, in western Wisconsin is impacted by the dairy industry. In Wisconsin, dairy farming is more than just economics; it is our heritage, our culture. A State-wide, month-long celebration is set aside each June to honor our proud dairy industry. Nearly 23,000 dairy farm families—over 8,000 in my district alone—produce more than 22.5 BILLION pounds of milk annually. These are not factory farms, these are family farms.

    Unfortunately, the antiquated, Depression-era federal dairy policy has resulted in a mass exodus from this industry. Since 1980, Wisconsin has lost nearly ONE–HALF of its dairy farms. Between 5 and 6 family farmers a day—approximately 1800 a year, quit farming. With their exit, the small town Main Street quietly loses yet another customer.
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    The 1996 farm bill sought to make changes in the discriminatory federal pricing system that pays dairy farmers more for their milk the further it is produced from Eau Claire, Wisconsin, a small town in my district. These changes include phasing out the milk price support program and reducing the pricing inequities between the regions. In addition, the 1996 farm bill also included a provision authorizing the temporary implementation of a compact for six New England states. This provision, which was stripped from the Senate version of the Farm Bill and was not included in the House passed bill, was included in the 11th hour into the conference report.

    Despite its original intent, dairy compacts are harmful to the nation's dairy farmers and do not assist small dairy farms. Since the Northeast Interstate Dairy Compact was first implemented in July 1997, small-sized family dairy farms in the Northeast have gone out of business 41% faster than they had in the two previous years. Large-sized family dairy farms, those with over 100 cows, have increased since the Compact's implementation.

    By artificially increasing the price of milk that producers receive for their milk in the compact region, consumers are subject to a higher costs. These higher costs has led to a decrease in milk consumption. For example, the retail price of milk in the Boston market, which is in the Northeast Interstate Dairy Compact, has risen 8% and packaged milk sales have dropped nearly 1%. Due to the increased price at the store, milk consumption nationwide dropped 2% last year. The Consumer Federation of America claims that since its implementation in July 1997, consumers in the six state Northeast Interstate Dairy Compact have paid $65 million more for fluid milk.

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    Moreover, higher fluid milk prices increases milk production while decreasing milk consumption. Unfortunately, the surplus milk that results from over production in the Compact region is manufactured into dairy products like cheese and butter, thereby driving down the price of these commodities. With over 70% of the nation's milk manufactured, a lowered price for manufactured dairy products will drive down farm-level milk prices for all of the nation's producers.

    Many of the negative effects of the Compact were predicted by those opposed to its creation. While the results of the higher Northeast Interstate Dairy Compact milk prices should be cause for alarm it is the movement to expand and extend the Northeast Compact, and the simultaneous efforts to replicate the Northeastern example through the creation of a Southeast Dairy Compact, that must be stopped. The creation of a Southeast Dairy Compact combined with the existing Northeast Compact would provide for 27 states and over 40% of the nation's milk supply to be governed by pricing cartels. Nearly 60% of fluid milk consumption will be under this balkanized policy.

    Compacts do not allow outside milk to fairly compete in the compact region. Under existing Compact rules, the dairy industry within these 27 states would effectively be insulated from competition from other regions by requiring sellers outside the region to raise their prices to gain access to the market. Such a pricing structure is dangerous and threatens interstate commerce in our free-market economy.

    It is hypocritical and unwise for a Congress that is pushing the free-trade and international market expansion on every other front, to advocate a domestic dairy policy that is inefficient, regionally discriminatory and unfair to consumers and my dairy producers. If the dairy industry is to remain competitive, Congress should strongly oppose a rigid regulatory pricing system that pits region-against-region.
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    Once again, thank you for the opportunity to provide input regarding my concerns about efforts to extend the life of the Northeast Interstate Dairy Compact and create a Southeast Interstate Dairy Compact. Allowing the creation of compacts would make the federal milk marketing order system meaningless, national reform of dairy policy would be moot, and interstate commerce would not exist.

PREPARED STATEMENT OF HON. JOHN MCHUGH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

    Mr. Chairman and members of the panel, it is my great privilege to share with you my personal insight on the development of the Northeast Dairy Compact and why I believe Congress must both reauthorize this Compact and establish a new Southern Dairy Compact.

    The Northeast Interstate Dairy Compact is the product of over ten years of cooperative and dedicated efforts by Northeast legislators and their staffs. In March 1988, I was Chairman of the New York State Legislative Commission on the Dairy Industry. My Commission met with Robert Starr, the Chairman of the Vermont House Agriculture Committee, and several other Vermont legislators. The purpose of the meeting was to discuss how the two states could more effectively work together to assist dairy farmers and keep available a nearby supply of milk for consumers. The impetus for the meeting was two-fold: falling prices for dairy farmers and trade barriers resulting from lack of uniformity among the state regulatory requirements in the Northeast.

    After discussion of the problems facing the Northeast region, it was unanimously agreed that the necessary remedies required regional, rather than unilateral state action. Both states recognized that the constitutional vehicle for multi-state regional action was an interstate compact. The staffs from both states, working under my direction and Mr. Starr's, were instructed to draft a proposed compact addressing the need for higher farm prices and the removal of trade barriers by achieving uniformity of regulation.
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    As the process of drafting proceeded, many choices and decisions, both procedural and substantive, had to be made. I worked closely with my staff and, with Mr. Starr, made the ultimate policy decisions. So, I am intimately familiar with why those choices were made. I will throughout this analysis of the Compact explain the rationale behind its critical provisions.

    The initial draft of the Compact was followed by extensive meetings and negotiations with the six New England states, with farmers' organizations, dairy industry trade associations, and consumer representatives.

    A remarkable consensus among farmers and consumers has been achieved. Today, the Northeast Interstate Dairy Compact comes before you, backed by the approval of the elected representatives of both houses of the legislatures of eight states and their governors. This includes intensely urban states, with strong consumer interests, such as Massachusetts and Rhode Island and rural states such as Vermont and Maine. It also includes New York, where dairy farming is the state's largest industry, but where any issue involving milk prices has, for almost a century, caused a sharp urban-rural clash. For the first time, that false division has been bridged. The Compact has the strong support of urban and rural representatives, and the support of members from both parties.

STRUCTURE AND UNDERLYING PRINCIPLES OF THE COMPACT

    The Compact explicitly provides that it does not displace the federal market order system or state milk regulation. It merely supplements them. It simply provides a mechanism for an over-order price on Class I (fluid) milk within the regulated area. If, but only if, a federal order is terminated in the area, the Compact may replace it with a Compact marketing order.
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    The economic and legal principles underlying the federal market order system are incorporated in the Compact. The language of the federal Agricultural Marketing Agreement Act of 1937 is directly incorporated in the Compact in many of its sections. This was done despite the fact that the draftsmanship of the federal law is complex and difficult. Nevertheless, the federal law now has behind it the judicial and administrative construction, and the experience, of more than fifty years. The Compact provides that the Compact Commission is empowered to apply and administer all the regulatory techniques historically associated with milk marketing.

    Therefore, it is simple to project how the Compact will apply and operate in varying situations: in the same way the federal order system applies and operates—with one major exception. The over-order price mechanism is limited to Class I (fluid) milk. That was done because, unlike the fluid market, the market for manufactured dairy products is a national one.

    The final decision-making authority is vested in the Compact Commission. (sec.4) Each participating state has one vote. (Its delegation may consist of more than one member, and its composition may be decided by each state.) (Id.)

    Counterbalancing the one state-one vote rule is the requirement for a dairy farmer referendum before any milk price is established. Accordingly, a majority of states cannot impose an over-order price provision which is unacceptable to the majority of dairy farmers in the regulated area.

    In order for a Compact price to be adopted, it must have the affirmative vote of any state to which the price applies—in all or part of the state.
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    One of the most important principles underlying the Compact is the great flexibility of the area to be regulated. Like a federal marketing order, the area under regulation is defined in the order itself. Accordingly, there can be one over-order price for all the participating states, or different prices for different states or parts of states, depending on what the Compact Commission and the farmers affected vote to do.

THE CONSTITUTIONAL BASIS OF THE COMPACT

    Without the consent of Congress, states have no power to regulate the farm price of milk produced in another state and brought in for sale within the state. Baldwin v. Seelig, 294 U.S. 511 (1935), West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994); Farmland Dairies, Inc. v. McGuire, 789 F. Supp. 1243 (1992)

    Such interstate transactions may be regulated by Congress under the Commerce Clause (Const., Art. 1, Sec 8, Cl. 3) and Congress is empowered to delegate its authority over interstate transactions to the states or a group of states. Maine v. Taylor, 477 U.S. 131. 138 (1986) (''It is well established that Congress may authorize the States to engage in regulation that the Commerce Clause would otherwise forbid.''); Northeast Bancorp, Inc. v Board of Governors, 472 U.S. 159, 174 (1985) (''When Congress so chooses, state actions which it plainly authorizes are invulnerable to constitutional attack under the Commerce Clause.'') Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 421–27, 433–36 (1946); Southern Pacific Co. v. Arizona, 325 U.S. 761, 769 (1945).
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    This Compact empowers the Compact Commission to regulate the price of milk which is sold within the Compact area, regardless of where it was produced. The undoubted constitutional validity of that provision is supported by the twin pillars of the Compact Clause (Art. 1. Sec. 10, Cl. 3) and the Commerce Clause (Art 1, sec. 8, Cl. 3)

    In the case of Cuyler v. Adams, 449 U.S. 433, 440 (1981), the Supreme Court held that ''where Congress has authorized the States to enter into a cooperative agreement, and where the subject matter of that agreement is an appropriate subject for congressional legislation. The consent of Congress transforms the States' agreement into federal law under the Compact Clause.''

    Accordingly, compacts have been upheld which regulated pollution of interstate streams, West Virginia ex rel Dyer v. Sims, 341 U.S. 22 (1951), navigable waters Petty v. Tennessee-Missouri Bridge Comm., 359 U.S. 275 (1959) and the allocation between states of the waters of an interstate river. Intake Company v. Yellowstone River Compact, 769 F.2d 568, 570 (9th Cir. 1985), cert. Denied 4476 U.S. 1163 (1986) (''When Congress approved this Compact, Congress was acting within its authority to immunize state law from some constitutional objections by converting it into federal law.'')

    The Compact explicitly authorized the regulation of plants located outside the regulated area, but having Class I (fluid) distribution within the area. (Sec 2, par 7; Sec. 9, par. d). These provisions have been construed and upheld in federal court. New York State Dairy Foods, Inc. v. Northeast Dairy Compact Commission, 26 F.Supp2d 249, 261 (D.Mass. 1998). This power to regulate outside milk is fundamental and indispensable for the proper functioning of the Compact.
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    When Congress approved the Northeast Instate Dairy Compact in 1996 (Pub.L. 104–127, Title 1, Sec. 147), Congress attached a condition forbidding the use of a regulatory device known as ''compensatory payments.'' The opinion of the court in Northeast Dairy Foods, Inc., supra correctly distinguished between ''compensatory payments'' and the pooling of milk from out of the area. The Compact Commission argued that:

''the fundamental difference between compensatory payments -provided for in section 10(6) and outlawed by Congress—and pooling—permitted by section 10(7) and not outlawed by Congress—turns on whether the proceeds benefit only producers who supply the other in-region plants (compensatory payments).''

    The court accepted that distinction. (Id.)

    The Dairy Consumers and Producers Protection Act (H.R. 1604) eliminates the prohibition against compensatory payments. (Sec 101, par. 2) That is entirely appropriate because the Compact itself limits those payments only ''to the extent necessary to equalize the cost of milk purchased by handlers subject to a compact over-order price or commission marketing order.'' (Sec. 10, par.6)

    The same section contains additional safeguards. It provides that ''No such [compensatory payment] provisions shall discriminate against milk producers outside the regulated area.'' It also provides a formula for a fair, non-discriminatory, compensatory payment: the difference between the Class I price in the state of production and the Class I price established under the Compact.
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    This formula reflects the Supreme Court's holding in Lehigh Valley Coop. v United States, 370 U.S. 76 (1962). A federal marketing order's compensatory payment provision was before the Court in that case. The outside dealer was required to pay into the pool the difference between the Class I (fluid) price and the Class III (surplus) price. The Court characterized this formula as ''prohibitive'' and virtually a trade barrier.'' (Id., p. 86–87) However, the Court noted several different forms of compensatory payments which would not involve any barrier to the free flow of outside milk into the area. (Id., p.87 note 13; 98)

    In the case of Lewes Dairy, Inc. v. Freeman, 401 F.2d 308, 314 (3d Cir. 1968), cert. Denied, 394 U.S. 929 (1969) the court noted that the Supreme Court did not strike down all compensatory payments* * *[and] intimated that a marketing order which invoked a rate of compensatory payments which merely placed non-pool (unregulated) handlers on a par with pool (regulated) handlers would not be a trade barrier.'' The formula the Supreme Court implicitly approved as not a barrier, is incorporated in H.R. 1604.

    Mr. Chairman, I have gone into this depth because of my strong belief, which has been supported by the courts on more than one occasion, that reauthorization of the Northeast Dairy Compact and establishment of a Southern Dairy Compact will not detrimentally affect consumers and farmers from other areas of the country. They will, however, provide our States and our dairy farmers, with some say over the fate of their dairy industry. There is no question that an affordable and fresh milk supply must be readily-available locally at all times. We cannot, however, forget the farmers who produce this milk. They deserve and have earned the right to receive a reasonable return on their product. Dairy compacts are the natural mechanism to ensure that they do.
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    I strongly urge your panel to consider and favorably approve H.R. 1604, the Dairy Consumer and Producers Protection Act. Not only is it legal, it is the right thing to do.

    Mr. HUTCHINSON. Thank you and I yield back.

    Mr. GEKAS. All right. I thank the gentleman.

    Well, we are ready to discharge this panel with the gratitude of the committee. It is a complex and a very contentious issue and, believe me, you have helped us sort through the various complexities that we must sort through. Thank you very, very much. You are discharged.

    We now bring the next subpanel to the witness table, beginning with Mae S. Schmidle, who is the Chair of the Northeast Interstate Dairy Compact Commission out of Newtown, Connecticut. Before joining the Commission, Mrs. Schmidle was a five-term State representative from the 106th District in Connecticut. She is very active in various community activities, including the Attorney Ethics Commission, the Red Cross, PTA, and League of Women Voters. Ms. Schmidle received her bachelor of arts from the University of Connecticut and MBA from Hartford University.

    John Frydenlund—is that correctly pronounced—is the director of Citizens Against Government Waste Center for International Food and Agriculture Policy, which was established in 1997. Citizens Against Government Waste is a 600,000-member, non-profit, non-partisan organization that promotes cost efficiency and accountability in government. In 1996, Mr. Frydenlund directed the Heritage Foundation's Agriculture Policy Project, which was instrumental in the agriculture reforms that Congress undertook that year. Mr. Frydenlund was raised on his family's dairy farm in Southern Minnesota. He received his B.A. in political science from the University of Minnesota.
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    These witnesses are joined by Kathy Lawrence, the founding executive director of Just Food, a New York City based non-profit corporation that works to develop a sustainable food system. Just Food coordinates with farming, gardening, anti-hunger, environmental, consumer advocacy and nutrition education and community development groups on collaborative projects that support the region's farmers and increase the availability of locally grown food in the New York metropolitan area.

    Prior to founding Just Food in September 1995, Ms. Lawrence managed education and outreach programs with the Northeast Sustainable Agriculture Working Group. Ms. Lawrence holds a master of international affairs degree from Columbia's School of International and Public Affairs and a bachelor of arts degree in Eastern Asian languages from the University of Kansas.

    Arthur Jaeger joins us. He is the assistant director of the Consumer Federation of America, a non-profit association of approximately 260 consumer groups representing a membership of 50 million Americans. Mr. Jaeger's work on behalf of the Federation includes advocacy for consumers on Federal agricultural policy and programs. Prior to assuming his position with the Federation, Mr. Jaeger was executive director of Public Voice for Food and Health policy. Mr. Jaeger holds a bachelor's degree in journalism and political science from George Washington University. His military service included 14 months in Vietnam where he earned a Bronze Star medal.

    Gregg Engles constitutes the clean up of the panel. Founder, chairman of the board, and chief executive officer of Suiza Foods Corporation, a leading manufacturer of dairy products and plastic containers for the food and consumer products industry. In 1997, Suiza had consolidated revenues of $1.8 billion. Suiza operates more than 50 manufacturing facilities with approximately 17,000 employees. Mr. Engles received his undergraduate degree in economics from Dartmouth College in 1979 and his law degree from Yale Law School in 1982.
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    We will proceed in the order in which the panelists were introduced, with the assertion that their written statements will be, as for all, considered as part of the record, without objection. And with the firm request of the Chair that a commitment be made to try to summarize within 5 minutes by each of the panelists.

    With that, we will start with Ms. Schmidle. You may proceed.

STATEMENT OF MAE S. SCHMIDLE, CHAIR, NORTHEAST INTERSTATE DAIRY COMPACT COMMISSION, NEWTOWN, CT

    Ms. SCHMIDLE. Thank you. I am honored to be here this afternoon and to tell you about a success story that has not cost the Federal Government one single cent and that is the Northeast Dairy Compact. I speak as the consumer representative and as the Northeast Dairy Compact chairman and as a former Connecticut legislator. I oppose H.R. 744 and I am in favor of H.R. 1604.

    The New England States took a bold and positive step to support the best interests of their consumers, their farmers, their processors, and their environment when we formed the Northeast Dairy Compact in 1997. It has turned out to be a win-win situation for everyone by helping to preserve farmlands; open spaces that benefit local economies, tourism industries; especially benefiting consumers by assuring a local supply of fresh, nutritious, and reasonably priced milk.

    Through a unique process, we organized ourselves, the New England States organized ourselves. And we have consumers, as you heard, we have processors and we have farmers. But, most of all, our concern was the public interest. We wanted to be sure that there was a fair and equitable price to the dairy farmers as well as fair and equitable prices to benefit the consumers.
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    The New England States worked together and we came up with some bylaws for our compact. Our New England Governors, when they passed the legislation for the compact, appointed members to the compact, 26 members. Two States appointed three people and four States appointed five people. These are all Governor's appointments to this particular Northeast Dairy Compact.

    We sat down and we developed and evolved bylaws. Our bylaws were done on a democratic process so that everybody could be equally represented so that everybody could be equally heard. We have officers and we have five committees and we have a voting process that I believe is second-to-none. In our voting process, anybody can make a motion, come forth with an idea. We debate, we discuss. Sometimes very slowly and other times very heatedly and very emotionally. We bring together all the information that the farmers, the consumers, and the processors can give us and then we form an opinion. We form our opinion because the States caucus and they get to—each State—gets together in its own group and they vote as a whole.

    But we have been doing this and doing it extremely well. We have a regulatory process, just as you do here in Congress—pardon?

    Mr. GEKAS. You said a regular what process?

    Ms. SCHMIDLE. We also have a regulatory process.

    Mr. GEKAS. Oh, a regulatory process.

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    Ms. SCHMIDLE. I am sorry. We in New England talk very speedily.

    We have a regulatory process for passing anything that we do. For example, if we set a price, if we have a petition, we have a process that enables us, much in the same way that Congress has a regulatory process, that enables us to have public hearings to advertise in the Federal Register and to make sure that we reach every branch of society that we can to find out how people are feeling and how we could progress before we get around to agreeing to do anything or passing any kind of regulation or resolution.

    And if that is not enough, once we decide to do something, then we go to referendum. And we go to the processors, we go to the producers, we go to the co-ops and say, this is what the compact feels is a fair and equitable thing to happen. How do you people feel? And we get 4,000 or 5,000 ballots coming in and voting on everything that we do. There is nothing arbitrary about us. We just make sure that everyone knows what we are doing and how we are doing.

    But most important of all, we have been very mindful of those in our society who are the most vulnerable. And as you have heard today, we do support the WIC program so that they are not impacted by any prices and we have also a regulation that deals with the school lunch program in the same way to make sure that any price change doesn't impact them.

    We have a clean bill of health from the United States Office of Inspector Generals. They descended on us for over a week and with their microscope they looked at every single thing the compact did. And they left and said, hey, unequivocally, you guys are doing exactly what you should do. And my light is red.

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    I just wanted to say, quickly, that in Connecticut, alone, that is my State, we have reversed the process of losing farms, dairy farms or family farms. Not only have we reversed the process in Connecticut, we actually have gained some farms. We have stabilized milk prices. In Connecticut, the price of milk last January was $.06 less than it was when the compact started.

    In summary, this is a very important, effective and efficient way for us to handle the dairy products and the milk situation that we have in New England. Consumer prices have been stabilized. New England prices have dropped below the national average. The loss of family farms has been stemmed and reversed. And the middle-man's ability to pay farmers lower prices and to charge retailers higher prices has been lessened. The farmers benefit and the consumers benefit. They keep their heads above the water. And so, Mr. Chairman, I respectfully request that we do not do away with the Northeast Dairy Compact, which has been very beneficial. And that we do support additional compacts, the reauthorization as we call it. Thank you.

    [The prepared statement of Ms. Schmidle follows:]

PREPARED STATEMENT OF MAE S. SCHMIDLE, CHAIR, NORTHEAST INTERSTATE DAIRY COMPACT COMMISSION, NEWTOWN, CT

SUMMARY

    The Northeast Dairy Compact Commission, through its well-defined by-laws and strong, powerful interaction through its consumer, farmer and processor Commission member interactions has proved successful and is doing exactly what the Congressional intent of S J Resolution #28 mandated it to do and is doing it well!
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    The 26 member Commission (appointed by New England state Governors) is balanced with consumers, farmers and processors adopted operating by-laws to insure that a democratic process of governance would be followed. In the best American tradition, the considerations of each and every member are considered and finally resolved through the majority judgement of each state.

    Through a firm and legal regulatory process, milk prices in New England have stabilized and farmers have been fairly compensated when necessary through an over-order price regulation. Ever mindful of impacting the most vulnerable people in our society, the Compact exempts and reimburses two of the most vulnerable supplemental nutrition programs—WIC (Women, Infants and Children) and milk used for school breakfast and lunch programs.

    Recently, the Northeast Dairy Compact received a clean bill of health when the auditors from the USDA Office of Inspector General reviewed the Compact and unequivocally stated that the Compact Commission properly administered funds and provided $46 million financial benefit to farmers.

    Loss of family dairy farms has been stemmed and in Connecticut the loss has even been reversed to a gain.

    The Northeast Dairy Compact Commission is, indeed, working and working well to the benefit of consumers, producers and processors and at no cost to government.

STATEMENT
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    The New England States took a bold, positive step to support the best interest of their consumers, farmers, processors and their environment when we formed the Northeast Dairy Compact Commission in 1997. This bold initiative has turned out to be a win-win situation for everyone by helping to preserve farms and farmlands, preserve open spaces that benefit local economies and tourism industries and especially benefiting consumers by assuring a local supply of fresh, nutritious, reasonably priced milk in New England food markets and supermarkets.

    Individual states grappled with the problems relating to their dairy farming industries and consumer milk prices and finally decided to confer with neighboring states who all had common concerns. Together, they ultimately recognized that working together in some sort of an interstate union approved by Congress would best address their serious concerns and formidable difficulties. With this recognition, farmers, consumers and processors in each of the six New England States went to their respective Legislatures and were successful in having supportive compact legislation passed.

    Between 1989 and 1993, each of the New England states passed uniform legislation to join the Compact and the Governors of each state signed the Legislation into Law.

Connecticut—Pub. L 93–320
Maine—Pub. L 89–437, Amend. Pub. L 93–274
Massachusetts—Pub L 93–370
New Hampshire—Pub. L 93–336
Rhode Island—Pub. L 93–106
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Vermont—Pub. L 93–57

    Following this, the Northeastern States and their Congressional Delegations, being very cognizant of the many serious concerns and problems relating to milk supply, milk prices and local milk availability, worked together in the good, old fashioned style of our Democracy to develop and help enact the original Congressional Compact Legislation now known as S.J. Resolution #28.

    Under the Compact Clause (Article 1, section 10, clause 3) of the United States Constitution, Congress must approve interstate compacts. The Compact language was included in the 1996 farm bill (Federal Agriculture Improvement and Reform Act) and was passed by Congress on March 28, 1996. Support from Congressional members outside of New England was necessary and, of course, forthcoming. The President signed the legislation into law on April 4, 1996.

    Included with the Farm Bill Conference Report were a number of conditions of consent. Among these was a requirement that, before the Compact could be implemented, the U.S. Secretary of Agriculture must review the legislation to determine if there was a ''compelling public interest'' for the Compact's implementation in the Compact region. After a public comment period, on August 9, 1996, Secretary Glickman found that the Compact, indeed, was in the compelling public interest and authorized its implementation.

    Shortly after the President signed the legislation, New England Governors set about the process of implementing the Legislation of each of their individual states and thereby creating a functioning and working organization to be known as the Northeast Dairy Compact Commission.
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    According to each state's legislation and in the time honored tradition, each Governor then appointed the Commission membership from his or her own state on a broad base participation that would include producers, processors, retailers and consumer representatives and that would address the broad public interest in milk prices regulation. The Governors of Maine and New Hampshire each appointed three members from their states and the Governors of Connecticut, Massachusetts, Vermont and Rhode Island each appointed five members for a total of 26 Commission members.

    These 26 members of the Northeast Dairy Compact Commission then proceeded to meet and organize themselves into a working, cohesive organization that would enable them to carry out the work of the Compact in an efficient and effective manner. The first order of business was to set up a By-laws Committee to determine exactly how the Compact would function.

    The By-laws Committee determined that the Commission would conduct its business in a most open and democratic fashion and according to Robert's Rules of Order. All voting, not just on issues, would be done in a most unique and democratic fashion. In preparation for a vote, each state would caucus with its membership present, determine by majority vote how it would vote and then cast one vote on the issue before them. In this way, all concerns of individual states would be represented and heard from and the voice of the majority would determine the vote.

    According to the By-laws, six Committees were established, each with six members—one from each state and, in some cases two—

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COMMITTEE ON ADMINISTRATION—including four officers, Chairman, Vice-Chairman, Treasurer, Secretary and two members at large.

COMMITTEE ON FINANCE

AUDIT COMMITTEE

COMMITTEE ON NOMINATIONS

COMMITTEE ON REGULATIONS AND RULES MAKING

BYLAWS COMMITTEE

    The Compact Commission Office would be under the direction of an Executive Director and additional staff as determined.

    Very clearly and emphatically, no Commission members would be paid for their work but would be reimbursed for bonafide expenses according to general accepted government recommendations for expenses. Any form of payment by any participating or sponsoring group would also be prohibited.

    The Commission conducts Rule Make in accordance with Federal Administrative Procedures and the Compact Commission administers pricing regulation in accordance with its terms and provisions and makes rules to effectuate the terms and provisions of the pricing regulation; receive and investigate complaints of violations; and recommend amendments.
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    Since the inception of the Compact Commission, the Commission has operated under the original By-laws with a minimum of non-substantive amendments. Regulation and Rule Making has been the major source of activity for the Compact Commission. Rule making has included—

1) Over order Price Regulations including Administrative Assessment and WIC

2) School Milk Exemption

3) Procedures for Rule Making

4) Administrative Assessment, Amended 1998

5) Handler Petition Procedure

6) Diversions and Transfers

    The Northeast Dairy Compact Commission meets monthly in a central location in or around Concord, New Hampshire. With travel and expenses being a serious consideration, its six active Committees meet occasionally in person but most frequently before or after Commission Meetings or by conference phone call which works best for all commissioners concerned.

    By meeting monthly, the Compact Commission is constantly aware of what goes on in the industry and is regularly apprised about market trends or changes. Monthly contact with consumers, farmers, and processors is a very valuable source of hands-on key information for the Commission.
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    The Compact Commission in all of its activities including Rules and Regulations, has been ever mindful of impacting the most vulnerable people in our society. The Compact Regulation exempts and reimburses two of the most vulnerable supplemental nutrition programs. Low income children and mothers are protected by a provision in the Compact which provides for a reimbursement to the Women, Infants, and children (WIC) program in the entire amount of the compact over-order price. The reason for the WIC reimbursement is two-fold. Nutrition programs such as WIC play an important role in the prevention of health problems. Also, WIC is not an entitlement program, therefore, the number of participants that WIC is able to serve at any given time is dependent upon availability of funds from Federal and State sources, and the cost of WIC food items. Since the amount of funds is fixed, any increase in the price of WIC foods has the effect of reducing the number of women and children the available grant dollars can serve.

    In addition, Compact regulation exempts school breakfast and lunch programs and reimburses those programs for any increased costs to their school milk purchases that the programs document as attributable to operation of the Compact price regulation. These exemptions reflect the governing principle of the Compact Commission of assuring that regulation does not adversely affect operation of these child nutrition programs.

    And, of course, there is absolutely no cost to any local, state or federal government as a result of the Northeast Dairy Compact. The Compact legislation requires the Commission to reimburse the Federal government for the cost of Commodity Credit Corporation purchases of any surplus production that might occur should the rate of regional increased milk production exceed the national rate.

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    The Northeast Dairy Compact has a clean bill of legal and administrative health as well. When Congressional opponents of the Compact recently requested an audit of the Compact by the USDA's Office of Inspector General, the Federal auditors gave the Northeast Dairy Compact a clean bill of health. THE AUDITORS UNEQUIVOCALLY STATED THAT THE COMMISSION PROPERLY ADMINISTERED FUNDS AND PROVIDED $46 MILLION FINANCIAL BENEFIT TO FARMERS. The courts, as well, have consistently found that the Compact is doing the right thing—they found that the work of the Compact is firmly and legally grounded.

    As an example of the success of the Northeast Dairy Compact Commission, in my home state of Connecticut, in December of 1998, the price of a gallon of milk was lower than in July of 1997! And equally as important, Connecticut has not just stemmed the loss of family dairy farms but has actually reversed the trend. In 1998, for the first time in 8 years, the number of dairy farms in Connecticut has actually increased.

    In short summary, the Northeast Dairy Compact Commission through its By-laws has conducted the business of the Compact very effectively and efficiently using solid regulations and tried and true democratic principles that have been above legal challenge. The bottom line is that consumer prices have stabilized; New England prices have dropped below the national average; the loss of family farms has been stemmed and in some cases reversed; the ''middlemans'' ability to pay farmers lower prices and to charger retailers higher prices has been lessened; farmers benefit from more stable and potentially higher farm prices by allowing them to keep their heads above water and by giving them an opportunity to plan for the future like other businesses; consumers benefit from local fresh milk and more stable prices at the supermarket.

    The Compact has enabled states within New England to have greater control of the quality of milk consumers drink—a local supply prevents consumers from having to pay high transportation costs to import milk; WIC and the school lunch program benefit; tourism and recreation industries and sportsmen benefit from the open lands necessary for dairy farmers; local economies benefit as a host of businesses support each dairy farm; and the environment benefits as conversion of open spaces to non-farm uses would be devastating to New England.
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    With good, solid substantiation, the Northeast Dairy Compact is a Win-Win situation for consumers, producers, processors and the Compact Commission which has remained above all legal challenges.

63851n.eps

    Mr. GEKAS. We thank the witness.

    And we turn to Mr. Frydenlund.

STATEMENT OF JOHN FRYDENLUND, DIRECTOR, CENTER FOR INTERNATIONAL FOOD AND AGRICULTURE POLICY, CITIZENS AGAINST GOVERNMENT WASTE, WASHINGTON, DC

    Mr. FRYDENLUND. Mr. Chairman, thank you. Before I begin my testimony, if I could ask your consent, I would like to submit a chart. There has been a lot of discussion today about the Class I price having little correlation to the retail price. A.C. Nielsen did this graph, covers the period from May 1996 through February of this year. Even if it is not an absolutely direct correlation between Class I and retail price, it is very close. I would like to submit it for the record.

    Mr. GEKAS. Without objection, it will be regarded as part of the record and we direct staff to make copies of it immediately and distribute them to the sitting members.
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    [The information referred to follows:]

63851o.eps

    Mr. FRYDENLUND. Thank you very much, Mr. Chairman.

    Mr. GEKAS. Mr. Frydenlund, you may proceed.

    Mr. FRYDENLUND. Mr. Chairman and members of the committee, on behalf of Citizens Against Government Waste and members of the National Consumer Coalition's Food Group, I thank you for this opportunity to testify in opposition to legislation such as H.R. 1604 which would extend and expand dairy compacts. My statement is endorsed by the Competitive Enterprise Institute, Consumer Alert, Hudson Institute, and the National Taxpayers Union.

    Dairy compacts are nothing more than a legalization of milk cartels, which seem more appropriate to the old style Soviet system rather than our free enterprise system. CAGW has focused our attention on the potential adverse economic consumer and taxpayer impacts of the compacts. But dairy compacts also, if you read the Federalist Papers, are definitely in violation of the Constitution. They restrict commerce for the United States and that is exactly what dairy compacts are intended to do.

    In fact, in Federalist Number 42, Madison warned that ''if authorities were allowed to regulate trade between States, import levies would be introduced by future contrivance.'' Dairy compacts are exactly the sort of contrivance feared by Madison. Dairy compacts are a restriction of commerce and impose what amounts to a tariff between States. And even if they are passed by referendum, taxpayers and consumers do not vote in those referendums. Except for these dairy compacts, past interstate compacts have been for the purpose of promoting commerce between States, rather than preventing the sale of products from one State to another.
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    Dairy compacts also represent a threat to the long-term viability of the dairy industry. The dairy industry must become more competitive in order to benefit from modernization and technological progress and to capitalize on export markets. It must also become more responsive to customer demand, while compacts are a slap in the face to the milk-drinking public.

    There is no justification for another government-sanctioned layer of regulatory bureaucracy to regionally fix prices. Dairy compacts pit region against region, fracturing the country and will prevent the industry from making the changes necessary to take advantage of an expanding global marketplace.

    Compact advocates claim that artificially high milk prices are necessary in certain regions in order to keep small dairy farmers in business and assure a stable milk supply. However, USDA's recent 3 years of research as part of the Milk Market Order Reform process blows that argument out of the water and should finally put such nonsense to rest. One of the most important findings to come out of the USDA's rulemaking is a recognition that many of the existing Class I differentials are too high and that they can be reduced without jeopardizing an abundant supply of milk in all regions. Therefore, it is incongruous to turn around and raise Class I prices through more compacts.

    Spreading dairy compacts from coast to coast will eventually put the dairy industry into the same chaos that developed in the late 1970's and early 1980's when the dairy support prices were sent through the roof, all in an attempt to gain political favor. Artificially high milk price supports led to excess milk production, declining sales of milk, and government purchases of surplus production that cost taxpayers $17 billion. Any artificial milk price increase beyond what the market demands will do the same thing.
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    If compacts are allowed to swallow up a vast percentage of the country, the cost to consumers would dwarf the $70 million that has been imposed on New England's consumers. While the New England region produces about 3 percent of the Nation's milk supply and accounts for only 5 percent of the U.S. milk consumption, H.R. 1604 would bring nearly 40 percent of the Nation's milk supply and almost 60 percent of the Nation's consumers under the power of a milk-pricing cartel.

    Dairy compacts impose an unfair milk tax on consumers. The consumer tax imposed by H.R. 1604 could amount to as much as $2 billion annually. Rather than creating milk cartels that will add yet another layer of regulation, Congress should be considering how best, after 60 years of government price manipulation, to get the government out of the milk business.

    In a way, it is easier for me to understand why some Members of Congress have consistently supported federally managed programs in the many State supported compacts, even when it hurts their most disadvantaged constituents. But it is more disappointing to our organization that some Members of Congress who profess to support market orientation for most of the economy do not seem to recognize the long-term advantages of moving to a freer market for the dairy industry. It is time for Congress to recognize that dairy compacts violate the Constitution, are a form of price fixing, eliminate competition, provide for a more meddlesome bureaucracy, and will lead to the imposition of great costs to taxpayers in the future.

    Dairy compacts also jeopardize all freedom to farm agriculture reforms. If Congress reneges on reform of the dairy program, it will begin the unraveling of all of the free market reforms accomplished in the 1996 farm bill. Congress must heed the lessons of the past as it makes decisions impacting not only the future of the dairy industry, but the entire country's consumers and taxpayers.
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    Mr. GEKAS. Would the gentleman bring his testimony to a close?

    Mr. FRYDENLUND. Congress should oppose expanding the Federal Government's role in milk pricing and stay on the path begun in the 1996 farm bill to phase out the government's role in the dairy industry. The commitments made in the 1996 farm bill, including a phase-out of the dairy price support program and a sunset to the Northeast Dairy Compact should be kept. Thank you very much.

    [The prepared statement of Mr. Frydenlund follows:]

PREPARED STATEMENT OF JOHN FRYDENLUND, DIRECTOR, CENTER FOR INTERNATIONAL FOOD AND AGRICULTURE POLICY, CITIZENS AGAINST GOVERNMENT WASTE, WASHINGTON, DC

    Mr. Chairman and members of the committee, on behalf of Citizens Against Government Waste (CAGW) and members of the National Consumer Coalition's (NCC) Food Group, thank you for the opportunity to testify in opposition to legislation, such as H.R. 1604, which would extend and expand dairy compacts.

    The NCC is a coalition of two dozen public interest groups supporting the principle that a market economy benefits consumers by expanding choice and competition, fostering innovation, improving health and safety, and lowering costs. The Competitive Enterprise Institute, Consumer Alert, and the Hudson Institute, all members of NCC, have specifically asked to be associated with this statement.

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    CAGW is a 600,000-member, nonprofit, nonpartisan organization, which grew out of President Reagan's Private Sector Survey on Cost Control, better known as the Grace Commission. The organization's mission is to work for the elimination of waste, mismanagement, and inefficiency in the federal government, with the goal of creating a government that manages its programs with the same eye to innovation, productivity, and economy that is dictated by the private sector.

    The Center for International Food and Agriculture Policy institutionalized CAGW's long-standing goal of dismantling Depression-era agricultural price supports and regulations. In addition to a belief that Congress should build on the accomplishments of the 1996 Freedom to Farm Bill and achieve a truly free market for agriculture, the Center advances the philosophy that the best way to wean America's farmers off the federal dole and assure them a prosperous and secure future is to promote a more open global food economy by dismantling barriers to free trade.

    In effect, dairy compacts violate these principles and are nothing more than a legalization of cartels for the dairy industry. ''Milk cartels,'' whether federally or state-sponsored, have no place in a free market. They would seem more appropriate to the old-style Soviet system, rather than a market-based system such as we have in the United States.

    Although CAGW has focused most of its attention on the adverse economic, consumer and taxpayer impacts of the compacts, the organization also believes that dairy compacts are an unconstitutional violation of the commerce clause. I cannot believe that anyone could read The Federalist Papers without concluding that the Founding Fathers intended that there be no restrictions on commerce within the United States. However, that is exactly what dairy compacts do.
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    In fact, in Federalist No. 42, Madison warned that if authorities were allowed to regulate trade between states, some sort of import levy ''would be introduced by future contrivances.'' I would argue that the dairy compacts are exactly the sort of contrivance feared by Madison. Dairy compacts are clearly a restriction of commerce, and, in effect, they impose what amounts to a tariff between states. The Founding Fathers never intended the states to impose levies on imports such as those imposed by one nation on another's goods.

    Throughout the history of this country, Congress has authorized the creation of interstate compacts. But, except for these dairy compacts, they have all been for the purpose of promoting commerce between states, rather than restricting commerce. I cannot find any precedent for a compact with the express purpose of preventing the sale of products from one state to another.

    Interstate dairy compacts represent a threat to the long-term viability of the dairy industry. The dairy industry must become more competitive in order to benefit from modernization and technological progress and to capitalize on export markets. It must also become more responsive to customer demand, while compacts are a slap in the face to the milk-drinking public.

    There is no justification for another government-sanctioned layer of regulatory bureaucracy to regionally fix prices. Dairy compacts pit region against region, fracturing the country, and will prevent the industry from making the changes necessary to take advantage of an expanding global marketplace.

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    At the same time that many have been advocating an expansion of these compacts, the U.S. Department of Agriculture (USDA) has been going through a rule-making, mandated by the 1996 farm bill, to reform the Federal Milk Market Order System. Compact advocates claim that these artificially high milk prices are necessary in certain regions in order to keep small dairy farmers in business and assure a stable milk supply.

    However, USDA's three years of research blows that argument out of the water and should finally put such nonsense to rest. One of the most important findings to come out of USDA's rule-making is a recognition that many of the existing Class I differentials are too high and that they can be reduced without jeopardizing an abundant supply of milk in all regions. Therefore, it is incongruous to turn around and raise Class I prices through more compacts.

    Spreading dairy compacts from coast to coast will eventually put the dairy industry into the same chaos that developed in the late 1970's and early 1980's, when the dairy support prices were sent through the roof, all in an attempt to gain political favor.

    Artificially high milk price supports led to excess milk production, declining sales of milk and government purchases of surplus production that cost taxpayers $17 billion during the 1980's. Any artificial milk price increase beyond what the market demands will simultaneously drive down milk consumption and increase milk production and repeat the mistakes of that decade.

    If compacts are allowed to swallow up a vast percentage of the country, the results will be devastating. The cost to consumers would dwarf the $55 million that has been imposed on New England's consumers. While the New England region produces about 3 percent of the nation's milk supply and accounts for only 5 percent of U.S. milk consumption, adding additional states to the Northeast Compact and creating a Southern Compact would bring nearly 40 percent of the nation's milk supply and almost 60 percent of the nation's consumers under the power of a milk-pricing cartel.
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    Dairy compacts impose an unfair ''milk tax'' on consumers. If compacts are allowed to spread, the consumer tax could amount to as much as $2 billion annually. It would also directly impact government spending by increasing the cost of the food stamp program, the school meals program and other child and elderly nutrition programs.

    Rather than creating milk cartels that will add yet another layer of regulation, Congress should be considering how best, after sixty years of government price manipulation, to get the government out of the milk business. For that reason, as a first step, the enactment of H.R. 744 would clean the slate by rescinding authority for the Northeast Interstate Dairy Compact.

    We recognize that H.R. 1604 has more cosponsors than does H.R. 744. Unfortunately, there are some members of Congress who profess to support market-orientation for most of the economy, but do not seem to recognize the long-term advantages of moving to a freer market for the dairy industry. It is time for Congress to recognize that dairy compacts violate the constitution, are a form of price-fixing, eliminate competition, provide for a more meddlesome bureaucracy, and will lead to the imposition of great costs to taxpayers in the future. Dairy compacts and H.R. 1604 not only undermine the potential for a more market-oriented dairy industry, but also jeopardize all ''freedom to farm'' agriculture reforms. If Congress reneges on reform of the dairy program, it will begin the unraveling of all the free market reforms accomplished in the 1996 farm bill.

    Congress must heed the lessons of the past as it makes decisions impacting not only the future of the dairy industry, but the entire country's consumers and taxpayers. Congress should oppose expanding the federal government's role in milk-pricing, as proposals to create additional compacts would do. Instead, Congress must stay on the path begun in the 1996 farm bill to phase out the government's role in the dairy industry. The commitments made in the 1996 farm bill, including a phase out of the dairy price support program and a sunset to the Northeast Dairy Compact, should be kept.
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    Mr. GEKAS. We thank you, Mr. Frydenlund.

    And Ms. Lawrence is recognized.

STATEMENT OF KATHY LAWRENCE, EXECUTIVE DIRECTOR, JUST FOOD, NEW YORK, NY

    Ms. LAWRENCE. Thank you. I am Kathy Lawrence. I am the executive director of Just Food, which is a New York City-based non-profit organization that is working to develop a sustainable food system in our region and in our city.

    Just Food was founded in the belief that we can build a food system that produces good food for all of our people and good livelihoods for farmers and others in the food system. As was mentioned, we work with a wide variety of organizations from anti-hunger to organic farming to consumer advocacy on collaborative projects that actually support the region's farmers and get healthful, affordable, locally grown food to low-income New Yorkers. And we know that these goals can be and should be mutually supportive, not mutually exclusive.

    Every day at Just Food, we work with farmers who are concerned about hunger and poverty. They want to see that everyone has adequate food, a decent place to live, and jobs to support themselves and their families. And every singe day, we work with low-income New Yorkers in Harlem, in the Bronx, and in Brooklyn who are concerned about the welfare of our farmers and their ability to make a decent living, support their families, produce good food, and secure their farms for future generations. Together, these people are creating markets for farmers and quality food access for poor New Yorkers. Everybody wins.
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    I think that this approach offers a stark contrast to the way the issues and the actors in the Northeast Dairy Compact debate are being portrayed. Opponents of the compact are deliberately and in some cases viciously perpetuating a false conflict between the interests of farmers and those of consumers, especially low-income consumers. I find this extremely disturbing and extremely one-sided and that is why I am here.

    Federal policy is not the major focus of Just Food. We are not a lobbying group and I feel a little out of my depth speaking here today. But the issues are so clear, the vested interests so strong, and the disinformation campaign waged by compact opponents has been so well funded and so pervasive that I felt compelled to be here today to represent an urban, low-income, anti-hunger perspective in support of ratifying and expanding the Northeast Dairy Compact.

    Because the simple fact is that every single New Yorker, whether they are rich or poor, has a vital stake in a healthy, economically strong, and environmentally sound regional food system. And the simple truth is that if we lose our farmers and our farms, all of us will suffer. We all have a stake in supporting our hardworking and productive regional farmers.

    Before I continue, I want to make it clear that the bulk of our funding comes from private foundations, members, and individual donations. The remainder of our funding comes from two Federal grants working on sustainable agriculture and food security issues.

    I know that Members of Congress and I am sure everyone on this subcommittee, whether they are here or not, has received letters, cartoons, press releases, action alerts, all purporting to give the facts about the compacts. And I would like to just pose a few questions and issues for this committee to deliberate on.
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    First of all, I want to talk about what we stand to lose by not ratifying the Northeast Dairy Compact. We stand to lose our farms. And as we lose our farms, we have less control, as consumers and as citizens, over the quality and the safety of our food, less say about how it is produced, by whom it is produced, under what kinds of working conditions, and much less say about who has access to it at what price. And we are losing our farms. We have lost 5,600 dairy farms in New York State alone in the last 10 years.

    And when these farms go, our rural and agriculture infrastructure goes, our capacity to meet our own food needs goes, and a major economic engine in New York State fails. And with it goes any hope of creating more, not fewer, farm and food-related jobs.

    I want to be really clear about one thing. It is primarily the lack of decent jobs at decent wages, and not the prices that farmers get for their products, that leads to hunger in our city and our State. Poor New Yorkers, whether they are urban or rural, suffer from a lack of jobs and economic opportunities, which is precisely what farming can offer.

    Some people would have you believe that we are trying to make some dairy farmers in some regions rich by raising the consumer price of milk at the expense of low-income consumers. It is not the intent and it is not the result of the compact. The compact was set in place not to raise the consumer price of milk, but to set a floor for the farmers that is calculated on the cost of production. We have heard a lot of information today about how prices are set and what the purpose of them is, but, basically, the compact is to set a floor so that farmers have some stability. It is not to raise the consumer price of milk, not one penny of possible compact-related increases have to be passed onto the consumer.
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    In wrapping up—and I had a lot more to say—I would like the members of the committee to think about several questions as they consider whether or not to ratify the compact. First of all, I want to be clear that it is not anti-consumer, it is not anti-poor. The record is very clear on that. It is not a barrier to trade and it is not a government program. The compact is a small, but essential step to help sustain our dairy farmers and our agricultural infrastructure while we work for the kind of food system that we really need, one that produces good food, good jobs, and a good environment.

    So I would like you to ask yourselves these questions before you make your decision. Who really decides dairy pricing now and who benefits most from those decisions? What do we stand to lose if we don't ratify the Northeast Dairy Compact and extend it to the Southeast? Who has a plan to employ the thousands of people in Upstate New York alone and all of the other States who will be without jobs if we lose our dairy farms and associated businesses? And which of you on this committee wants to guarantee to low-income New Yorkers that milk prices will not go up and quality will not go down if consolidation and processing continues, Northeast farms disappear, and milk is shipped in from far distances?

    Thank you very much for this opportunity.

    [The prepared statement of Ms. Lawrence follows:]

PREPARED STATEMENT OF KATHY LAWRENCE, EXECUTIVE DIRECTOR, JUST FOOD, NEW YORK, NY

    My name is Kathy Lawrence. I am the Executive Director of Just Food, a New York City-based non-profit organization that is working to develop a sustainable food system in our city and throughout our region. Just Food was founded in the belief that, by working in cooperation with many other groups and individuals, we can build a food system that produces good food for all of our people and good jobs for farmers and others in the food system. The food system we're helping to create also contributes substantially to a clean and healthy environment and a thriving regionally-based economy.
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    Just Food works with farming, gardening, anti-hunger, environmental, consumer advocacy, nutrition education, social justice and community development groups on collaborative projects that support the region's farmers while increasing the availability of healthful, locally-grown food to the people of New York City, particularly those with little or no income. We know that these goals can be and should be mutually supportive—not mutually exclusive.

    Every day we at Just Food work with farmers who are concerned about hunger, poverty and social justice. They want to see that everyone has adequate food, a decent place to live and jobs to support themselves and their families. And every day we work with low-income New Yorkers and community-based organizations that are concerned about the welfare of our farmers; their ability to make a decent living, support their families, produce good food and secure their farms for future generations. Together these people are creating markets for farmers and food access for poor New Yorkers. Everybody wins.

    This approach offers a stark contrast to the way the issues and actors in the Northeast Dairy Compact debate are being portrayed. Opponents of the Compact are deliberately and in some cases viciously perpetuating a false conflict between the interests of farmers and those of consumers, especially low-income consumers. I find this extremely disturbing and one-sided. That is why I am here.

    Federal policy is not the major focus of Just Food. We are not a lobbying group and quite honestly I feel out of my depth speaking here today. But the issues are so clear, the vested interests so strong and the disinformation campaign waged by Compact opponents so well-funded and so pervasive that I felt compelled to be here to represent an urban, low-income, anti-hunger perspective in support of ratifying the Northeast Dairy Compact.
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    Because the simple fact is that every single New Yorker, rich or poor, has a vital stake in a healthy, economically strong and environmentally sound regional food system. And the simple truth is that if we lose our farmers and farms all of us will suffer. We all have a stake in supporting our hardworking and productive regional farmers.

    Before I continue, I want to make clear that the bulk of our funding comes from private foundations, members and individual donations. The remainder of our funding comes from two federal grants—one from the USDA Community Food Projects Program for an urban agriculture, food access and economic development project, and one from the USDA Sustainable Agriculture Research and Education (SARE) Program to study and develop linkages between regional farmers and ethnic food buyers in New York City. Just Food is one of several partners in an additional SARE grant to study and promote Community Supported Agriculture (CSA) in the Northeast. (I have attached information about CSA for those not familiar with the concept).

    You will hear from experts today who will speak with far greater knowledge than I about how the Compact actually works, what the documented impact of the Compact has been in its twenty-two months of operation. They will give detailed testimony on the true effects of the Northeast Compact on the consumer price of milk, who is making the profits in milk today, and how the Compact will help small and medium-scale dairy farmers.

    I want to take a different approach. Members of Congress have received letters and cartoons, press releases and action alerts purporting to give the facts about the Compact. I would like to pose a number of issues for the Members of this Subcommittee to consider as you deliberate on the fate of the Compact.
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First, what do we stand to lose by not ratifying the NE Dairy Compact?

    We stand to lose our farms. As we lose our regional farms, we have less control as consumers and citizens over the quality and safety of our food, less say in how it is produced, by whom and under what kind of working conditions, and less say about who has access to it.

    And we are losing farms. According to the National Agricultural Statistics Survey, in the last ten years more than 5,600 dairy farms went out of business in New York State. When these farms go, our rural and agricultural infrastructure goes, too. Our capacity to meet some of our own food needs regionally disappears. A major economic engine in New York State fails and with it any hope of creating more—not fewer—farm and food-related jobs. Farming in New York State accounts directly for $3 billion dollars of the economy, and through its multiplier effect, over $20 billion dollars. Dairy farming accounts for two-thirds of that total. So what happens when our farms go? Is there any coherent plan for economic development and job creation in New York State? No.

    On the other hand, for each New York farm that we as food buyers help sustain, we support on-farm employment, the rural tax base, up to seven additional farm-related businesses, and the potential to create processing, trucking and other jobs. These are jobs and businesses rooted in the community that circulate their dollars in the local economy rather than syphoning it off like the malls and industrial projects that seem to be the only kind of job creation many can envision.

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    It is primarily the lack of decent jobs at decent wages—not the prices paid to farmers—that leads to poverty, poor access to food, and hunger in our state and city. Poor New Yorkers suffer from a lack of jobs and economic opportunities—precisely what farming offers.

Aren't we being asked to make dairy farmers rich by raising the consumer price of milk—at the expense of low-income consumers?

    No! The intent of the Compact is not to raise the consumer price of milk. Not one penny of any potential Compact-related increases in the price of milk needs to be passed on to the consumer. Processors and distributors could choose to absorb this cost and still make money on what is the most profitable section of the grocery store: the dairy aisle.

    The purpose of the Compact is to set a floor for the price that farmers receive for their milk—a floor that should cover their cost of production. The result would be a more stable and predictable income for farmers and an end to the kind of situation we're in right now, with prices to farmers at close to a twenty-year low! For years, dairy farmers have sold their milk for prices below the cost of production—meaning they get less for their milk than it costs them to make it. According to a USDA study of agricultural and financial issues, in 1996 dairy farmers in Vermont, Pennsylvania and New York took an average loss of $2.61 per hundredweight of milk. Although this was an improvement from the $4.35 loss in 1995, milk production was still in the red. Can we really blame farmers for seeking a price that at least allows them to cover their costs? Is it any wonder they began to explore a mechanism that would provide them with fair prices?

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    Most importantly, the fantastical figures that Compact opponents seem to pull from thin air bear no relation to the documented impact of the Compact on the consumer price of milk in participating states. The impact has been very modest indeed. According to a February 1998 report of the U.S. Office of Management and Budget (OMB) report, during the first six months the Compact was in effect, the total additional cost of fluid milk for an average family of four in the Compact region was $1.67 or 28 cents per month! That same report showed that consumer prices in New England six months after the Compact took effect averaged five cents per gallon less than in the rest of the country.

    Many well-meaning groups and individuals doing terrific work in the fight against hunger have raised grave concerns about increases in the consumer price of milk. These concerns are completely understandable and valid. For people living at or below the poverty level, every penny counts and the prospect of major price increases in such an essential food as milk is very frightening. I share this concern and I deplore the industry-funded organizations who have played on this fear with scare tactics, dishonest labels like ''milk tax'' and ''dairy cartel'' and grossly exaggerated projections.

    Who knows where the wild figure of ''permanent'' milk prices of $3.40/gallon came from? Who knows how the tens of millions of consumer dollars per state being bandied about were calculated? Have you ever seen a citation? Ever seen the formula? You might want to reserve judgement until someone shows you some math you can follow and trust.

    I can tell you that in New York State we have an anti-gouging law that prohibits the retail price for milk to exceed 200 percent of the Class I price of fluid milk. When it became clear that the recent crash in the price to farmers wasn't being mirrored by decreasing prices to consumers, our State Attorney General, Eliot Spitzer, began an investigation of price gouging and publicized his intention to enforce the law. I quote from his press release, ''Retailers can react with remarkable speed when producer prices rise, but when the producer price declines, as it has recently, stores set a leisurely pace for making changes that are mandated by law and benefit consumers . . . We will monitor retail milk pricing very carefully and we will not hesitate to take appropriate action to compel stores to do what is right''. With a Compact price to farmers of $1.46 per gallon, the maximum consumer price under the Compact would be $2.92. According to the latest figures from the International Association of Milk Control Agencies, the current price per gallon of milk in New York City ranges from $2.30 to $3.59. So where's the dramatic increase? And why, given the current low price to farmers, is the price to consumers so high? It certainly can't be blamed on the Compact.
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Will we get better consumer prices as more farmers go out of business and our food production is monopolized by mega-corporations?

    No chance. At best we'll be begging for government and corporate left-overs from a food system run to support corporate profits alone, not to sustain local jobs, communities, food access or our natural resources. The cheap food policy in the U.S. has not served farmers and it has not ended hunger. Why? Because ending hunger in the U.S. is not about producing more food more cheaply by fewer and fewer people. It is, in large part about producing good jobs and economic opportunity.

    We have everything we need in the Northeast region to produce an adequate supply of high quality milk at an affordable cost. If we have to import our milk from other regions, costs will increase, quality will decrease and jobs will disappear.

Shouldn't the market and production efficiency dictate what farms are profitable?

    Many say farms should go out of business if they aren't ''efficient'' enough and can't compete in the ''free'' market. But the market isn't free and the only efficiency that counts is maximum, short-term profit generation for fewer corporations, while the social, economic and environmental ''external costs'' of industrialized agriculture are borne by society as a whole and by farmers and low-income rural and urban communities in particular. Dairy farming in the U.S. is shifting rapidly to the West and Southwest, where electricity, water, and fuel are all subsidized and where grain and water must be transported long, destructive distances to feed huge herds of confined dairy cattle. Is this the food system we want?
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    Right now, New York dairy farmers are subject to a federally-mandated price based on the national supply and demand for cheese and other manufactured products out in the West and Midwest states. Huge increases in milk production in California, Idaho, New Mexico and nearby states have kept national prices low even though those states would never provide a drop of fresh milk to new York consumers unless the price was increased dramatically to cover transportation costs. So the federally ''fixed'' price works to the distinct disadvantage of Northeast dairy farmers. Where's the free market in that?

Will we have more open space, more scenic landscapes, more wildlife, better water and a healthier environment if our farmers go out of business?

    No. Farms can actually improve the environment and the natural resource base. That is why New York City is investing $40 million in the Watershed Agricultural Program to help watershed farmers in the Catskills and elsewhere protect the NYC water supply and save the city money. As farmers adopt more sustainable practices—like whole farm planning, better manure management, rotational grazing and organic production, everyone wins. But farms can't continually improve their practices and our environment if they're not in business.

We all have a stake in supporting our hardworking regional farmers.

    We at Just Food believe that we can and must support the region's farmers while increasing the availability of healthful, locally-grown food to the people of New York City.

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    The dairy compact is not anti-consumer or anti-poor. It is not a milk tax, and we are not talking about dramatic price increases to the consumer (unless of course the milk dealers decide to gouge consumers while blaming it on the Compact). And the Compact will not make any dairy farmers rich.

    The Northeast Dairy Compact Commission is a democratically-run group of representatives from each participating state who represent consumers, farmers, processors and government. The Commission makes decisions on Compact pricing and regulations only after formal public hearings and a comment period, allowing infinitely more stakeholder input and dialogue than the current milk pricing system.

    In sum, the Compact is a small but essential step to help sustain our dairy farmers and our state's vital agricultural infrastructure while we all work to create the kind of food system we really need: one that creates high-quality, affordable food, good jobs, a strong economy and a healthy environment.

    Before making your final decision on the Northeast Dairy Compact, please ask yourselves the following questions:

    What do we stand to lose?

    Who has a plan to employ the thousands of people in upstate New York alone, who will be without jobs if we lose our dairy farms and associated businesses?

    Who wants to guarantee to low-income New Yorkers that milk prices will not go up and quality will not go down if consolidation in processing continues and milk is shipped from farm distances?
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    Who really decides dairy pricing now, and who benefits most from those decisions (clue: it's not farmers or consumers!) and should this system change?

63851p.eps

63851q.eps

    Mr. GEKAS. We thank you, Ms. Lawrence.

    And we turn to Mr. Jaeger.

STATEMENT OF ARTHUR S. JAEGER, ASSISTANT DIRECTOR, CONSUMER FEDERATION OF AMERICA, WASHINGTON, DC

    Mr. JAEGER. Thank you very much, Mr. Chairman. Consumer Federation of America is a non-profit association of some 260 pro-consumer groups with combined membership of more than 50 million people. Consumer Federation of America opposes dairy compacts because we feel they are a bad deal for consumers, especially low-income consumers, and they are also not an effective way of assisting small struggling dairy farms.

    The Northeast Dairy Compact has triggered retail milk price increases averaging about $.15 per gallon over the last 2 years. That works out to a total cost, by our computations, of about $65 million. And I do have a chart that I will pass on to the committee. It is Nielsen data. It is not the same chart that Mr. Frydenlund offered, but I think it rather dramatically shows the increase in price in New England. It shows the price in New England versus the price in the Middle Atlantic States. And you can see in the chart the price in New England has stayed high under the compact while the price in the Middle Atlantic States has fluctuated with market forces below that.
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    Mr. GEKAS. Without objection, the document will be reprinted in the record.

    [The information referred to follows:]

63851r.eps

    Mr. JAEGER. Essentially, the higher price received by New England dairy farmers is passed along as an added cost by processors and retailers. We may not like that, but that is what has happened. The combined effect of establishing both a Southern Compact and extending and expanding the Northeast Compact would be very substantial. We estimate the cost to consumers over the latter 6 months of this year to be $432 million or about $.22 more per gallon over 27 States.

    These higher prices will result in decreased milk consumption. While a slight decline in consumption may seem trivial, the public health effect of that decline may not be. Milk consumption has been declining steadily for years and the National Academy of Sciences recently recommended that Americans increase their consumption of calcium. Compacts make it less likely this goal will be achieved.

    The cost of dairy compacts does fall most heavily on low-income families. These families spend more of their income on food and more of their food budget on dairy products. The extra cost these families spend on milk won't be available to purchase other items. As a result, under the Northeast Compact and the proposed Southern Compact, Food Stamp recipients in 27 States stand to lose $61 million in purchasing power over the next 6 months.
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    Advocates of compacts argue that they are helping to keep small family dairy farms afloat. The loss of family farms of all types is a serious problem and a major concern of my organization, the Consumer Federation of America. But raising the price of milk to all consumers through compacts is not the solution. Compacts, as we have heard, assess benefits on every gallon of milk sold. So the farms that produce the most milk receive the most benefit. This gives enormous subsidies to those who least need it, the largest dairy farms. The smallest, most vulnerable farms receive only a minute portion of the total subsidy. This is probably not enough to assure that the small farms stay in business.

    In New England, according to our calculations, the smallest dairy producers, those with less than 20 cows, will receive an average of $650.00 from the Northeast Compact over the last half of this year. At the other end of the scale, dairies with 200 to 500 cows will receive an average benefit of $29,000 per farm. Those with more than 500 cows will receive an average benefit of $67,000. That is over 6 months.

    Estimated average benefits in the Middle Atlantic States and the South show a similar pattern. Asking consumers, especially low-income consumers, to pay more for milk only to see the lion's share of the benefit accrue to large, well-off dairy producers doesn't make sense. If compacts continue, Congress should find a way to target the benefits on the small, struggling farmers who most need the help.

    Thank you.

    [The prepared statement of Mr. Jaeger follows:]
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PREPARED STATEMENT OF ARTHUR S. JAEGER, ASSISTANT DIRECTOR, CONSUMER FEDERATION OF AMERICA, WASHINGTON, DC

    I am Art Jaeger, assistant director of the Consumer Federation of America.(see footnote 1) I am pleased to address the subcommittee today on regional milk pricing agreements known as interstate dairy compacts.

    At CFA, we are primarily consumer advocates, not lawyers. Nonetheless, we see merit in the argument of those Constitutional scholars(see footnote 2) who say dairy compacts are an inappropriate interference with interstate commerce.

    Compacts allow dairy producers within a particular region to receive a higher price for milk than those outside the region. Yet they shield these same producers from competing farmers outside the region by means of a tariff. This stifles competition and creates an artificial economic barrier around producers within the region.

    Compacts also set a troubling precedent that could lead to regional pricing schemes not only for milk but for other commodities. The end result could be a complicated patchwork of state and regional pricing laws and balkanization of some segments of the economy.

    This result stands in stark contrast to the usual goal of interstate compacts, which is to allow a region to band together—not to gain an advantage over another region—but to promote economic cooperation through development of waterways, bridges and other transportation systems. Compacts are also inconsistent with the trend toward freer markets in U.S. agriculture and removal of trade barriers between countries.
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Compacts Increase Milk Prices to Consumers

    That said, however, these legal arguments are not the main reason CFA opposes interstate dairy compacts. Simply put, CFA opposes dairy compacts because they are a bad deal for consumers, especially low-income consumers.

    There is no question the two-year-old Northeast Interstate Dairy Compact has triggered higher retail milk prices. Essentially, the higher compact price for milk received by New England dairy farmers is passed along to consumers as an added cost by processors and retailers. This pass-through began immediately after the Northeast compact went into effect in July 1997.(see footnote 3) Initially, New England milk prices rose 15 to 21 cents per gallon. While the price increases later moderated, the cost of the Northeast compact through this month has averaged 15 cents per gallon of milk, for a total of $65 million.

    Through much of 1998, record high milk prices muted the impact of the Northeast compact on consumers. Federal milk prices remained well above the $16.94 per hundredweight compact price, eliminating the consumer-paid compact subsidy. That changed earlier this year, however, when the Agriculture Department announced a 37 percent drop in the federally set ''basic formula price'' for milk.

    In non-compact states, this drop in the basic formula price should result in substantial savings for consumers for much of the rest of the year. In compact states, however, the compact price will negate potential savings, causing retail milk prices to remain at the high levels of last year.
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Effect of Extending and Expanding Compacts Would Be Substantial

    Originally, the Northeast compact was scheduled to sunset in April 1999. Last year, however, Congress extended the life of the compact six months, to October 1999. Also since formation of the compact, six Mid-Atlantic states have expressed an interest in joining. In addition, 15 states in the South and Southwest have passed or are considering legislation to form a dairy compact of their own.

    The combined effect on consumers of establishing a Southern compact and of extending and expanding the Northeast compact would be substantial. CFA estimates the cost to consumers for the six months from July to December 1999 in 27 states to be $432 million, or about 22 cents more per gallon of milk.(see footnote 4)

    If the Northeast compact raises its price or the proposed Southern compact imposes a price higher than the New England price, costs to consumers would rise accordingly.(see footnote 5)

Compacts Decrease Milk Consumption

    These higher milk prices will result in some decrease in milk consumption in compact states. After an extensive review of relevant economic literature, a 1998 University of Missouri study concluded that every 10 percent increase in milk prices causes at least a 3.2 percent decrease in milk sales.
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    While a slight decline in milk consumption may seem trivial, the public health effect may not be. Milk consumption has been declining steadily in this country for years and the National Academy of Sciences recently recommended that all Americans, especially children and the elderly, increase their consumption of calcium. USDA data indicate that, on average, teenagers are only drinking enough milk to receive a quarter of the recommended 1300 milligrams of calcium each day. Compacts make it less likely the trend of declining per capita milk consumption will be reversed.

Compacts Hurt Low-Income Families Most

    The cost of dairy compacts falls heaviest on low-income consumers. Low-income families spend more of their income on food and more of their food budget on dairy products. Government data suggest that families earning $15,000 or less spend 10 percentage points more—24 percent versus 14 percent—of their after-tax income on food than the average family. Likewise, 23 percent of low-income consumers' budgets are allocated to dairy products, compared with only 12 percent for the average consumer.

    For the most part, low-income families can be expected to pay the higher compact price for milk. But the extra dollars these families spend on milk aren't available to purchase other items. As a result, low-income food stamp recipients in the 27 states examined by CFA stand to loose an estimated $61 million in purchasing power over six months under the Northeast and Southern compacts. Put another way, this is a $60 million tax on low-income families in compact states. If the government increases food stamp benefits to reflect the increase in the cost of the Thrifty Food Plan caused by these higher milk prices, this burden of the compact will fall on U.S. taxpayers.
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Compacts Don't Preserve Small Farms

    Advocates of compacts argue that they help keep small family dairy farms afloat. The loss of family farms of all types is a particular concern of the Consumer Federation of America. They add much to the economic and social fabric of the nation and efforts should be made to save the remaining family farms in the Northeast and elsewhere.(see footnote 6) But raising the price of milk to consumers through dairy compacts is not the solution. At best, it is a very inefficient way to assist small farms, if it helps them at all.

    Compacts assess benefits on every gallon of milk sold. So the farms that produce the most milk receive the most benefit. This gives enormous subsidies to those who least need it—the largest dairy farms. The smallest, most vulnerable farms receive only a minute proportion of the total subsidy. In most cases, this is not enough to ensure their financial viability.

    In New England, according to CFA calculations, the smallest dairy producers, those with less than 20 cows, will receive an average of only $650 from the Northeast compact over the last half of this year. At the other end of the scale, dairies with 200 to 500 cows will receive an average benefit of $29,000 per farm over six months. Those with more than 500 cows will receive an average of $67,000 for the six-month period.

    Estimated average benefits in the Mid-Atlantic states and the South show a similar pattern. Average benefits for small farmers over six months are $800 in the Mid-Atlantic and $950 in the South. Those for 200-to-500 cow dairies are $34,000 and $36,000, respectively. Minimum average benefits for dairies of more than 500 cows throughout the region were estimated at $155,000.
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    The competitive position of large producers is enhanced under compacts, since these producers receive such large subsidies under compacts. Put another way, dairy compacts benefit large producers at the expense of small producers. As a result, contrary to their intent, the likely result of compacts is that big dairy operations will get even bigger while smaller dairies continue to leave the dairy business.

    Asking consumers, especially low-income consumers, to pay more for milk only to see the lion's share of the benefits accrue to large, well-off dairy producers doesn't make much sense. If compacts continue, the Consumer Federation of America strongly encourages Congress to find a way to target the benefits on the small, struggling farmers who need the help.

Conclusion

    For all these reasons—their interference with interstate commerce; their impact on consumers, especially low-income consumers; their impact on milk consumption; and the minimal assistance they provide to those farmers most in need of help—the Consumer Federation of America encourages the subcommittee to oppose legislation to expand and extend interstate dairy compacts this year.

    Mr. GEKAS. We thank you, Mr. Jaeger.

    And we turn to Mr. Engles.

STATEMENT OF GREGG ENGLES, CHAIRMAN AND EXECUTIVE OFFICER, SUIZA FOODS CORPORATION, DALLAS, TX
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    Mr. ENGLES. Thank you, Mr. Chairman and members of the committee. With your permission, I would like to submit my written statements for the record. My oral remarks, I was prepared to make the detailed case against compacts like those that have been made here earlier today, but you have had plenty of witnesses do that and debate the logic and the success or lack thereof of the Northeast Dairy Compact in achieving its goals.

    Everyone who has spoken today has acknowledged or stated that this issue is a very complex issue or some such thing. And it is, at least in terms of the existing and proposed regulatory schemes. As one senator recently told me, this is a regulatory policy of which a commissar could be proud.

    But, in my judgment, the real issue isn't really all that complex, at least when viewed in the context of history. All advocates of compacts argue their necessity in terms of stemming the decline in dairy farmers, large or small, or in preserving a local supply of milk. To use Senator Landrieu's words, to avoid their States being ''milk deficit'' States.

    I would suggest to you that both of these arguments are nothing more than a subterfuge for legislative efforts to protect local temporal interests at the expense of some other locality or, in the ultimate conclusion, at the expense of some vast, diffuse group such as consumers or taxpayers. This policy is not in the national interest nor, ultimately, in the local interest.

    Let me start with some historical context. In 1940, there were 4.6 million dairy farms in America. In that same era, there were 10,000 fluid milk processing plants. And the vacuum tube industry was just making radio a reality and attracting workers and capital. In 1999, there are less than 90,000 dairy farms in America, a decline of 92 percent in the last 60 years. There are 340 fluid milk processing plants left in America. That is a decline of 95 percent in the last 60 years. And the Internet age is upon us, competing with unbelievable vigor for workers and for capital.
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    Are dairy farmers declining? Absolutely. They have for the last 100 years, year in and year out, as are dairy processing plants. Despite spending $15.8 billion in Federal subsidies between 1980 and 1988, Congress was unable to stem this decline. Dairy processing plants and employment declined in equal measure. Why did this happen? It happened because our great American economy, when left to its own devices, allocates capital and labor with efficiency, sometimes ruthless efficiency. It is happening because people, particularly young people, want to be part of the new, not the old, economy. Wages, lifestyle and prestige lure them to do so.

    Suppose the following scenario: The young son of a dairy farmer in Norwich, Vermont, decides to go to college across the Connecticut River at Dartmouth. He is well-educated. He graduates and is offered a job as an assistant fund manager at Fidelity for its Internet fund. His father wants him to inherit the farm and come back to Norwich. Most likely, he will move to Boston. Perhaps the farm ceases dairy operations and its cows are transferred to a larger operation whose proprietors manage rather than work the farm. A bright young man moves to the most value-creating job in our economy available to him, dairy production moves to larger farms, and perhaps we lose a dairy farm. It is painful for that farmer.

    When his Congressperson looks in his eyes, as we have heard today many times, he wants to help him. We all do. But collectively, we have moved forward as a society. Moreover, that change and the accompanying pain is happening constantly in every industry in our economy. Buggies and buggy whips are gone and there were lots of dislocation and pain when that happened. Steamships, propeller-driven aircraft, mainframe computer makers, and the corner store, are all gone or declining. But, as a society, we have moved forward with great progress. We are so proud of that, as Americans, but we had to let it happen by always allowing change.
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    We produced more milk last month than ever in our history. We did it with 97 percent fewer farmers than 50 years ago and with 95 percent fewer processing plants. We have progressed. If Congress had successfully intervened to maintain the 4.6 million dairy farm work force of 1940, where would we be? Would we be better off? How many young men and women wouldn't have gone on to create great new industries or provide labor for them and create a tremendous amount of national wealth by virtue of necessity? How much money would we have diverted from the future to preserve the status quo?

    No rational dairy farmer would oppose a policy to subsidize his business. So you hear nothing but support from farmers in compact States. The political bureaucracies that represent them will respond in kind, as you would expect. But you cannot equate a lot of support or a lack of opposition with good policy.

    Whether it is good politics remains to be seen, but let me give you a view of the future politics on dairy compact.

    If we continue and proliferate compacts, let me plot the road ahead for you. Once compacts spread, every State will join them. Compacts raise prices. Higher prices yield higher production and reduce consumption. That creates a deadly downward spiral that, frankly, we are partially in, that ultimately must result in you, Congress, getting back in the business we have struggled as a Nation to put behind us: buying excess agricultural production.

    To extricate yourselves from such a cash subsidy which, in the early 1980's, exceeded $2 billion a year, you might then take taxpayer money and pay dairy farmers to slaughter their cows, which would, in turn, devastate beef prices and have cattle farmers knocking on your door in anger seeking relief for themselves.
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    Why do I feel so confident that this is the likely road in the event that compacts perpetuate? Because we have been here before and it is precisely what happened. And because the sequence is the inevitable result of artificially high prices, whether set federally or under regional compacts. Dairy compacts are atrocious policy. As you have heard today, they pit farmers in one region against those in another. They pit growing industries against mature ones by artificially restricting the flow of labor and capital. They penalize the poor by raising food costs. Those families shop at the grocery store even though the school lunch program is subsidized and WIC is subsidized. They benefit large farmers and well-off farmers disproportionately compared to small farmers.

    So I would urge you, vigorously, to reject compacts. Louisiana will always be a milk deficit State. It costs more money to produce milk in Louisiana, Arkansas, too. But there are also automobile, and naval orange, and microchip deficit States. How about a microchip compact to solve that problem? Arkansas is a tremendous exporter of poultry products. How would Arkansas feel if Texas and Oklahoma banded together to raise prices on imported products from Arkansas?

    Suiza is in the milk business. We need every day an adequate supply of high-quality milk. Farmers are our partners. They are essential to our future. But a policy of supporting those who, because of size, efficiency, and quality of life either cannot or choose not to remain in the marketplace is ill-conceived because it does not work and will gravely damage the entire dairy industry. Thank you for your patience.

    [The prepared statement of Mr. Engles follows:]
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PREPARED STATEMENT OF GREGG ENGLES, CHAIRMAN AND EXECUTIVE OFFICER, SUIZA FOODS CORPORATION, DALLAS, TX

I. INTRODUCTION AND SUMMARY

    Mr. Chairman, I am Gregg Engles, the Chairman and Chief Executive Officer of Suiza Foods Corporation. I want to thank you for the opportunity to testify today to tell you from first-hand experience the tremendous cost of regional dairy compacts to the consumer and to the dairy industry, which includes farmers as well as us, who are processors.

    My company, Suiza Foods, is the largest purchaser of fluid milk in the Northeast Compact Region and, thus, has had the most experience of any company in dealing with the negative impact of dairy compacts. This issue is critically important to consumers and to dairy processors, such as Suiza.

    Suiza is a leading manufacturer of dairy products and plastic containers for the food and consumer products industries. We operate over 50 dairy manufacturing plants in 25 states and Puerto Rico and have almost 17,000 employees. Our plants are located primarily in the eastern half of the United States, as shown in Attachment 1. You may be familiar with some of our local brand names, which include Lehigh Valley Dairies in Pennsylvania; Garelick Farms, Tuscan Farms, West Lynn Creamery, Grants Dairy, and Miscoe Springs, in New England; Cumberland Farms in Maryland; as well as Land-O-Sun, Flav-O-Rich, Burger Dairy, Morningstar, Louis Trauth, Country Delite, Dairy Fresh and C.F. Wesley in other parts of the country.

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    Our seven New England dairy plants are forced to operate under the Northeast Interstate Dairy Compact, and at least 19 others are located in states that have either passed legislation or are considering legislation to join the Northeast Compact or a Southern Compact.

    We strongly oppose the extension of the Northeast Dairy Compact and any expansion of dairy compacts to other states. Compacts are bad economic policy, bad consumer policy, and bad public policy.

 Dairy compacts unfairly raise the costs of milk for processors and consumers.

 Dairy compacts lead to greater market volatility.

 Dairy compacts violate the Constitution's mandate of free and open interstate commerce and will lead to the balkanization of our dairy industry.

 Dairy compacts do not achieve their goal of stemming the continuing decline in small dairy farms. Instead, most of the Compact's premium price goes to the large dairy farms at the expense of consumers.

II. COMPACTS CAUSE HIGHER COSTS FOR PROCESSORS AND CONSUMERS

    Compacts fix the price that Suiza and other processors pay for raw milk, above federal minimum prices. The differential between the federal minimum price and the Compact price is known as the Compact Premium. Milk processing is a low margin operation with the cost of raw milk accounting for about 70 percent of our total operating costs. Consequently, any increases in the price we pay for raw milk has to be passed on to the local retailer and, ultimately, the consumer. That is exactly what we have seen with the Northeast Compact. Immediately after the Compact's price fixing was imposed, retail prices in New England soared by 20 cents per gallon. The resulting ''tax'' on consumers between July 1997 and May 1999 was approximately $60 million, as shown in Attachment 2. It should be noted that the aggregate cost to New England food stamp recipients was over $5 million, a heavy burden on the poor, particularly children for whom milk is a critical source of nutrition. There will be comparable adverse impacts on consumers in every other state that becomes part of a Dairy Compact.
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    Increased raw milk prices also decrease demand as consumers shift to less expensive, less nutritious, substitutes. Decreased demand means that our fixed costs have to be spread over reduced volumes, causing further increases in the cost to the consumer. Moreover, since only about 50 percent of raw milk is used for bottling, the Compact Premium, which is effectively paid by milk consumers, ends up subsidizing processors that use milk for cheese and other dairy products.

III. COMPACTS LEAD TO INCREASED MARKET VOLATILITY

    Since the Compact payments to farmers are funded by the Compact Premiums on milk used for bottling, the success of the Compact requires strong milk sales. Unfortunately, the reverse is true: demand for milk falls as prices rise, resulting in declining sales for Suiza and other processors and, of course, for the dairy farmers. Thus, while the Compact is intended to protect dairy farmers from low prices and price volatility, it ends up suppressing demand, reducing milk sales and driving some farmers out of business, with the smallest being the hardest hit. Attachment 3 illustrates the point.

    The Compact Premium distorts the market in another significant way. Since higher prices reduce the demand for raw milk, farmers will have a milk surplus, which is likely to go into other dairy products, such as cheese and butter. Since the federal prices of milk used for bottling and milk used for cheese production are inter-related, the resulting surplus milk production will drive down the federal minimum prices, causing further volatility in the prices that dairy farmers receive as well as further volatility in the supply/demand equation, all to the detriment of consumers, processors and farmers.
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IV. BALKANIZATION OF THE MILK INDUSTRY

    Free and open interstate commerce has been the keystone of our national economy, making us one nation, working together. The Constitution protects this fundamental freedom of commerce. Dairy compacts are an unjustifiable exception to this important right and pit farmers and processors in Compact states against those in other regions. As a processor, we are affected because our plants in New England are forced to pay the Compact price premium for milk shipped from states outside the Compact. This is essentially a ''tariff'' for ''importing'' milk across state lines. If allowed to continue, Compacts will carve the entire country into government-sanctioned trading blocks with tariff barriers and lead to harmful balkanization of the milk industry. For Suiza and other processors, decisions to establish, expand, or close dairy plants would be affected by these state-imposed trade barriers rather than by free market considerations.

    It is ironic that the push for these state trading blocks is coming at a time when Congress has taken important steps to simplify federal milk regulation and the milk industry is becoming even more national in scope as the result of technology and distribution improvements, which make it easier to ship raw and bottled milk nationwide and to compete on a nationwide basis.

    Some may argue that state compacts are simply a substitute for federal milk marketing areas. There is a key difference. Federal oversight provides a unified national perspective in keeping with the Constitution's mandate that interstate commerce be unfettered. State compacts, on the other hand, impose divisive, regional barriers not in keeping with our national system.
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V. THE COMPACT IS NOT STEMMING THE CONTINUING DECLINE OF SMALL DAIRY FARMS

    The tremendous cost of the Northeast compact is clear: higher prices for processors and consumers, greater market volatility, and balkanization of the national milk industry. Moreover, the Compact is not even achieving its stated goal, i.e, stopping the decline of small dairy farms. As shown in Attachment 3, the rate of decline in small dairy farms in the Northeast has actually increased since implementation of the Compact. One major reason is that the system for distributing Compact Premiums is inherently biased in favor of large dairy farms because Compact Premiums are paid on the basis of milk production. The more one produces, the more one receives.

VI. ALTERNATIVES TO DAIRY COMPACTS

    There are several ways to reduce milk price volatility and protect small dairies that are far less disruptive and more effective than dairy compacts.

A. Forward Contracting.

    As a dairy processor, we believe that forward contracting provides a good method for dairy producers and processors to smooth out price volatility. Through forward pricing, processors and farmers, or their cooperatives, mutually agree on prices ahead of time, relying on the future markets and other market indicators. With forward contracting, producers would accept slightly lower prices and processors slightly higher prices than regulated minimum in exchange for certainty, which would allow for more effective business planning. This benefits the producer, the processor and, ultimately, the consumer.
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    However, forward contracting does not work under the current federal regulatory regime. If a processor pays a producer less than the Agriculture Department's minimum price, the Department issues an underpayment notice, threatens to bring an enforcement action and can assess penalties and interest on the underpayment. Moreover, a contract to pay less than the government-mandated minimum is unenforceable. As a result, producers and processors, such as Suiza, can not obtain the full benefits of forward contracting in reducing market volatility.

    Mr. Chairman, we recommend that changes in the regulatory framework be made to allow the use of forward contracting.

Revenue Insurance Program.

    We also recommend a revenue insurance program similar to crop insurance programs that protect farmers from catastrophic price violatility. It would be structured to guarantee dairy farmers income at a specified percentage of gross margin, defined as the difference between milk prices and feed costs. The program would ensure that dairy farmers, particularly small dairy farmers, are equipped to weather extended or significant price fluctuations.

C. Continuation of Milk Pricing Reforms.

    With the 1996 farm bill, Congress required the Agriculture Department to implement comprehensive reforms of federal dairy programs. On April 2, 1999, the USDA issued its final rule on reform of the milk marketing system. Although the new pricing structure is still complex, it clearly moves toward making dairy pricing policy more market-oriented, which is better for everyone, from dairy farmers to dairy processors to consumers. We recommend that Congress allow federal milk marketing reform to proceed as envisioned by the 1996 farm bill.
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VII. CONCLUSION

    Mr. Chairman, compacts do not solve problems in the dairy industry, but only make them worse, worse for dairy farmers, dairy processors and consumers, all at a tremendous cost to free and open interstate commerce. We urge you to limit the spread of interstate compacts, and to allow them to sunset where they already exist.

    Thank you.

63851s.eps

63851t.eps

63851u.eps

    Mr. GEKAS. We thank you, Mr. Engles.

    The Chair yields to itself such time as it might consume out of the 5 minutes that it allots to itself.

    Mr. Engles said in his statement that the poor would have to pay more under a compact. Ms. Lawrence lauds the compact for being able to provide continuous food supplies to the poor with no extra cost or no real impact on the pricing. These are the kinds of conflicts that we have to try to resolve. How does Ms. Lawrence counter the statement by Mr. Engles, if I quoted him correctly?
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    Ms. LAWRENCE. Well, I would say that, first of all, when you aggregate numbers like that, they sound really, really big. And when you call something a tax when it is actually not a tax but a proportion of food expenditures, it sounds even bigger. But if you look at the compact in its 21 months in effect, from July 1997 to April 1999, $46 million total were made in compact premium payments. If you divide that up by the population of the New England dairy compact region and if you assume that every single penny of those payments were passed on to consumers, you end up with a total cost of $3.50 per person or $.17 per month for the entire duration that the compact has been in effect.

    Mr. GEKAS. But are you acknowledging an increase, but a minimal increase, you say?

    Ms. LAWRENCE. Absolutely. Absolutely. I am.

    Mr. GEKAS. Does that make the argument for Mr. Engles or does it mitigate the argument of Mr. Engles?

    Mr. ENGLES. Well, from my point of view, I think you can make these numbers come out any way you want by slicing. I sat with a Member of Congress the other day and we walked through the math of roughly $.20 to $.30 per gallon of compact premium and that number seemed high to him so he wanted to slice it up by quarts and then by pints and ultimately we were down to cups of milk so the number gets small enough.

    The reality of it is you have got to take that $46 million and you have got to say who is buying these products? Well, it is primarily families and families with children. That is where the great bulk of milk is consumed. So you can't say it is $3.50 per person, you have to start looking at it on a family-by-family basis. You take a family of five people. You take an average consumption of two gallons per week per family. You take $.40 per gallon or $.50 per gallon and you are talking somewhere on the order of $40.00 to $50.00 a year.
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    Now that doesn't sound like a lot of money to me, necessarily. And I would expect that it doesn't sound like a lot of money to you. But if you are somebody who is making $11,000 or $12,000 a year, and that is a tremendous amount of your disposable income, and yes, it is important.

    You can sweep these things under the rug, but the reality is you are raising prices, you are taking milk out of children's diets, and that is not beneficial for either them or for the industry.

    Mr. GEKAS. Having developed a headache with these statistics, I reserve the balance of my time. [Laughter.]

    I yield to the lady from Wisconsin.

    Ms. BALDWIN. Thank you, Mr. Chairman. One quick question I would like to pose to Mr. Engles. Perhaps a little bit off-topic, but it is a theme that has been coming up throughout the hearing today. I know in my State we have a lot of emphasis on survival of the family farm. And I say that as distinct from another interest in protecting the dairy industry generally. I think it has a lot to do with the history of our State and the values that we see embodied in a family farm operation.

    I heard you touch on this issue in your testimony, but I wonder if you would care to explore it a little bit further in terms of the value nationally, the big picture value, of having a mix of sides of operations. I mean, you talked about the millions of operations we had 60 years ago and how few we have. To me that implies in some ways larger operations have achieved some economies of scale and efficiencies, but I fear losing the family farm. I think that that scale operation also has some very attractive features that are important to local economies. I would like to hear your comments.
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    Mr. ENGLES. Well, I think my comments on that are going to be to punt it back, to some degree, to the political arena because that is where this issue really ought to reside. But the reality of it is there is a market out there for all of these products and the market is going to determine the winners and losers and that is the predicate of our economy.

    I like the idea of family farms as well. And, frankly, there are some very efficient family farmers and you don't have to have 18,000 cows to make it in the dairy business. There are, however, a lot of smaller farms that are not economically viable and I think the question that ultimately this Congress is going to have to decide is are we going to create a system in which they can survive despite their lack of economic viability.

    If you do so, I would urge you not to do it by virtue of compacts. You are taking an enormous amount of dollars. You are throwing it at a way of life that you want to preserve. And the tremendous majority of it is going to people who are already economically viable. That is simply not good policy. If you want to step in and protect small dairy farmers, there are lots and lots of ways to do it.

    Many of the farmers who were up here on the earlier panel bemoaned the fact that they can't get a handle on the relationship between what they are going to get paid for their milk over a period of time and what it is going to cost them to produce it. Well, that is not because there aren't mechanisms available in today's economy to do so. They can go out on the Chicago Mercantile Exchange and hedge their cost of feed out a year and establish what their cost side is going to be. The reason they can't do it is because I can't contract with that family farmer in Wisconsin to supply my plant in Madison on an annual basis that relates to his cost of feed.
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    So if you lock your costs in at $8.00 a hundredweight to produce milk and you think that $2.00 a hundredweight is inadequate profit, I can't contract with you to buy your milk for the year for $2.00 a hundredweight. Because if the Federal price goes above $10.00, the market administrator comes to me and says you have to pay me the difference. So there is no benefit to me in contracting. The Federal regulatory scheme here squashes our ability to deal with these issues as buyers and sellers of this product. And it is a very inefficient way of conducting a $30 billion business.

    Mr. GEKAS. The gentleman from Massachusetts, by order of priority of attendance, is yielded 5 minutes.

    Mr. DELAHUNT. Yes, thank you, Mr. Chairman. I find this more and more fascinating because—maybe I am learning as we go along here.

    I guess your statement, Mr. Engles, is that there are better ways, if we make the policy decision, that the family farm is important for other than economic reasons, to sustain and to support, there are better vehicles to do it than through the compact.

    Mr. ENGLES. Absolutely.

    Mr. DELAHUNT. Okay. And, you know, Ms. Lawrence's testimony was—and I think appropriately so—that that is a value that she would support because of the jobs that it does provide and a way of life that it supports.

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    Ms. LAWRENCE. And for the food that it provides. High-quality food locally.

    Mr. DELAHUNT. Right.

    Ms. LAWRENCE. That is really important.

    Mr. ENGLES. And I understand that. What concerns me, Ms. Lawrence, is that the statistics that I heard from Mr. Jaeger, who represents a consumer group, is that it is really not benefitting the small farmer. That is what concerns me. I don't want a system that is benefitting someone who doesn't need it to the tune of $67,000 and $29,000, depending on the size of the herd.

    The people clearly on this side of the aisle are the people who have been advocating and supporting anti-poverty programs, but I want to do it in the right way. I don't mind—I daresay everybody on this side and I am sure some on the other side are advocates for WIC programs, for example, to ensure that all Americans are, no matter what their income level, adequately nourished. But I am beginning to have serious doubts as to whether this is the way to do it. I think we have got to be open-minded about it. And as I hear the two gentleman from your left, I am beginning to believe that Mr. Frydenlund is right.

    Now I am sure that he and I don't agree that often on a lot of issues. And it is surprising that he would have a disagreement with Mr. Hutchinson, who would, you know, probably not support all of the programs that Ms. Baldwin and Mr. Watt and I would advocate for. But we have a bureaucracy here that, I mean, I can't believe it would take a graduate course at MIT to understand—just to work your way through this stuff. This is difficult to understand.
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    I can imagine those conversations and—does anybody—Mr. Frydenlund, would you have, for example, the costs, the administrative costs, associated with these vehicles?

    Mr. FRYDENLUND. Are you talking about——

    Mr. DELAHUNT. The bureaucracy.

    Mr. FRYDENLUND. Well, you can only guess.

    Mr. DELAHUNT. I mean, that is great. We can only guess.

    Mr. FRYDENLUND. Just to run the Milk Marketing Order System in the Department of Agriculture is costing almost $700 million over 5 years or about $150 million a year. So——

    Mr. DELAHUNT. Ms. Lawrence, I would rather have that $140 million going to a WIC program.

    Ms. LAWRENCE. But can I make a distinction here?

    Mr. DELAHUNT. Sure.

    Ms. LAWRENCE. The system that is absolutely not working for dairy farmers anywhere in this country is not the compact system, it is the Federal Marketing Order as it currently exists. And if farmers are going out of business in Wisconsin and in the Midwest, it is because of the price that they are getting according to the Federal Marketing Order, not because of the price that farmers are getting in the Northeast.
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    The Northeast Compact Commission is pretty clear. Ms. Schmidle laid out how they do their regulations and how they come up with their price. It is pretty simple. She has the amounts of what that costs to have consumer and processors and farmers sit together and look at mutual interests within a region.

    But the two options we have before us today are the compact system and the Federal Marketing Order, which clearly does not work. We don't have complete free market, which would be a really good way to put dairy farmers out of business. And we don't have any of these other mechanisms. Meanwhile farms are going out of business. So the compact is a first initial step to keep some farmers in business, to stabilize the price to both farmers and consumers and to figure out a better way to do it.

    Mr. DELAHUNT. I agree with that last statement. There had better be a way to do it.

    Mr. GEKAS. The time of the gentleman has expired. Because of the pressures of the voting, we yield immediately to Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. And I will try to be very brief. Let me first apologize to this panel and to the last panel also for not being here for all of the testimony. I heard bits and pieces. And that is one of the disadvantages of having a major hearing of this kind on the same day that we are debating juvenile justice on the Floor, a bill that came out of our Judiciary Committee. And I am not going to belabor that point. Mr. Nadler has already beat up on the chairman on that earlier today.
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    I am going to go back to the point I touched on this morning because still the most dramatic thing for me that I have heard today, other than the bells going off, is some testimony by Mr. Graves this morning. And maybe I am looking for somebody who is not here that we all can beat up on and I see the Kroger person was on the last panel. So maybe I can beat up on the retail people since they are not at the table to defend themselves, at least on this panel. I will make up to them on the next panel.

    But Mr. Graves said that, regardless of what price the farmer gets paid, the dairy farmer gets paid, there is little reflection of that increase or decrease in the retail price of milk. And if that is the case, Mr. Jaeger, you are a consumer advocate. I am a consumer advocate. I mean, you know, if I see a dramatic increase in price, impact in price, that these compacts are having.

    It sounds to me like the retailers are either making a mega-profit or taking a mega-loss, depending on how much they are forced to pay to the dairy farmer for milk. Because the public won't let the retailers raise prices of milk too terribly much and the public has accepted a price of milk at some level so that if the cost per gallon goes down by $.40, the retailer is going to take that $.40 and not pass the $.40 saving along to the consumer.

    Am I missing something here?

    Mr. JAEGER. I think you may have, right before you reentered the hearing, perhaps, Mr. Frydenlund offered a chart that shows that the retail price of milk does track the wholesale price of milk. In addition, the chart that I offered, which I think was also in somebody else's testimony, shows that, while the retail price of milk in New England has been fairly constant and fairly high since the compact went into effect, in the adjoining region, the Middle Atlantic States, the retail price of milk does fluctuate up and down, I assume with fluctuations in the Federal Order System and other economic conditions.
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    Mr. WATT. Now I am getting a headache. [Laughter.]

    Senator Landrieu's chart this morning showed retail cost going that way and milk prices being fairly stable over time. I guess that is a national thing. These are—it varies from region to region. You all are giving me a headache. [Laughter.]

    Mr. JAEGER. Well——

    Mr. WATT. Let me move on to something that is more constructive. And, Mr. Engles, you don't have time to do this right now, but the one comment you made that struck me, in response to what Mr. Delahunt was saying, was there is a more efficient way and better way and a less costly way to do this. I would love to have everyone's written statements about what that more efficient way is.

    How you would do this more efficiently and still save the family farm and not increase retail prices. I think all of those things are important to all of us.

    And we are trying to figure out a way to do all of those things: save the family farm, let the family farmer make some profit so that the Midwest or whoever has the best production and weather and whatever doesn't end up with a monopoly on this thing and then we will all be in trouble. And still get milk at prices that people can afford. Those are very difficult issues and I think we all are intently working toward those objectives. Perhaps not as effectively and efficiently as we can, but all of us are getting headaches trying to get there.

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    I am with you, Mr. Chairman. I have got a headache.

    Mr. GEKAS. The Bromo-Seltzer will be distributed in the balance of the time that we have. We will now recess because of the pressures of the voting on the Floor and we will return to the——

    Ms. SCHMIDLE Mr. Chairman?

    Mr. GEKAS. Yes.

    Ms. SCHMIDLE Excuse me, may I just make one parting comment? Somebody raised the question about the constitutionality of the compact. In fact, the compact has been declared constitutional. We pass constitutional muster. So, just by way of information.

    Mr. GEKAS. We will learn more about with out next panel.

    Mr. WATT. This is the Judiciary Committee. We don't worry about such mundane things. [Laughter.]

    I am sorry.

    Mr. GEKAS. We will recess until 4:20. We stand in recess.

    [Recess.]

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    Mr. GEKAS. The hour of 4:20 p.m. having arrived, the recess is completed and we will proceed with the final panel. We note the presence of a quorum in the persons of the gentleman from North Carolina and the Chair and we invite the panelists to join us at the table.

    Daniel Smith, an attorney who practices in Montpelier, Vermont. He was the founding executive director of the Northeast Dairy Compact Committee from November 1996 to May 1998. Prior to that assignment, he was the executive director of the Northeast Interstate Dairy Compact Committee from 1992 to 1996. Mr. Smith received a bachelor of arts from Dartmouth College in 1978 and his juris doctor degree from the University of Wisconsin. He was a member of the Legislative Council for the Vermont Legislature where he served as counsel to the House and Senate Agriculture Committees.

    Steven Rosenbaum, partner of Covington and Burling of Washington, D.C., received his bachelor of arts degree from the University of Texas at Austin in 1977 and his law degree from Harvard Law School in 1980. Mr. Rosenbaum has been associated with Covington and Burling since 1980. Mr. Rosenbaum has the distinction of having successfully argued the West Lynn Creamery case before the United States Supreme Court, which presented a Commerce clause challenge to a State milk price law.

    Professor William Thomas is with us from the University of Georgia. He is a dairy economist at the University of Georgia's College of Agriculture and Environmental Sciences. In this capacity, he works with all segments of the dairy industry. His major areas of emphasis are preparing risk-rated production budgets and retail dairy merchandising. Professor Thomas received his bachelor of science degree from North Georgia College and his M.S. and Ph.D. from Clemson University.
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    He will be joined by the Lou Gerig of this outfit, the cleanup hitter, Professor Robert M. Dunn, Jr. He is a professor of economics at George Washington University. His major field of interest is international trade and finance. Professor Dunn received his B.A. degree from Williams College and his M.A. and Ph.D. in economics from Stanford University. He has published and lectured extensively.

    We will, as per custom, deem your written statements as prepared for inclusion in the record. And, without objection, they will be so included. And we will ask each to summarize as best one can within 5 minutes. We will begin with Mr. Smith.

STATEMENT OF DANIEL SMITH, FORMER EXECUTIVE DIRECTOR, NORTHEAST DAIRY COMPACT COMMISSION, MONTPELIER, VT

    Mr. DANIEL SMITH. Mr. Chairman, members of the committee, I thank you for the opportunity to appear before you today. My name is Daniel Smith. I am an attorney practicing in Montpelier, Vermont. I was the founding executive director of the Compact Commission in 1996 and have been involved in the compact initiative since its inception in 1988.

    I am here on behalf of the States Ratification Committee, which is a collection of the commissioners of agriculture from the 24 States, and now 25 that Pennsylvania is about to adopt compact language, that have presented these compacts for ratification by the Congress. I would like to summarize my testimony. The essential points of it. I would preface my remarks by hoping that I won't contribute to the headache that is developing in the room. I think anybody who is involved in dairy policy has exactly the same response, that this is a dense and complicated area of the law and a dense and complicated area of economics.
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    What you have before you is the product of 25 State legislatures' response to that difficult problem. And in that sense, you have before you the product of over 10 years of consideration of how best to address that problem at the State level. As such, this compact effort is a remarkable example of our Federalist system. The States have chewed over this problem in the so-called laboratory of State experimentation that the founding fathers defined and have presented these compacts to Congress as a policy initiative for your consideration.

    No matter how the opponents and the supporters of the compact may debate the merits of the compact, the one thing that is clear is that, at this point in time, 25 States have presented this initiative to you. Mr. Watt, you asked if there was a better way to do this. Mr. Delahunt seems to have the same concern. There may be a better way to do this. But what you have in front of you is a statement by 25 diverse States, Governors, legislatures, constituencies of those States which themselves are incredibly diverse suggesting that this is the way to address the problem.

    So I start with that as the primary point. This is an exercise in Federalism, at least on the State level. You have a policy initiative that at least has been vetted, more than most initiatives, I believe, that you are presented with.

    The next question which this Congress must confront directly is whether it is the right approach. And that is the issue before you. I would suggest to you that, for the same reason that the States adopted this program, the Congress should adopt it as well. And the reason is that these compacts fill a hole in the Federal system. There is practically unanimous opinion that the Federal program isn't working as it is presently configured. The reason, from the perspective of the States, is that it has a hole in it. And the hole in the system is the ability of the States, at the local level, to modify the system as necessary to reflect local conditions.
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    The Agriculture Marketing Agreement Act of 1937 that you have heard about actually set up a system that allowed that to occur. There was a two-part system under the AMAA by which the Federal Government could establish a pricing structure that responded to national market conditions and the States could establish a marketing structure in complement to the Federal system to reflect local conditions. With the development of the regionalization of the dairy industry, the ability of the States to apply that local adjustment to the national system has eroded away. What the compacts do, in simple terms, is restore the balance, the Federalist balance, in the system that existed previously.

    That is why the States have brought this forward before you to reinvigorate their ability to make local decisions on behalf of their constituencies you have heard all about today, on behalf of the ability to get into the price, the density of the pricing structure, at the local level, instead of at the national level.

    I would like to close by just responding to what seems to be one of the key underlying assumptions of the opponents that this is economic protectionism. Now many things have been said about the Northeast Dairy Compact Commission, about how the process works. There is one indisputable fact. It is not a question of statistics. As Commissioner Graves indicated, 40 percent of the milk in the New England market, subject to the compact, comes from New York State, which is not a party State of the compact. That milk comes into the region without encumbrance. There is no tariff in the sense of fencing the milk out. The milk can move into the market and, most to the point, 40 percent of the proceeds of the compact regulation go to the New York State farmers.

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    It is not a cartel. It is not protectionism. It is regulation of a market system, of a marketplace according to the parameters of the market, uniformly and without discrimination. I thank you for your consideration.

    [The prepared statement of Mr. Daniel Smith follows:]

PREPARED STATEMENT OF DANIEL SMITH, FORMER EXECUTIVE DIRECTOR, NORTHEAST DAIRY COMPACT COMMISSION, MONTPELIER, VT

    Chairman Gekas, Members of the Subcommittee. Thank you for the opportunity to appear before you to speak in support of H.R.1604, the act authorizing reapproval of the Northeast Interstate Dairy Compact, additional joinder to that Compact and initial ratification of the Southern Dairy Compact.

    My name is Daniel Smith. I served as the Founding Executive Director of the Northeast Dairy Compact Commission, and continue to serve as the compact effort's institutional memory.(see footnote 7) I appear before you today in support of H.R. 1604 on behalf of my client, the States Ratification Committee. This Committee, comprised of the respective Commissioners of Agriculture from each of the twenty-four states which have adopted compact language, represents the collective effort of these states to obtain Congressional approval of their respective compact legislation.

    My testimony is framed by the Committee's specific, legal and technical, jurisdiction over these interstate compacts. Other witnesses in support of the compacts have described the states' direct concerns with the breakdown in dairy markets and regional losses of dairy farms which prompted their adoption. My testimony addresses matters of federalism and constitutional and legal theory, which underlay the states' action in adopting the compacts.
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    The principle substance of my testimony is that Congress should approve these compacts as a most appropriate use of the Constitutional mechanism for formal, interstate, action prescribed by the Interstate Compact Clause. Such combined, cooperative, legislative action by Congress and the states would serve both to strengthen our unique federalist system and to improve operation of the nation's milk market regulatory system.

    In support of this general proposition, my testimony presents two major points for your consideration:

1. The interstate adoption of compact language by these twenty-five states, and their subsequent petition for Congressional ratification, conforms precisely with the letter and spirit of intent of the Constitution's Interstate Compact Clause, with regard to federalist action by the states.(see footnote 8)

     Under this state-action, federalist heading, I will briefly describe how adoption of these compacts at the state level conforms most precisely with the commonly accepted purpose of the Interstate Compact Clause, as promoting a ''laboratory'' of local, federalist experimentation. I will describe how the balancing of the compacting states' interests achieved by the compact texts, particularly by the provisions relating to voting procedures, are exemplary of the federalist ideal. I will also highlight the values of federalism promoted by the compacts' internal balancing of the diverse interests in each region's milk market regulation, from producers to end point consumers.

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2. Congressional approval of the compacts would also most appropriately promote the ideal of federalism at the national level. According to the interpretative case law, the Congressional decision of whether to approve interstate compacts presents a ''political'' question(see footnote 9), necessitated when a proposed compact would enhance state power ''quoad the National Government.''(see footnote 10) In this instance, approval of the proposed compacts would actually serve to restore the pre-existing but now almost defunct, federalist balance between national and local authority envisioned by the Agricultural Marketing Agreement Act of 1937, which defined the national law of milk market regulation.(see footnote 11)

I draw extensively on Professor Fallon's statement throughout my testimony. Professor Fallon was scheduled to appear before the Subcommittee on the original hearing date, last week. Although the views expressed in my testimony are strictly my own, I wish to acknowledge my debt to him for his scholarship on the issues discussed in my testimony.

     Such restoration of the proper balance between federal and local authority would allow for a more effective regulatory response to the regional evolution of the nation's milk markets. This result further establishes the ''political'' appropriateness of a decision by Congress to approve these Compacts, within the meaning of the interpretive case law. More specifically, under this combined heading of constitutional and statutory, legal, theory, I will identify the increasing void in the law of milk market regulation which developed in the 1970s with the withering of intrastate regulation of milk markets. By reference to the testimony of my co-presenter, Professor Thomas, I will explain how regional regulation, as authorized by the compacts, would allow the states, in the public interest, to address the market imperfections described by Professor Thomas' testimony.
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The Dairy Compacts and Our System of Federalism—State Action(see footnote 12) As Product of the States' ''Laboratories'' for Government Policy

    Woven through the commentary on the operation of our federalist system of government is the understanding that the states serve as ''laboratories'' of experiment for the development of government policy.(see footnote 13) ''The framers thus astutely created a mechanism of legal control over affairs that are projected beyond State lines and yet may not call for, nor be capable of, national treatment.''(see footnote 14) The operation of no less than fifty such state laboratories of government policy, together with the unifying function of the central government, is well understood as making our government system unique and keeping it vital and forward looking.

    When states choose to act regionally rather than intrastate, the constitutionally prescribed mechanism is the Interstate Compact Clause. In their seminal and prescient review of the law of interstate compacts earlier in the century, Felix Frankfurter and James Landis declared:

''The imaginative adaptation of the compact idea should add considerably to resources available to statesmen in the solution of problems presented by the growing interdependence, social and economic, of groups of States forming distinct regions. It may well be that the New England States, the Middle Atlantic States, the Pacific Coast States, and similar groupings will each evolve, through compact, common industrial standards, thereby recognizing diversities not coincident with the capricious boundaries of forty-eight States not yet to be resolved by a flat common denominator nation-wide in its operation. Time and circumstances alone must determine the existence of such diversities and common needs and the wisdom of regional rather national treatment.''(see footnote 15)
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    Perhaps it goes without saying that the formal interstate cooperative action undertaken by the twenty-four states and which has culminated in today's hearing reflects precisely the ''imaginative adaptation of the compact idea'' envisioned by these eminent statesmen of the past. The legislative history of adoption of these compacts is certainly replete with examples of tireless dedication by state legislators to the compact idea.(see footnote 16)

    While I will not delve too deeply into the history of the Dairy Compact movement, it is important to trace the effort from informal action through the pilot project stage to the current phase of broader application. The effort first began in 1988 with preliminary, informal action by the Vermont and New York Legislatures. The effort then spread throughout New England, with this phase culminating in 1992 with formal legislative adoption of the Northeast Interstate Dairy Compact by the six New England states. The Northeast Compact was subsequently approved as a limited ''pilot project'' by Congress in 1996, which then allowed for concrete regulatory action as envisioned and authorized by the Northeast Compact.

    Based in large part upon the legislative success of the New England initiative at the regional and federal level, and upon the effectiveness of the subsequent compact regulation, between 1996 and 1998, most of the group of states completing the New England-Mid Atlantic milk market (New Jersey, Maryland, New York and Delaware (as this subcommittee meets, Pennsylvania is in the final stages of adoption, as well)) adopted compact language to join the Northeast Dairy Compact. The movement also spread south during this time, with a large block of southern states (Alabama, Arkansas, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia) adopting compact language, all in relatively short order, to establish an entirely separate and distinct Southern Dairy Compact. Finally, in addition, the states of Georgia, Oklahoma and Kansas have also adopted language to allow them also to join the Southern Compact. (The Missouri legislature has also adopted Southern Compact language which awaits signature by the Governor.)
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    Such a multi-state, tri-part regional initiative can be understood as nothing less than a remarkable example of federalist action at the state, laboratory level. The initiative has been entirely self-initiated and promoted by the states at the regional level. Among perhaps our most uniquely diverse groupings of states and regions, governors have joined with legislators and broad coalitions of constituents to adopt compact legislation.

    It is noteworthy that the compact legislation has been approved by strong majorities in almost all of the states. By way of examples, I would point to the legislative actions by each of the states represented by members on this subcommittee(see footnote 17)

Alabama:

        77—0 House
        26—0 Senate

Arkansas:

        91—0 House
        33—0 Senate

Massachusetts:

        Adoption by unrecorded voice votes
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New York:

        94—44 Assembly
        40—19 Senate

North Carolina:

        106—1 House
        49—0 Senate

Pennsylvania:

        181—20 House
        44—6 Senate
        (Bill is in Conference Committee as of June 15, 1999)

South Carolina:

        Adoption by Unrecorded voice votes

Tennessee:

        95—0 House
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        23—10 Senate

One-State/One Vote: Compact Provisions as Promoting Federalist Principles

    In his statement attached by appendix to my testimony, Professor Fallon cites an opinion by Justice Sandra Day O'Connor which succinctly identifies three of the most important values of federalism:

''First, federalism 'assures a decentralized government that will be more sensitive to the diverse needs of a heterogeneous population; [second,] it increases opportunity for citizen involvement in democratic processes; [third,] it allows for more innovation and experimentation in government.' ''(see footnote 18)

    Professor Fallon indicates that ''Congress should pay heed to these three values, each of which offers reasons why the compacts should be approved.'' I commend Professor Fallon's discussion of federalism to you. I would also like to add the following textual discussion of the compacts as they relate to these federalist values.

    Perhaps the most striking federalist feature of the proposed compacts is their establishment of a governance pattern of one-state, one vote. In my opinion and experience, these provisions represent no less than the original basis for adoption of the Northeast Compact, have ensured effective operation of the Northeast Compact Commission, and have provided the impetus for the additional state actions to join the northeast compact and to establish the southern compact.

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    Operation of the ''pilot project'' Northeast Compact Commission gives insight into the effectiveness of this unusual federalist compromise. Though it is comprised of twenty-six persons in total, the Northeast Compact Commission is in reality comprised of six member state delegations, with each state delegation entitled to a single, uniform vote. Pricing decisions require a two-thirds majority of the member states. Most important, any pricing decision requires the affirmative vote of any and all states affected by a proposed regulation.

    Here is truly a laboratory for ''innovation and experimentation in government'' within Justice O'Connor's meaning. The Northeast Compact's voting provisions (mirrored by the Southern Compact) ensure that the compacting states may participate as members of the Compact Commission without divesting themselves of their basic sovereign, regulatory, authority over their territory. With this safeguard in place, the state delegations may seek to be individually innovative in responding to their intra-state concerns while at the same time experiment collectively without risk in addressing the larger regional issues at play.

    The Compact Commissions also truly represent ''citizen involvement in democratic processes'' as envisioned by Justice O'Connor. The twenty-six members of the Northeast Compact Commission are appointed by the governors of the six New England states. The Commission membership is as diverse as it is large, representing all interests concerned with dairy pricing, including farmers, processors, retailers and consumers. There are also government officials, including two State WIC Program Directors. The Southern Compact provides for an equally diverse cross-section of the interests concerned with proper operation of the southern region's milk market.

    Moreover, through the rule-making process, the Northeast Compact Commission has demonstrated most positively its ''sensitiv[ity] to the diverse needs of [the] heterogeneous population'' of the northeast. As part of its labor in striking the appropriate balance in the price-making decision, in addition to accounting for the concerns of farmers, processors and consumers at large, the Commission also adopted an exemption for the region's WIC programs and a reimbursement provision for the School Lunch Programs. Based on the experience of the pilot project, it may also be expected that the Southern Compact Commission will act in an equally sensitive fashion.
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    In summary, the textual protection of state sovereignty combined with the demonstrated record of the Northeast Compact Commission have provided the impetus for the remarkable interstate effort represented by adoption of these compacts by twenty-four states. Subject to the federalist frameworks of their single-state voting patterns, the compacts would truly allow for ''innovation and experimentation in government within Justice O'Connor's meaning(see footnote 19)

    More particularly inclusion of all the states comprising the naturally occurring mid-Atlantic/New England milk market will allow the delegations, individually and collectively, to address the issues of milk marketing presented for that market. And a commission representing the southern states, a decidedly separate and distinct region of the country, to address the concerns unique to the milk market for that region.

    This ability of each compact region to address the concerns unique to the regions leads to the second substantive point of my testimony.

The Dairy Compacts and Our System of Federalism—Congressional Action

    As noted in my introduction, according to the interpretative case law, whether Congress should approve interstate compacts presents a ''political''(see footnote 20) question when a proposed compact would enhance state power ''quoad the National Government.''(see footnote 21) Certainly these compacts do so enhance the power of the compacting states by their establishment of authority over the respective regional interstate commerce in milk.(see footnote 22) The political question of whether such enhancement of state power should be authorized is thus properly raised for review by this body. When reviewed in its proper historical and legal context, the answer to the question emerges unequivocally in the affirmative.
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    The regional evolution of the nation's milk markets and the compacts' restoration of the balance between federal and local power envisioned by the Agricultural Marketing Agreement Act of 1937

    The Agricultural Marketing Agreement Act of 1937 established a regulatory pattern of dual, federal/state authority. In this sense, the AMAA itself established a federalist system of administration.

    Since its passage, so-called ''Marketing Orders'' adopted pursuant to the AMAA have established a coordinated series of minimum farm prices through a comprehensive, nationally administered regulatory program. At the same time, the AMAA left the states free to regulate above the federally established minimums, subject to the constitutional dictates of the Interstate Commerce Clause.(see footnote 23) For many years after the Depression, states from throughout the country utilized their authority to regulate ''over-order'' prices. With the increasing regionalization of milk markets, however, the states' authority over the commerce in milk has become at best a vestigial power. In accordance with the dictates of the Interstate Commerce Clause, states have been increasingly hamstrung by their extremely limited regulatory authority over milk imported from beyond their territorial boundaries. Because of the competitive pressure that such unregulated, imported milk creates, the regulatory programs of the states, in many cases long-standing and dating back to the Depression, have by now ultimately withered away.

    The important point here is that the AMAA had envisioned a two-part regulatory pattern, with the state over-order pricing programs being an integral component. Today's milk market regulation, however, finds only the single, uniform, national component of the regulatory program having any remaining vitality. Yet this one, nationally-based, component of the program has increasingly been called upon to carry the load for the program's dual, federal/state function, as originally envisioned.
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    It may well be argued that the effect of this void in the regulatory program has lead in whole or in part to the market imperfections described by my co-witness, Professor Thomas. The national program may indeed ensure the provision of an adequate supply of milk, overall and nationally. But this does not mean that the system is responsive or sensitive to the loss of dairy farms, the resulting loss of farm infrastructure and the corresponding impact on rural economies and cultures. Proper calibration and response to these values were quite sensibly and logically left to the local, state level, where these concerns are the most immediate and properly understood.

    The proposed compacts respond to the regionalization of milk markets by again establishing a pattern of milk market regulation built around the contours of the distinct regional market places at work nationally. In this modern form, the compacts again allow for local, now regional, adjustment of the national program to reflect local conditions . In so providing, the compacts restore the traditional balance between state and federal authority as originally provided for in the overall regulatory pattern.

    In summary, it is a readily apparent that Congress founded the law of milk market regulation on essential, federalist, principles. Authority over the different milk markets in the country, national and local, was properly divided between the national power and local control. Consistent adherence to these federalist principles should now lead Congress most logically to approve these compacts, to restore and enhance this most carefully crafted system of complementary, federal/state oversight of milk markets.

Conclusion
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    As it stands now, the national law of milk market regulation is exactly the type of ''flat common denominator nation-wide in its operation''(see footnote 24) which Frankfurter and Landis thought would prove so amenable to improvement by operation of the Interstate Compact Clause. And, again consistent with their observation, these Dairy Compacts arise from the design of the framers, who ''astutely created a mechanism of legal control over affairs that are projected beyond State lines and yet may not call for, nor be capable of, national treatment.''(see footnote 25) The compacts proposed by the regions of New England, the mid-Atlantic States and the south would simultaneously give vigor to our federalist system, in principle, and enhance the effectiveness of our nation's law of milk market regulation. Accordingly, this Subcommittee should vote to recommend their approval by the full House Committee on the Judiciary.

    Thank you for your considerate attention.

    [NOTE: The statement of Professor Richard Fallon and the addendum materials referenced in the statement of Mr. Daniel Smith are on file with the Subcommittee on Commercial and Administrative Law, House Committee on the Judiciary.]

    Mr. GEKAS. We thank you, Mr. Smith.

    Mr. Rosenbaum.

STATEMENT OF STEVEN J. ROSENBAUM, PARTNER, COVINGTON AND BURLING, WASHINGTON, DC
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    Mr. ROSENBAUM. I would submit that the legal issues presented here are straightforward and that the inconsistency between the compact and the constitutional norms that this committee and its predecessors has applied for 200 years is vast.

    What the compacts do can be stated very simply. If you are a Louisiana dairy farmer selling milk to a Louisiana processor, the compact will tell the processor what price it must pay. Now, so far that doesn't sound very strange because Louisiana is in the compact. But let us assume you are a Texas dairy farmer and you want to sell your milk to a Louisiana processor. The dairy compact is going to tell you how much to pay also. You may, as a Texas dairy farmer, want to charge less because you may have lower costs and you may want to compete. That is just too bad. Under the compact, you are precluded from doing so.

    Let us assume instead that you are a Texas farmer selling to a Texas processor who wants to ship milk into Louisiana and sell it there. Too bad. The compact is going to say to you, we will tell you, Texas processor, how much you must pay the Texas farmer for that milk.

    This is economic protectionism at its core. There are three ways States can engage in economic protectionism. They could forbid any goods from out of State from coming in. They could put a tariff on it. Or they could dictate the price that has to be charged for that product. It is the third mechanism that the compacts adopt.

    This is something that has been opposed in this country under our Constitution for 200 years. As the Supreme Court said, our system is that every farmer and craftsman should be encouraged to produce by the certainty that he will have free access to every market in the Nation, that no home embargoes will withhold his exports, and no other State will by custom, duties, or regulation exclude them. That principle goes out the window if this compact is approved.
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    Now you may ask yourself, has it been a traditional application of the compact clause by this Congress or any other Congress to allow this? In other words, is there a precedent for this sort of thing happening? I have had the fortune or misfortune of reviewing every compact ever approved since the first one was approved in I think 1790. And I can state with confidence, the answer is no.

    Mr. GEKAS. How many are there?

    Mr. ROSENBAUM. About 300, Your Honor.

    Mr. GEKAS. How many?

    Mr. ROSENBAUM. About 300. And, Mr. Chairman, it has never been done. The compact clause has been used to approve things like the metro system, which allows police to enforce the laws in Virginia and Maryland and D.C. Or the New York-New Jersey Port Authority. Or to decide border disputes. Or to decide how much water States can take out of the Colorado River. Many States border the river so you have a compact to decide those things. Not once has any Congress ever said, we are going to allow a compact to establish economic protectionism and dictate the price that out-of-State people have to charge for their goods.

    Now the last question I would pose is, well, nonetheless, maybe we have never done it before, is this what the Constitution had in mind? And the answer to that, I would submit, is absolutely not. When people think of the Constitution, they think of freedom of religion or freedom of the press. That is what comes to mind. But the reality is it was this issue, this very issue, of States trying to engage in economic protectionism that led to the Constitution coming into existence.
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    Under the Articles of Confederation, which we had when we started as a country, there were no such limitations. States were ganging up against each other. The State of Virginia said, let us have a constitutional convention because we are not going to make it as a Nation going down this route. And that is why we ended up with a Constitution. A lot of other things went into it, obviously, by the time it was adopted, but it was to avoid States from excluding the goods of more efficient States that wanted to sell at different prices, at lower prices, that we founded our Constitution. And I would ask this committee not to turn its back on that history today.

    [The prepared statement of Mr. Rosenbaum follows:]

PREPARED STATEMENT OF STEVEN J. ROSENBAUM, PARTNER, COVINGTON AND BURLING, WASHINGTON, DC

    My name is Steven J. Rosenbaum, and I am a partner at the Washington, D.C. law firm of Covington & Burling. I received my law degree from Harvard Law School in 1980. I have for many years served as outside counsel for the International Dairy Foods Association (''IDFA''). I have litigated several cases involving efforts by states to enhance the competitive position of their own citizens at the expense of citizens of other states.

    IDFA asked two of the nation's most prominent constitutional law scholars to address whether approval of the proposed dairy Compacts would represent a radical departure from fundamental constitutional principles. Both of these gentlemen had hoped to appear before this Subcommittee today. However, Professor Van Alstyne of Duke has been unable to attend because his wife has undergone major surgery, and Professor Neuborne of New York University has been called away to Germany to participate in the efforts to settle the claims of Holocaust victims.
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    Fortunately, both of these leading constitutional scholars have prepared written comments regarding the proposed Compacts. Copies of these comments are attached to my written statement. In their absence, I will address the constitutional issues raised by the proposed Compacts.

    The proposed dairy Compacts would (a) establish the minimum price that dairy processors located within the Compact region must pay dairy farmers located within the Compact region for their milk, (b) forbid dairy processors located within the Compact region from buying the milk of dairy farmers located outside the Compact region at a price lower than the minimum price established by the Compact, and (c) forbid dairy processors located outside the Compact region from shipping packaged milk into the Compact region unless they had paid at least the minimum Compact price.

    In short, these Compacts would ''wall off'' the citizens of Compact states from price competition by citizens of other states.

    From a constitutional perspective, these proposed Compacts present severe concerns. Their adoption would represent an abandonment of the most fundamental precepts that have guided our nation since the Constitution was adopted. Indeed, as I shall explain, the very reason the Constitution was adopted was to prevent precisely the kind of conduct that the Compacts wish to pursue.

    1. The term ''economic protectionism'' describes the erection of trade barriers by a state or group of states. A state could try to do this by imposing a tariff on goods produced in another state. Or a state could try to do this by forbidding the sale of the goods of out of state producers at a price less than that desired by in state producers. This is what the Compacts would do.
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    Economic protectionism has been fought against ever since the Constitution was adopted in 1789. The Supreme Court has, time after time, struck down state laws and regulations that attempted to achieve the same protectionistic goals as would the proposed dairy compacts. Indeed, many of these decisions involved state efforts to protect the interests of their own dairy farmers at the expense of dairy farmers elsewhere.

    The Supreme Court has struck down these laws because, as the Court eloquently stated in H.P. Hood v. DuMond, ''our system . . . is that every farmer and craftsman shall be encouraged to produce by the certainty that he will have free access to every market in the Nation, that no home embargoes will withhold his exports, and no [other state] will by custom duties or regulations exclude them.''

    This most fundamental of constitutional principles would be abandoned by the Compacts, which would forbid all access to out of state farmers, except at prices the Compact saw fit to impose.

    2. The proposed use of congressional approval authority over interstate compacts to permit states jointly to engage in economic protectionism is wholly without precedent. Interstate compacts have been used to resolve border disputes, allocate the use of shared natural resources such as rivers and lakes, permit joint operation of transportation systems like the Metro system here in the D.C. area, and the like.

    Other than its temporary approval of the Northeast Dairy Compact, Congress has never—I repeat, has never—approved a compact that would engage in economic protectionism. Compacts like those now pending before this Subcommittee—which are designed to exercise pricing authority over goods produced within the Compact, and to exclude the lower priced goods of outsiders—have never been countenanced. Congress would be going down a path it has wisely chosen not to tread.
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    3. There is no indication whatsoever that Congress' power to approve interstate compacts was ever intended to be used to engender economic protectionism. To the contrary, the Constitution as a whole was established in significant part for the very purpose of putting an end to state economic protectionism.

    After independence had been won from England, but before the Constitution was adopted, the states were drifting into a state of commercial warfare. They were erecting tariffs and other barriers to prevent competition from the products of other states. It was for that precise reason that the Constitutional Convention was called. It was for that reason that the Constitution enshrined the principle of a single national market.

    Compacts would turn the clock back to the days before the Constitution was adopted. They would establish the very kind of sectional economic protectionism that the Constitution meant to overcome. Our national market would cease to exist. We would instead turn into a collection of economic fiefdoms.

    4. Whatever Congress' power may be to lift the ban of the negative Commerce Clause, Congress may neither enact, nor authorize the states to enact, discriminatory restrictions that violate the equal protection clause of the Fourteenth Amendment, or the privileges and immunities clause of Article IV, Section 2. Serious doubts exist concerning Congress' power to authorize the states to engage in the hardcore protectionist activities that the Founders viewed as utterly inconsistent with the nation's political unity and economic well being.

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PREPARED STATEMENT OF WILLIAM VAN ALSTYNE, WILLIAM R. AND THOMAS E. PERKINS PROFESSOR OF LAW, DUKE UNIVERSITY

    My name is William Van Alstyne, and I am the William R. and Thomas E. Perkins Professor of Law at Duke University. I have held that chair since 1974, having become a professor at the University in 1965.

    Constitutional law has been the principal focus of my academic career for four decades. I have written and taught on a wide range of constitutional law topics, including the separation of powers; federalism; freedom of speech and the press; the powers, practices and limitations of judicial review; the Fourteenth Amendment; and amending the Constitution. I have testified before Congress on these and on other subjects on numerous occasions.

    These comments address the proposal that Congress authorize the establishment of one or more interstate dairy compacts. These compacts would: (a) establish the minimum price that dairy processors located within the compact region must pay dairy farmers located within the compact region for their milk, (b) forbid dairy processors located within the compact region from buying the milk of dairy farmers located outside the compact region at a price lower than the minimum price established by the compact, and (c) forbid dairy processors located outside the compact region from shipping packaged milk into the compact region unless they had paid at least the minimum compact price.

    So, for example, assume that the compact involved the six New England states, and that the compact required New England processors to pay New England dairy farmers $17 per hundred pounds of milk. The compact would insulate these New England farmers from competition from farmers outside of New England by (a) prohibiting New England dairy processors from purchasing the milk of farmers located outside of New England at any price less than $17, and (b) prohibiting dairy processors located outside New England from selling packaged milk in New England unless those processors had likewise paid at least $17 for their milk. The latter restriction would apply irrespective of whether the milk came from New England farmers.
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    These compacts, seeking approval in this Congress, make no disguise of what they mean to do. They mean to ''wall off'' the citizens of compact states from price competition by citizens of other states. They mean to put up fences which the Constitution otherwise forbids them to do. Within these fences, multi-state cartels of participating states will administer regimes of economic protectionism of a kind the Constitution will not otherwise condone.

    The full economic ramifications of such compacts, including their impact upon consumer dairy product prices, is for others to evaluate. And I trust the Congress will not fail to consider those ramifications, such as they are likely to be, and to do so in a serious manner, moreover, without any easy capacity for self-deception informing the process.

    From a merely constitutional perspective to which my own Comments are directed, however, the proposed compacts also raise several issues I think are worth your consideration as well. There are at least these three:

1. Is regional economic protectionism—the balkanization of trade within the United States by trade barriers erected by groups of states—consistent with the premises of the Constitution of the United States?

2. Does any historical precedent provide any measure of support for the notion that it is appropriate for Congress to approve compacts to be joined by two or more contiguous states to permit them to engage in economic protectionism?

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3. Did the framers of the Constitution and did ''the people of the United States'' who replaced the Articles of Confederation with that Constitution ''in order to form a more perfect union,'' envision that interstate compacts would be utilized to permit states to engage in economic protectionism?

    As explained in greater detail below, my conclusions are as follows:

  First, economic protectionism thwarts, rather than advances, fundamental constitutional values. The proposed interstate dairy compacts are an affront to constitutional norms.

  Second, notwithstanding 200 years of experience, the use of interstate compacts to engage in economic protectionism is wholly without precedent.

  Third, there is no indication whatsoever that Congress' power to approve interstate compacts was designed to foster economic protectionism.

I. AVERTING ECONOMIC PROTECTIONISM HAS ALWAYS BEEN A FUNDAMENTAL CONSTITUTIONAL CONCERN.

    ''Economic protectionism'' describes an effort by the citizens of one or more states to insulate themselves from competition by citizens of other states. The most blatant form of economic protectionism would be a state tariff on products imported from another state. Almost as blatant is a state requirement that goods produced in other states cannot be sold within the state at a price below that which the state requires to be paid to its own citizens. This is the form of economic protectionism the proposed interstate dairy compacts seek to establish.
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    The prevention of this kind of economic protectionism has been a constant theme since the United States Constitution was adopted in 1789. The most salient provision (though not the only pertinent provision) is the Commerce Clause, Article I, Section 8, Cl. 3, which provides: ''The Congress shall have Power . . . [t]o regulate Commerce . . . among the several states . . . ''While the clause assuredly is a grant of power to Congress, it has long been held that ''the Commerce Clause also directly limits the power of the States to discriminate against interstate commerce.'' Wyoming v. Oklahoma, 502 U.S. 437, 454 (1992).

    This self-executing aspect of the Commerce Clause is as familiar as it is critical, serving directly as it does—and has for two centuries—to ''prohibit[] economic protectionism—that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.'' New Energy Co. v. Limbach, 486 U.S. 269, 273–74 (1988). The Commerce Clause strictly forbids a state from ''stripping away . . . the competitive and economic advantages [out-of-state citizens have] earned for [themselves].'' Hunt v. Washington State Apple Adver. Comm'n, 432 U.S. 333, 35I (1977).

    So strong is the constitutional concern that a state law which amounts to ''simple economic protectionism'' is subject to a ''virtually per se rule of invalidity. . . .'' Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978). Nor may a state claim cover for its protectionist barriers by arguing that its efforts were intended to help its own citizens rather than harm others. ''[I]t is irrelevant to the Commerce Clause inquiry that the motivation of the [state] was the desire to aid the makers of the locally produced [goods] rather than to harm out-of-state producers.'' Bacchus lmports, Ltd. v. Dias, 468 U.S. 263, 273 (1984). Nor may a state engage in economic protectionism because a segment of its economy is purportedly in decline. To the contrary, ''the propriety of economic protectionism may not be allowed to hinge upon the State's—or this Court's—characterization of the industry as either 'thriving' or 'struggling.' '' Bacchus lmports, 468 U.S. at 273.
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    The very purpose of an interstate dairy compact is to protect dairy farmers within the Compact region from price competition from other dairy farmers. That purpose runs afoul of the interests served by the negative Commerce Clause.

    It is particularly noteworthy that these compacts would ordain economic protectionism for dairy farmers. As the Supreme Court has commented, ''[a] surprisingly large number of our Commerce Clause cases arose out of attempts to protect local dairy farmers.'' West Lynn Creamery v. Healy, 512 U.S. 186, 206 n.22 (1994) (citing decisions). Several of these cases involved state laws substantively identical to those at issue here (save for the fact that they involved the protectionist legislation of individual states).

    The most prominent of these dairy farmer cases, and, indeed, one of the leading Commerce Clause decisions in general, is Baldwin v. G.A.F Seelig Inc., 294 U.S. 511 (1935). Baldwin involved a New York statute that erected a minimum price to be paid by dairy processors to dairy farmers. Justice Cardozo, writing for a unanimous Court, started from the premise that the Commerce Clause did not prevent the State from setting a minimum price for milk that was both produced and consumed in the State. But the constitutional problem was that, in order ''[t]o keep the system unimpaired by competition from afar,'' the State had also forbidden any ''sale within the state of milk bought outside unless the price paid to the producers was one that would be lawful upon a like transaction within the State.'' 294 U.S. at 519. In other words, processors could not buy the milk of out-of-state farmers unless they had paid the New York minimum price.

    The Supreme Court concluded that this statute ''set a barrier to traffic between one state and another as effective as if customs duties, equal to the price differential, had been laid upon the thing transported.'' Id at 521. The Court observed that ''[i]f New York, in order to promote the economic welfare of her farmers, may guard them against competition with the cheaper prices of Vermont, the door has been opened to rivalries and reprisals that were meant to be averted by subjecting commerce between the states to the power of the nation.'' Id. at 522. Striking down the statute, the Court concluded (at 527):
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What is ultimate is the principle that one state in its dealings with another may not place itself in a position of economic isolation. . . . Neither the power to tax nor the police power may be used by the state of destination with the aim and effect of establishing an economic barrier against competition with the products of another state or the labor of its residents. Restrictions so contrived are an unreasonable clog upon the mobility of commerce. They set up what is equivalent to a rampart of customs duties designed to neutralize advantages belonging to the place of origin.

    Similar issues were presented in Polar Ice Cream & Creamery Co. v. Andrews, 375 U.S. 361 (1964), which addressed Florida regulations that effectively reserved the market for milk consumed in fluid form (the most valuable kind) to in-state dairy farmers. The Supreme Court observed that ''[t]he principles of Baldwin are as sound today as they were when announced,'' and held that Florida ''may not, in the sole interest of promoting the economic welfare of its dairy farmers, insulate the Florida milk industry from competition with other States.'' Id. at 375, 377.

    The Supreme Court's most recent encounter with state regulations intended to assist local dairy farmers is West Lynn Creamery. That decision involved a Massachusetts pricing order that imposed an assessment on all fluid milk sold by processors to Massachusetts retailers. Although two-thirds of that milk was produced out-of-state, the entire assessment was distributable to Massachusetts dairy farmers only. Citing Baldwin, the Court held Massachusetts' pricing order ''clearly unconstitutional'' because its ''avowed purpose and its undisputed effect are to enable higher cost Massachusetts dairy farmers to compete with lower cost dairy farmers in other States.'' 512 U.S. at 194.
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    In short, the Supreme Court has consistently struck down state regulations that attempted to achieve the same protectionist goals as would the proposed interstate dairy compacts. Indeed, it was in one of the milk cases that the Court most eloquently espoused the concept of a national market that no state could elude:

  Our system, fostered by the Commerce Clause, is that every farmer and every craftsman shall be encouraged to produce by the certainty that he will have free access to every market in the Nation, that no home embargoes will withhold his exports, and no foreign state will by customs duties or regulations exclude them. Likewise, every consumer may look to the free competition from every producing area in the Nation to protect him from exploitation by any. Such was the vision of the Founders; such has been the doctrine of this Court which has given it reality.

H. P. Hood & Sons, Inc. v. Du Mond, 336 U. S. 525, 539 (1949).

    In short, constitutional jurisprudence has evinced a consistent and unyielding hostility toward the kind of economic protectionism in which the proposed interstate compact states now wish to engage.

II. NO HISTORICAL PRECEDENT SUPPORTS THE USE OF INTERSTATE COMPACTS TO FOSTER ECONOMIC PROTECTIONISM.

    The proposed use of congressional approval authority over interstate compacts to ''trump'' the Commerce Clause and permit states jointly to engage in economic protectionism is wholly without precedent. (Of course, I exclude from this statement Congress' temporary approval of the Northeast Dairy Compact in 1996, the proposed continuation of which goes to the heart of this paper.)
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    Article I, Section 10, Clause 3 of the United States Constitution establishes Congress' authority over interstate compacts, providing: ''No State shall, without the Consent of Congress . . . enter into any Agreement or Compact with another State. . . .'' Congress has exercised its authority to approve interstate compacts (or amendments thereto) on more than 290 occasions over the last 200 years. But Congress has never done so for the purpose of approving an interstate compact that would engage in economic protectionism.

    The resolution of state boundary disputes was the purpose of all but one of the 36 compacts enacted before 1921. Jill Hasday, Interstate Compacts in a Democratic Society: The Problem of Permanency, 49 Fla. L. Rev. 1 (1997). Examples of such compacts include the Virginia and Kentucky Compact, 1 Stat. 189 (1791), the Missouri and Arkansas Boundary Compact, 9 Stat. 211 (1848), and the South Dakota and Nebraska Boundary Agreement, 30 Stat. 214 (1897).

    More recently, interstate compacts have addressed states' need jointly to administer shared natural resources. For example, a large number of compacts provide for the apportionment of water taken from rivers running between or through two or more states. See, e.g., Colorado River Compact, 42 Stat. 171 (1921); Republican River Compact, 57 Stat. 86 (1943); Yellowstone River Compact, 65 Stat. 663 (1951).

    Many other compacts involve the building of bridges over a river separating the two states forming the compact. E.g., Lake Champlaign Bridge Compact, 45 Stat. 120 (1928); Missouri River Bridge Compact, 63 Stat. 930 (1949); New Jersey-Pennsylvania Turnpike Bridge Compact, 65 Stat. 650 (1951).
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    Other compacts were designed to establish a single authority over a multi-state transportation system. For example, the well-known Washington, D.C. Metro subway system is the product of an interstate compact among Maryland, Virginia and the District of Columbia. See Washington Metropolitan Area Transit Regulation Compact, 74 Stat. 1031 (1960). A similar compact was entered between New York and New Jersey, in order jointly to operate their port facilities. See New York-New Jersey Port Authority Compact, 42 Stat. 174 (1921). Additional compacts have concerned shared public safety matters such as the disposal of low-level radioactive waste, see, e.g., Appalachian States Low-Level Radioactive Waste Compact, 102 Stat. 471 (1988); or the avoidance of forest fires, see, e.g., Mid Atlantic Interstate Forest Fire Protection Compact, 70 Stat. 636 (1956).

    Conspicuously absent from the foregoing recitation—or from any other recitation that could be made—is a compact designed to exercise pricing authority over goods produced within the compact, and to exclude the lower-priced goods of outsiders. That has never been done.

    Nor, for that matter, have the commentators suggested that the Compact Clause should be applied in this fashion. See, e.g., David Shapiro, Federalism: A Dialogue 126 (1995) (interstate compacts can prove highly useful ''in the many instances when the states prove too small for the efficient provision of public goods, or for the internalization of both the costs and benefits of the decisions about resource allocation''), Felix Frankfurter & James M. Landis, The Compact Clause of the Constitution—A Study in Interstate Adjustments, 34 Yale L. J. 685 (1925) (citing the potential of compacts to tackle regional problems calling for regional solutions, such as the generation of electrical power). Indeed, far from endorsing the use of compacts to further economic protectionism, the commentary has expressed concern that compacts might result in undesirable impacts like cartelization. See Regulation, Federalism, and Interstate Commerce 136–40 (A. Dan. Tarlock ed. 1981).
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III. THERE IS NO INDICATION THAT THE FRAMERS INTENDED THE COMPACT CLAUSE TO BE EXERCISED SO AS TO PERMIT STATES TO ENGAGE IN ECONOMIC PROTECTIONISM.

    Historical precedent for the use of the Compact Clause to engender economic protectionism is thus conspicuous by its absence. So is any indication that the Compact Clause was ever intended to be so used.

    The Compact Clause was little mentioned during the constitutional debates. See Frankfurter & Landis at 694 (''[t]he records of the Constitutional Convention furnish no light as to the source and scope'' of the Compact Clause). During the Convention, the Committee of Detail submitted a draft of what is now the Compact Clause, and the Committee of Style, created to revise the draft, did so without saying anything about Article I Section 10. See United States Steel Corp. v. Multistate Tax Comm'n, 434 U.S. 452, 461 n. 11 (1978).

    Additionally, as the Supreme Court has observed, ''[t]he records of the state ratification conventions also shed no light.'' Id. The Federalist Papers do no more than state that the portion of Article 1, Section 10 that contains the Compact Clause fell ''within reasonings which are either so obvious, or have been so fully developed, that they may be passed over without remark.'' The Federalist, No. 44, pp. 299, 302 (James Madison) (Jacob E. Cooke ed. 1961).

    There is thus nary a whiff that the Compact Clause was intended to permit economic protectionism. In fact, every indication is that the Constitution as a whole was established in significant part for the very purpose of putting an end to state economic protectionism. It would be surprising indeed for the Compact Clause to be used to undercut that purpose.
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    As the Supreme Court has observed, it was the very ''drift toward anarchy and commercial warfare between states'' that led them to abandon the Articles of Confederation and enact the Constitution. Hood, 336 U.S. at 533. After the end of the Revolutionary War, each state began legislating ''according to its estimate of its own interests, the importance of its own products, and the local advantages or disadvantages of its position in a political or commercial view.'' Id. (citation omitted).

    These protectionist actions led to the Constitutional Convention being called. ''The sole purpose for which Virginia initiated the movement which ultimately produced the Constitution was to take into consideration the trade of the United States, to examine the relative situations and trade of the said States [and] to consider how far a uniform system in their commercial regulations may be necessary to their common interests and their permanent harmony.'' Id. (quotations omitted).

    The ''negative'' Commerce Clause was the ultimate product of this concern. The ''father of the Constitution,'' James Madison, wrote that the Commerce Clause——

grew out of the abuse of the power by the importing States in taxing the non-importing, and was intended as a negative and preventive provision against injustice among the States themselves. . . .

    West Lynn Creamery, 512 U.S. at 193 n.9, quoting 3 M. Farrand, Records of the Federal Convention of 1787, p. 478 (1911).

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    In short the Founders made a considered and deliberate decision in rejection of economic protectionism, and resolved to provide new and stronger means of forestalling its development within the United States.

CONCLUSION

    Against the preceding review and discussion, the proposed interstate dairy compacts are ironic and more. They seek no reconciliation of two or more states over a boundary, nor some sharing of a common lake or river, nor the innovation of shared facilities under shared management, or, indeed, of anything in the history of any of the constructive myriad ways such authorized compacts have reflected in two centuries of previous congressional approval and use. Rather, these compacts but seek the partisan security of two or more contiguous states combining in enclaves of economic protectionism, to put up new conditions and new barriers to commerce even in milk: unless when and wherever it was bought, even before processing, it was bought at no less a high price than that which these states expect will be wanted by their own dairy farmers (for whom it presumes to set the price), it will not permit it to be marketed within the region controlled by the member states of the multi-state compact cartel. It would, I respectfully submit, be extraordinary if Congress were to consent to the inauguration of regimes of this character. I earnestly hope it will not do so. They would but enshrine the very kind of sectional economic protectionism the Constitution meant to overcome in its most essential provisions—those restricting the states as well as those empowering Congress. They wholly lack historical precedent, moreover, and can claim no support whatever in the character or quality of interstate compacts previously authorized by the Congress of the United States.

PREPARED STATEMENT OF BURT NEUBORNE, JOHN NORTON POMEROY PROFESSOR OF LAW, NEW YORK UNIVERSITY SCHOOL OF LAW
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INTRODUCTORY STATEMENT

    I am the John Norton Pomeroy Professor of Law at New York University School of Law, where I have taught Constitutional Law for twenty-five years. For the past thirty-five years, I have been an active constitutional lawyer, serving as National Legal Director of the American Civil Liberties Union from 1982–1986, and as a member of the New York City Commission on Human Rights from 1988–1992. In addition to my teaching responsibilities, I currently serve as Legal Director of the Brennan Center for Justice at NYU, a partnership between and among Justice William Brennan, Jr.'s family, many of the law clerks who served Justice Brennan during his historic tenure on the Supreme Court, and the faculty of NYU Law School, dedicated to honoring the Justice's extraordinary contribution to American law. I have written widely in the area of constitutional law and policy. A partial listing of my publications is annexed as an appendix to this statement.

    I have prepared this statement at the request of the International Dairy Foods Association (IDFA),(see footnote 26) an umbrella organization consisting of the Milk Industry Foundation, the National Cheese Institute, and the International Ice Cream Association, but the opinions I express are, of course, entirely my own. I make this statement to express my opposition to efforts to secure Congressional approval of interstate compacts designed to fix regional milk prices at artificially high levels in order to aid high-cost local producers at the expense of the consuming public and lower-cost producers elsewhere in the nation.

    I will leave to better qualified observers a discussion of the adverse economic and social consequences of artificially increasing the regional price of milk, especially the adverse impact on low-income parents who ultimately bear the bulk of the real costs associated with artificially inflated milk prices. Suffice it to say that whenever the price of a necessity like milk is artificially raised, the net effect is a substantial wealth transfer from the poorest segment of society to the powerful political interests that command the artificially high price.
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    I will also leave to others a discussion of the alternative means of assisting local dairy farmers to confront vigorous competition from lower-cost producers, ranging from government assistance in the modernization of facilities, to direct farm subsidies financed from general tax revenues. Once again, suffice it to say that a government-imposed artificially inflated price level is not the only—indeed, it is not even the most effective—way to foster the survival of a local dairy industry.

EXECUTIVE SUMMARY

    It is a profound mistake, both as a matter of constitutional law and constitutional policy, to use the device of the interstate compact to create a regime of regional economic protectionism that flies in the face of the national free market in goods and services established by the Founders. The primary impetus for the Founders' decision to abandon the Articles of Confederation in favor of the United States Constitution was the desire to foster a national free market in goods and services throughout the United States. The Founders understood that rampant state and regional protectionism under the Articles of Confederation was the single greatest threat to the American experiment. See infra, Point I.

    Consistent with the intent of the Founders, efforts by states to impose price controls in order to benefit local high-cost producers at the expense of lower-cost producers elsewhere, have been uniformly condemned as unconstitutional by the Supreme Court as violations of the negative commerce clause. Our sense of co-existing as citizens of a single nation has stemmed, in large part, from the Supreme Court's consistent enforcement of the Founders' incisive perception that local or regional economic protectionism is not only inefficient, it is corrosive of the bonds of political unity that bind us together as the strongest nation on earth. See infra, Point II.
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    Whatever Congress's power to authorize discriminatory hard core protectionism at the state or regional level, the use of interstate compacts to exercise such power is extremely unwise, and in my opinion, potentially unconstitutional. Using Article I, section 10 (the Compact Clause) as the vehicle for authorizing regional protectionism invites the nation to divide into competing regional economic blocs in flat betrayal of the Founders' vision, and virtually assures that regions of the country will organize in order to secure economic advantage at the expense of one another. While efforts by single states (or by all of the states equally) to obtain such power from Congress can be dealt with effectively because they are subject to inherent political checks, groupings of states acting as regional protectionists will inevitably erode the normal political checks on parochialism. For example, what happens when an interstate compact between and among twenty-six states seeks to wage economic warfare on a few low-cost producing states. Such a formal political combination would command a Congressional majority, and plunge the nation into a destructive trade war.

    Moreover, deciding whether to favor high-cost local producers at the expense of local consumers is an issue that should be decided at the local political level. Unlike the boundary disputes and regional resource situations where interstate compacts are routinely used to insulate certain types of regional decision-making from parochial state political interference, the decision whether to impose hard core protectionism should never be shielded from open political discussion and ultimate political control by the people who must, ultimately, bear its economic cost. The decision to fix milk prices at an artificially high level is, in effect, a regressive tax levied on the populations of the compact clause states; a tax that shifts money from the pockets of low income consumers to the local dairy industry. Perhaps such a tax is justified. But the decision about whether such a wealth transfer is or is not a good idea should be made by the voters of each state (or by the voters of all the states in the case of national legislation)(see footnote 27), not by sheltered bureaucrats operating under the cover of a politically-insulated interstate compact. An interstate compact operates in the political shadows. No official in any state is politically accountable for its decisions. In effect, it is a decision to take milk price-fixing out of day-to-day politics.
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    Taking interstate boundary disputes out of day-to-day politics is an excellent idea. Taking the day-to-day regulation of shared natural resources out of politics is an excellent idea.

    That is why interstate compacts have worked so well in those areas. But insulating decisions about whether the price of milk should be set at an artificially high level to protect high-cost dairy farmers against low-cost competition from intense democratic scrutiny is a terrible idea.

    The fact is that the Compact Clause was never intended, and, except for the milk price-fixing controversy currently before Congress, has never been used, as a vehicle for regional protectionism. I believe that it would be a serious mistake, and, quite possibly, a constitutional violation, to unleash the Compact Clause as a potent engine of regional protectionism more than 200 years into our national history. See infra, Point III.

    Finally, whatever technique Congress uses, Congress's power to trump the presumption of a national free market established by the Constitution is subject to significant constitutional limits imposed by the Equal Protection Clause, the Privileges and Immunities Clause, and the Commerce Clause itself. Since Congress lacks power to enact (or to authorize others to enact), legislation that discriminates in violation of the 14th Amendment's Equal Protection Clause, or the Privileges and Immunities Clause of Article IV, section 2, Congress may not impose (or authorize others to impose) domestic protective tariffs that discriminate against out-of-state or out-of-region producers. Moreover, since regional price fixing mechanisms are constitutionally indistinguishable from protective tariffs, Congress may not establish (or authorize others to establish) such overtly discriminatory hard core protectionist regimes, whether it does so pursuant to legislation, or the approval of an interstate compact. See infra, Point IV.
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I.

THE PRINCIPAL IMPETUS FOR THE FOUNDERS' DECISION TO ABANDON THE ARTICLES OF CONFEDERATION IN FAVOR OF THE UNITED STATES CONSTITUTION WAS THE FOUNDERS' DESIRE TO FOSTER A FREE MARKET IN GOODS AND SERVICES THROUGHOUT THE UNITED STATES

    At the close of the Revolution, the thirteen original states experimented with a loose confederation that delegated power over foreign affairs to a national government, but retained power over virtually everything else at the state and local level. The lack of a national power to regulate interstate Commerce led to the eruption of a series of trade wars, pitting states and regions against one another in a mutually destructive spiral. Justice Jackson expressed the consensus judgment of history best in H. P. Hood and Sons v. DuMond, Inc, 336 U.S. 525 (1949), when he stated:

When victory relieved the Colonies from the pressure for solidarity that war had exerted, a drift toward anarchy and commercial warfare between the states began. ''[E]ach state would legislate according to its estimate of its own interests, the importance of its own products, and the local advantages or disadvantages of its position in a political or commercial view''. This came ''to threaten at once the peace and safety of the Union''. The sole purpose for which Virginia initiated the movement which ultimately produced the Constitution was ''to take into consideration the trade of the United States; to examine the relative situations of trade of said States; to consider how far a uniform system in their commercial regulations may be necessary to their common interest and their permanent harmony'' and for that purpose the General Assembly of Virginia in January of 1786 named commissioners and proposed their meeting with those from other states. The desire of the Forefathers to federalize regulation of foreign and interstate commerce stands in sharp contrast to their jealous preservation of the state's power over its internal affairs. No other federal power was so universally assumed to be necessary, no other state power was so readily relinquished. [As Madison] indicated, ''want of a general power over Commerce led to an exercise of this power separately, by the states, wch [sic] not only proved abortive, but engendered rival, conflicting, and angry regulations.'' 336 U.S. at 534.
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    Indeed, James Madison noted that the single most important achievement of the Constitutional Convention was to rescue the nation from a continuation of the parochial trade wars that had marred the first ten years of its existence and threatened its future ''permanent harmony''.

    Before taking steps that might encourage the modern-day recurrence of those trade wars (this time through the agency of protectionist interstate compacts), Congress should reflect on the fact that Madison's understanding of the relationship between economic protectionism and the erosion of political unity was brilliantly prescient. One of the Founders' enduring insights was that regional economic protectionism is ultimately corrosive of national political unity. To prevent economic regionalism, the Founders imposed a constitutional prohibition on state and regional efforts to discriminate against goods and services produced elsewhere in the nation. To tamper with that constitutional prohibition is to tamper with the mainspring of the nation's political and economic fabric.

II.

EFFORTS BY STATES TO IMPOSE PRICE CONTROLS IN AN EFFORT TO AID HIGH-COST LOCAL PRODUCERS AT THE EXPENSE OF LOWER COST OUT-OF-STATE PRODUCERS HAVE UNIFORMLY BEEN HELD TO VIOLATE THE NATION'S COMMITMENT TO A NATIONAL FREE MARKET IN GOODS AND SERVICES

    Consistent with the Founders' intentions, the Supreme Court has repeatedly ruled that the grant of power in Article I, Section 8, to Congress to regulate interstate commerce carries with it a negative pregnant precluding the states from engaging in economic protectionism aimed at favoring local economic interests at the expense of outsiders. E.g., Camps Newfound/Owatonna Inc. v. Town of Harrison, 520 U.S. 564 (1997); Fulton Corp. v. Faulkner, 516 U.S.325 (1996).
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    The paradigm of forbidden economic protectionism is the imposition of a protective tariff by one state designed to raise the price of goods imported from another state in an effort to shield high-cost local producers from national competition. Given the Founders' clear commitment to a national ''common market,'' no state has attempted openly to establish a system of domestic protective tariffs. Instead, they have experimented with devices designed to achieve the identical effect of neutralizing the competitive advantage of out-of-state lower cost producers. The most obvious hard core protective technique has involved the setting of minimum prices designed to prevent out-of-state competitors from underselling local producers. In Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511 (1935), New York attempted to set minimum prices for milk. New York's scheme was to forbid the sale of milk in New York unless a dealer had paid the minimum price to a producer, no matter where the transaction took place. The effect of New York's plan was to prevent low cost milk from entering the New York market. Justice Cardozo, writing for a unanimous Court, held that New York's price-fixing scheme:

. . . set a barrier to traffic between one state and another as effective as if customs duties equal to the price differential had been laid upon the [milk]. Nice distinctions have been made at times between direct and indirect burdens. They are irrelevant when the avowed purpose of the obstruction, as well as its necessary tendency, is to suppress or mitigate the consequences of competition between the states. Such an obstruction is direct by the very terms of the hypothesis. We are reminded in the opinion below that a chief occasion of the commerce clause was 'the mutual jealousies and aggressions of the States, taking form in customs barriers and other economic retaliation.' [If] New York, in order to promote the economic welfare of her farmers, may guard them against competition with the cheaper prices of Vermont, the door has been opened to rivalries and reprisals that were meant to be averted by subjecting commerce between the states to the power of the nation. 294 U.S. at 521–22.
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    More complex efforts to stifle interstate competition by fixing milk prices have also been invalidated. For example, in West Lynn Creamery v. Healy, Inc., 512 U.S. 186 (1994), the Court invalidated an effort to tax milk dealers on the quantity of milk sold in Massachusetts, and to rebate the tax to Massachusetts dairy farmers. In effect, the plan taxed all milk, but rebated the tax to Massachusetts dairy farmers, rendering the tax discriminatory because its burden fell solely on out-of-state milk. The West Lynn Court noted that the tax plan was a minimum pricing scheme in disguise, and that a minimum price regulation has the same unconstitutional effect as a tariff or customs duty—''neutralizing the advantage possessed by lower cost out-of-state producers''.(see footnote 28) Id. at 194.

    Thus, if any state attempted to set minimum prices for milk in an effort to protect its dairy farmers from low cost competition from out-of-state producers, the plan would be blatantly unconstitutional as a violation of the so-called negative Commerce Clause.

III.

CONGRESS SHOULD NOT USE ITS POWER UNDER THE COMPACT CLAUSE TO AUTHORIZE STATES TO FORM HARD CORE REGIONAL PROTECTIONIST BLOCS

    I will suggest in Point IV that Congress lacks power to authorize hard core protectionism by the states no matter what techniques are used. But, whether or not such substantive power exists, regional price-fixing compacts are not an appropriate vehicle for the exercise of Congress's power. It is, I believe, a profound mistake, both as a matter of constitutional law and constitutional policy, to use the device of the interstate compact to create a regime of regional economic protectionism that flies in the face of the national free market in goods and services established by the Founders.
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    Congress is, of course, far from powerless if it finds it necessary to relax the rigors of an uncontrolled national free market. For example, in an effort to prevent the proverbial race to the bottom, Congress may enact national minimum standards that avoid destructive state and regional competition. The establishment of a national minimum wage, maximum hours legislation, and uniform safety standards are classic examples of the exercise of Congress's power. Moreover, in connection with the enactment of national standards, Congress may authorize federal regulatory officials to establish regional variations from national standards to reflect local conditions. Indeed, in the case of milk, Congress has done precisely that under the Agricultural Marketing Agreement Act of 1937, which authorizes the Secretary of Agriculture to regulate minimum prices paid to milk producers by issuing marketing orders for particular geographical areas. See 7 CFR section 1001.1, et seq. (1993)(setting regional prices for raw milk).(see footnote 29)

    The use of such federal legislation to regulate interstate commerce, precisely because it is the expression of the entire nation, contains an important built-in political safeguard against unfair local protectionism, since it is unlikely that a national legislature would enact legislation that permits one state or region to protect its high-cost producers unfairly at the expense of the national majority.(see footnote 30)

    As an alternative to direct federal legislation, Congress may encourage regulation of the national free market by delegating additional regulatory authority to the states. Congress's decision to delegate the power to regulate the insurance industry to the states pursuant to the McCarran Act is the classic example. Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946). Congressional delegation of uniform regulatory authority to each of the states, as in the McCarran Act, permits careful tailoring to local conditions, while simultaneously retaining important internal political checks against irresponsible protectionism.(see footnote 31) Since any Congressional delegation of regulatory authority to the states must treat each state equally, each state is limited in its temptation to engage in irresponsible protectionism by the knowledge that sister states are similarly empowered to retaliate. Moreover, since any delegation of regulatory authority to the states must be approved by Congress, irresponsible behavior by one or, even, several states risks a withdrawal of the regulatory authority by the rest of the nation.(see footnote 32)
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    Supporters of the regional milk price-fixing compact have eschewed the two usual avenues of Congressional action. They are dissatisfied with existing Congressional legislation regulating national milk prices because it fails to provide them enough protectionism for high-cost milk producers. Moreover, they are unwilling to seek a delegation of uniform authority to all the states to regulate interstate commerce in milk, recognizing that such a Balkanization of the milk industry will never be approved in the national interest, and would provoke bitter political struggles in the various states. Instead, for the first time in the nation's history, they seek to erode the constitutionally mandated national free market by asking Congress to grant authority to several states to form an interstate compact pursuant to Article I, section 10 of the Constitution designed to carve out an island of regional protectionism from the national free market for milk.(see footnote 33) Multi-state compacts are, however, wholly unsuited to act as vehicles for Congressional regulatory judgments under the Commerce Clause. Most importantly, interstate compacts lack the internal political safeguards that render direct Congressional regulation, or uniform Congressional delegation to the states, appropriate vehicles for the exercise of Congressional power under Article I, section 8. For one thing, requests for Congressional approval of interstate compacts emanate from multiple states acting as a pre-established unit, inherently increasing the political power of a protectionist faction. Taken to an extreme, if twenty-six states formally united as a bloc to establish an interstate compact designed to engage in economic warfare with the rest of the nation, the coordinated political power of the twenty-six states acting as a formal bloc would overwhelm any political checks that would, ordinarily, make it difficult to persuade the national majority to acquiesce in local protectionism.

    Of course, the twenty-six states could pursue their protectionist aims through ordinary legislation. But the absence of a pre-established formal bloc created by the compact would leave the coalition vulnerable to the ordinary process of political erosion, as members joined or left in accordance with individual judgments of self-interest. The existence of a formal compact places barriers to exit that simply do not exist in an ordinary political coalition. Moreover, the requirement that ordinary legislation grant uniform regulatory power to all the states permitting effective retaliation if necessary would pose a significant check on irresponsible action by any ordinary political coalition of states. Interstate compacts are, however, non-uniform by definition. Member states would operate under one legal regime freed from the constraints of the negative Commerce Clause, while non-member states would remain subject to the constraints of the negative Commerce Clause. Thus, unlike a delegation of uniform regulatory authority to the individual states, an interstate compact vests power in some states to ignore the constraints of the negative Commerce Clause, while continuing to impose those constraints on the remainder of the states. In that sense, an interstate compact designed to permit hard core protectionism is the formal antithesis of the Equal Protection of the laws.
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    The obvious potential for friction among the states, abuse and unequal treatment inherent in using interstate compacts to create islands of protectionism explains why the Founders did not intend interstate compacts to operate as techniques for regulating interstate commerce. Rather, the Founders envisioned interstate compacts as mechanisms to permit state governments to form hybrid political entities needed to perform traditional police power functions in settings where a single state government would lack the capacity to act effectively. Cuyler v. Adams, 449 U.S. 433 (1981). Not surprisingly, the early use of the interstate compact was almost entirely confined to the resolution of boundary disputes between the states. The boundaries fixed by the Colonial Charters were notoriously ambiguous, leading to sustained conflict. Indeed, at the time of the Revolution, no fewer that eleven formal boundary disputes existed between and among the thirteen colonies. Once the Constitution came into being, two obvious mechanisms for resolving boundary disputes were possible: (1) time consuming and bitter litigation in the Supreme Court; and (2) negotiated settlements. The litigation route usually resulted in all-or-nothing decisions that often embittered relations between the contesting parties. But negotiated settlements were often impossible because they required simultaneous and binding political acceptance in both contending states. The interstate compact was the technique designed by the Founders to permit the contending states to create a hybrid political entity empowered to take the necessary steps to resolve a boundary dispute that would bind each state without the necessity of assembling political support in each state for a particular settlement.

    As the 19th century progressed, states used the intestate compact to create hybrid political entities designed to exercise coordinated police power over natural resources that could not be effectively regulated by a single state, either because geography rendered the resource inherently regional in nature (as in compacts governing interstate rivers and harbors), or because the effective regulation of a natural resource risked being bogged down in parochial state political efforts to extract maximum local advantage from a shared resource. As with the boundary compact, the police power compacts were designed to insulate the judgments of the compact from day-to-day political control by the state electorates.
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    Prior to the Northeast Regional Dairy Compact, my research has not uncovered a single instance of Congress's use of its power under Article I, section 10 to license blocs of states to engage in economic protectionism. The first interstate compact was approved by Congress in 1789 to enable Virginia and Kentucky to resolve a boundary dispute.(see footnote 34) In the ensuing 210 years, Congress has approved 299 additional interstate compacts. It is no coincidence that, except for the Northeast Interstate Dairy Compact, none of the 299 interstate compacts have sought to enable a combination of states to engage in precisely the protectionist behavior that led the Founders to abandon the Articles of Confederation and to embrace a constitutionally mandated national free market in goods and services.

    In addition to the lack of internal political checks discussed above, an obvious reason explains why interstate compacts have never been used to impose hard core protectionist regimes on the national free market. Unlike the boundary and police power situations where interstate compacts are routinely used to insulate certain types of decision-making from parochial state political interference, the decision whether to impose hard core protectionism should never be shielded from open political discussion and ultimate political control by the people who must, ultimately, bear its economic cost. The decision to fix milk prices at an artificially high level is, in effect, a regressive tax levied on the populations of the compact clause states that shifts money from the pockets of low income consumers to the dairy industry. Perhaps such a tax is justified. But the decision about whether such a wealth transfer is or is not a good idea should be made by the voters of each state (or by the voters of all the states in the case of national legislation)(see footnote 35), not by sheltered bureaucrats operating under the cover of a politically-insulated interstate compact. Indeed, the reason why proponents of the milk price fixing scheme are seeking to proceed by compact, rather than by national legislation, or Congressional delegation of regulatory authority to the state is that both of those techniques permit the affected members of the electorate to pass political judgment on the wisdom and fairness of the scheme. An interstate compact, on the other hand, operates in the political shadows. No official in any state is politically accountable for its decisions. In effect, it is a decision to take milk price-fixing out of day-to-day politics.
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    Taking interstate boundary disputes out of day-to-day politics is an excellent idea. Taking the day-to-day regulation of shared natural resources out of politics is an excellent idea. That is why interstate compacts have worked so well in those areas. But insulating decisions about whether the price of milk should be set at an artificially high level to protect high-cost dairy farmers against low-cost competition from intense democratic scrutiny is a terrible idea. It is bad enough that we must pay taxes. It is worse that those taxes sometimes shift wealth from one segment of the population to another. It would compound the problem though, to develop a technique that allows powerful local interests to impose massive wealth transfer taxes without having to face the democratic judgment of the affected voters. But that is exactly what will happen if Congress uses the Compact Clause to delegate hard core protectionist power to an interstate compact to fix the price of milk.

IV.

CONGRESS'S LIMITED POWER TO ALTER THE CONSTITUTIONALLY MANDATED EXISTENCE OF A NATIONAL FREE MARKET IN GOODS AND SERVICES DOES NOT INCLUDE THE POWER TO ENACT OR TO AUTHORIZE DISCRIMINATORY PRICE-FIXING SCHEMES DESIGNED TO PROTECT HIGH-COST LOCAL PRODUCERS AGAINST COMPETITION FROM THE REMAINDER OF THE NATION

    Supporters of the scheme to fix regional milk prices acknowledge that, standing alone, the price-fixing scheme would violate the Constitution as a blatant interference with the national free market mandated by the negative Commerce Clause. They argue, however, that Congress has the power to cure the constitutional violation by authorizing the states to engage in the discriminatory practice, either directly or through the device of regional price-fixing compacts. But Congress's power to lift the bar of the so-called ''negative'' Commerce Clause is not unlimited. Congress, legislating pursuant to the Commerce Clause, lacks the power to authorize blatant interferences with a national free market motivated by an obvious desire to protect local producers from national competition.(see footnote 36) More importantly, whatever its power to lift the ban of the negative Commerce Clause, Congress may neither enact, nor authorize the states to enact, discriminatory restrictions that violate the Equal Protection Clause of the 14th Amendment, and/or the Privileges and Immunities Clause of Article IV, section 2.
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A. Congress's Limited Power to Lift the Bar of the Negative Commerce Clause

    Chief Justice Marshall believed that the grant of power to Congress under Article I, section 8 to regulate interstate commerce was exclusive. According to Chief Justice Marshall, while the states retained the ability to act under the police power, states were denied the power to regulate interstate commerce. Compare Gibbons v. Ogden, 9 Wheat. (22 U.S.) 1 (1824) (suggesting that Congress's power over interstate commerce is exclusive), with Wilson v. Black-Bird Creek Marsh Co., 2 Pet. (27 U.S.) 245 (1829)(recognizing state police power to regulate, even when the regulation affects interstate commerce). Throughout the 19th century, the Supreme Court struggled to chart the uncertain line between legitimate exercise of state police power, and illegitimate efforts to regulate interstate commerce. See Cooley v. Board of Wardens, 12 How. (53 U.S.) 299 (1851); Wabash, St. Louis & P. Ry. Co. v. Illinois, 118 U.S. 557 (1886); Smith v. Alabama, 124 U.S. 465 (1888). It was from these 19th century cases that the flat ban on state efforts to engage in interstate milk price-fixing announced in Baldwin v. G. A. F. Seelig, Inc. emerged. See also Dean Milk Co. v. Madison, 340 U.S. 349 (1951)(invalidating milk regulation); A & P Tea Co. v. Cottrell, 424 U.S. 366 (1976)(invalidating milk regulation).

    Moreover, for much of the 19th century, it was assumed that Congress could not validate an otherwise illegitimate state effort to regulate interstate commerce. See Cooley v. Board of Wardens, 12 How. (53 U.S.) 299 (1851). In Leisy v. Hardin, 135 U.S. 100 (1890), however, the Supreme Court was confronted with efforts by ''dry'' states to enforce prohibitions on the importation of beverages containing alcohol. Confronted by a clear state police power issue, the Court suggested for the first time that Congress could authorize states to engage in certain forms of local regulation that might otherwise be in violation of the commerce clause. In response, Congress promptly enacted legislation authorizing the states to ban the importation of beverages containing alcohol, even though they were items of interstate commerce. The Court upheld the authorization in In re Rahrer, 140 U.S. 545 (1891).
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    Leisy and Rahrer hold that, under certain limited circumstances, Congress may reinforce the police power of the states by lifting the constitutional check on its exercise imposed by the negative Commerce Clause. But the core of the state regulation must be a genuine effort to exercise the police power, not a disguised exercise in local economic protectionism. There is, of course, an almost complete overlap between the states' traditional police power to preserve the health, safety, and morals of the citizenry, and a decision to regulate alcohol. Thus, the enhanced state regulation permitted in Leisy v. Hardin and In re Rahrer was a flat ban on alcohol rooted in the police power, not an exercise in economic protectionism designed to protect high-cost local producers. Indeed, nothing in either case suggests that Congress could approve blatantly discriminatory legislation designed to protect in-state producers from interstate competition.(see footnote 37)

    Congress's power to lift the bar of the negative Commerce Clause was expanded in Prudential Insurance Co. v. Benjamin, 328 U.S. 408 (1946). Two years earlier, in United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533 (1944), the Court had reversed a series of cases holding that insurance was not commerce, thereby disturbing the historic pattern of ceding insurance regulation to the states. Congress responded in 1945 by enacting the McCarran Act, which provided that ''silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of [insurance] by the several States.'' In Benjamin, the Court was confronted by a South Carolina tax on out-of-state insurance companies that exempted South Carolina companies. In the absence of the McCarran Act, the South Carolina tax would almost certainly have been invalid as a discriminatory treatment of interstate commerce. See Welton v. Missouri, 91 U.S. 275 (1876). In view of the McCarran Act, however, the Court sustained the discriminatory tax, reasoning that Congress had affirmatively decided to permit states to regulate insurance companies free from the constitutional barriers imposed by the negative Commerce Clause. See also Western & Southern Life Insurance Company v. State Board of Equalization, 451 U.S. 648 (1981).
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    Benjamin undoubtedly represents a significant increase in Congress's power to lift the constitutional barriers to state economic regulation imposed by the negative commerce clause. But nothing in Benjamin suggests that Congress can authorize overtly protectionist legislation that violates the core understanding of the Founders about the importance of a national free market. In one sense, the McCarran Act was an attempt to restore a long-time regulatory status quo that had been disturbed by the Court's decision to expand the definition of interstate commerce to include insurance. Alternatively, the South Carolina tax scheme can be viewed a rough effort to tax large out-of-state insurance companies, while exempting the smaller in-state companies. In any event, I do not believe that the case should be read as an open invitation to Congress to dismantle the national free market structure that was the basis for the Constitution itself.

    Whatever the ultimate extent of Congress's power to lift the bar of the negative Commerce Clause, the state regulation at issue must be rooted in a traditional exercise of the state's police power, and not a protectionist desire to cut off interstate competition. Thus, I believe that Congress lacks power under Article I, section 8 to sanction overtly protectionist local legislation.

B. Restrictions on Congressional Power Imposed by the Equality Provisions of the Constitution

    Whatever Congress's power may be under the Commerce Clause, Congress clearly lacks power to authorize the states to engage in behavior that violates substantive provisions of the Constitution. Mississippi University for Women v. Hogan, 458 U.S. 718 (1982). Indeed, the very type of discriminatory tax that had been upheld under the Commerce Clause in Benjamin was invalidated by the Supreme Court in Metropolitan Life Insurance Co. v. Ward, 470 U.S. 869 (1985), as violative of the Equal Protection Clause. In Ward, a California tax imposing a higher rate on out-of-state insurance companies was struck down as a violation of the Equal Protection Clause of the 14th Amendment. In words that are directly applicable to the regional milk price-fixing scheme currently before Congress, the Ward Court noted that ''promotion of domestic business within a State, by discriminating against foreign corporations that wish to compete by doing business there, is not a legitimate state purpose.''(see footnote 38) Id. at 880.
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    Congress's power to authorize economic protectionism is also limited by the Privileges and Immunities Clause of Article I, section 2 of the Constitution.(see footnote 39) In Hicklin v. Orbeck, 437 U.S. 518 (1978), the Court noted that there is a ''mutually reinforcing relationship between the Privileges and Immunities Clause of Article IV, section 2, and the Commerce Clause—a relationship that stems [in part from] their shared vision of federalism''. Thus, local efforts to reserve employment opportunities for residents at the expense of out-of-state residents have been deemed violative of the Privileges and Immunities Clause, even though they may satisfy the negative Commerce Clause. See United Bldg. & Constr. Trades v. Camden, 465 U.S. 208 (1984)(invalidating residential quota for public works jobs).

    The functional link between the Commerce Clause and the Privileges and Immunities Clause is illustrated by the line of Supreme Court cases enforcing a national free market in services as well as goods by preventing state-imposed employment discrimination against out-of-state residents. See United Bldg. & Constr. Trades v. Camden, 465 U.S. 208 (1984)(invalidating residential quota for public works jobs); Hicklin v. Orbeck, 437 U.S. 518 (1978)(invalidating Alaska hire law requiring employment preferences for Alaska residents in certain jobs); Supreme Court of New Hampshire v. Piper, 470 U.S. 274 (1985)(invalidating ban on non-resident practice of law). Similarly, both the Commerce Clause and the Privileges and Immunities Clause are recognized as the source of a constitutional right to migrate from one state to another in search of a better life, see Crandall v. Nevada, 6 Wall. (73 U.S.) 35 (1867)(invalidating tax for leaving state); Edwards v. California, 314 U.S. 160 (1941)(invalidating restrictions on entering state), a substantive constitutional right that Congress may not abrogate. Shapiro v. Thompson, 394 U.S. 618 (1969)(Congress may not authorize state interference with right to interstate migration).
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    Thus, whether one views the price-fixing scheme from the perspective of the Commerce Clause, the Equal Protection Clause, or the Privileges and Immunities Clause, serious doubts exist concerning Congress's power to authorize the states to engage in the very hard core protectionist activities that the Founders viewed as utterly inconsistent with the nations' political unity and economic well-being.

CONCLUSION

    The decision to tamper with the national common market envisioned by the Framers is among the most momentous that Congress can face. The Founders understood that a common economic market is critical to a common political identity. The pending scheme to fix regional milk prices in an effort to shield high-cost regional producers from low-cost national competition strikes at the heart of the Founders' vision. Indeed, given the powerful guaranties of equality contained in the Commerce Clause, the Equal Protection Clause, and the Privileges and Immunities Clause, I believe that Congress lacks power to usher in a regime of hard core economic protectionism that is as inherently discriminatory as the price fixing scheme currently before Congress. Finally, whatever Congress's substantive power, I believe that it is a terrible mistake (and quite possibly unconstitutional) for Congress to use consent to an interstate compact as a vehicle to authorize hard core protectionism. Such a device lacks internal political checks against irresponsible behavior, is historically unprecedented, and shields a crucial political judgment from democratic review.

    Mr. GEKAS. I thank the gentleman for his testimony.

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    Dr. Thomas.

STATEMENT OF WILLIAM A. THOMAS, PROFESSOR AND DAIRY ECONOMIST, UNIVERSITY OF GEORGIA, ATHENS, GA

    Mr. THOMAS. Thank you, sir. Mr. Chairman, committee members, I am appearing before you to offer my views and expertise on the dairy industry and dairy compacts, specifically. A dairy compact is designed to ensure an adequate supply of fluid milk for the customers, to preserve family dairy farms by providing a price safety net for fluid milk, and it also recognizes the benefits of States regulating fluid milk prices collectively in the public interest and that is one of the key words.

    You have heard many of these things several times and I will not make your headaches any worse than they already are, but let me try to bring a new insight in a couple of different areas. Why are the States interested in preserving the dairy farms? It is not just because they are dairy farms. Preserving the dairy farm provides economic benefits to every State with dairy farms. A typical Northeast dairy farm spends about $400,000 on inputs each year. About 75 percent of those inputs are purchased locally. This is about the same economic activity as is generated by 10 normal consumer families.

    Preserving dairy farms also provides real benefits to local government. For example, every tax dollar that is paid on a residence in Frederick County, Maryland, local government spends $1.14 on services. Farmland in that county only requires $.53 in services for each tax dollar that it pays. So, in a sense, agriculture in general, including dairy farms, help generate enough revenue to run local communities and governments.
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    You have heard over the last several years about how many dairy farmers have gone out of business. North Carolina has lost 17 percent of its production. Louisiana, 20 percent. New Jersey, 17 percent. Arkansas, 22 percent. You have heard that this rate of decline is either normal or excessive. Overall, when we look at what has happened in the Southeast or the proposed Southern compact area, we have had a 22 percent decline in per capita production. This is a new term. It compares changes in production to changes in the population.

    Now, can a compact cause a surplus by raising the price to farmers a little bit? I don't think a compact can change a deficit to a surplus. If you look at the fact that in the Eastern Time Zone, we have 49 percent of the population of this country. It only produces 31 percent of the milk. If we include the Eastern and the Central Time Zone, to include Wisconsin and even some of South Dakota, we have 78 percent of the population and 66 percent of the milk. Still I don't see a possibility of, by raising prices marginally, of creating a surplus.

    At the same time, each year in the South—and that is my main area of firsthand knowledge—we lose more and more production, we have to import more milk. And this imported milk is more expensive than locally produced milk.

    You have heard about the Wisconsin dairy farmers maybe concerned about their price being lowered by the compact. However, if we look at USDA's annual cost of production data for 1997, which is the latest that is available, the upper Midwest actually had a higher cost of production than the Southeast. Their losses were only $.02 a hundredweight. Based on that data it would be impossible for a farmer to produce the milk at a profit, ship the milk down to the Southeast, and supply the market at a lower cost than the milk can be produced locally.
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    As a matter of fact, if the Midwest farmers, processors and cooperatives are really concerned about the competition that they face, they should be looking West. Eighty-five percent of their market is the manufactured milk market, and their real competition for manufactured dairy products is to the West and considered California. One interesting point I think needs to be looked at. Based on USDA's cost of production, the only region in 1997 that had a positive return was the Pacific region, which was dominated by California. This is a State which has a State Milk Marketing Order and is not under the Federal Order.

    Reality, in spite of what the previous speaker said, is that the Federal Order today markets milk by where it is marketed, not by where it is produced. Today a Texas farmer who sells his milk in Georgia is told the minimum price that can be paid for his milk under the Federal Milk Marketing Order. The compact brings pricing back to a local basis, makes it more responsive to local needs and changes in market conditions. The Federal Order System now will take a year or more to render an emergency decision. Congress can even do a lot better than that. But the Northeast Compact has responded to changes in a month or two.

    Thank you, sir.

    [The prepared statement of Mr. Thomas follows:]

PREPARED STATEMENT OF WILLIAM A. THOMAS, PROFESSOR AND DAIRY ECONOMIST, UNIVERSITY OF GEORGIA, ATHENS, GA

INTRODUCTION
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    Congressman Gekas and other members of the Subcommittee on Commercial and Administrative Law, I am appearing before you to offer my views and expertise on dairy markets and policy in general and Dairy Compacts specifically. I will share insights from a number of my colleagues at several land grant institutions who have written on these issues. To the extent that my views may suggest specific policy actions, they do not represent an official statement by the University of Georgia.

    Today, I wish to make three major points which I hope will be useful to you as you listen to concerns about the dairy industry and the role Dairy Compacts could play.

1. There are three primary functions of a Dairy Compact. It assures an adequate milk supply of fluid for consumers. It preserves family dairy farms by providing a price safety net for fluid milk. It also recognizes the benefits of states regulating fluid milk prices collectively in the public interest.

2. If compacts are not authorized, there will continue to be a major exodus of dairy farmers in both the Northeast and Southeast. This will result in a loss of the infrastructure critical to the industry and have a major negative economic impact on many rural communities.

3. While most of the benefits from dairy compacts accrue to dairy farmers, there are also benefits to consumers which should not be overlooked. A basic goal of dairy compacts is to ensure an adequate supply of fresh fluid milk. With states such as New York having lost more than 5,600 family dairy farm businesses over the last ten years, a local supply of fluid milk in a number of states is becoming more and more questionable. Stable producer prices in the Northeast Compact market area have resulted in relatively stable retail prices and Northeast retail milk prices were $.05 cents per gallon lower on average than retail prices nationally after six months of Compact pricing. Low income consumers under Compact pricing are held harmless through credits given for the WIC program and school milk.
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WHAT IS THE PURPOSE OF DAIRY COMPACTS

    The primary purpose of dairy compacts is to assure an adequate, local supply of pure and wholesome fluid milk for consumers in the region. In order to do this it is necessary to maintain a healthy dairy industry in that area.

    Preserving dairy farming provides both cultural and economic benefits to any region. States have found that dairy farming is important to their rural communities and character. From the esthetic and environmental view, farms preserve open spaces, sculpt the landscape and provide the land base for a diversity of recreational pursuits.

    They are also important economically. A typical Northeast dairy farm spends about $400,000 on inputs each year. Almost 75 percent of this is spent locally Dairy farms generate more economic activity than many other farm enterprises since much of the output is processed and consumed in a relatively close vicinity. Comparing a dairy farm to a typical household, a 100 cow dairy farm spends about as much as 10 households. Georgia dairy farms are larger than New England farms and generates over $800,000 in spending.

    I should mention here that many of these inputs are specialized and if the level of milk production falls below a critical level, milking equipment and supplies, dairy feed, dairy vets and consultants, and milk hauling become more expensive. Ultimately some of these services may not be available at all.

    Recognizing the ability of states to regulate milk prices collectively is in the public interest. The states have found that preserving dairy farms and providing an adequate supply of fluid milk serves the public interest. Assurance of a fair and equitable price for their milk ensures that dairy farmers have the ability to provide milk to the market and the vitality of the local dairy industry, with all the associated benefits. There are real benefits to local governments in maintaining agriculture. For example, the Farmland Preservation Trust says that for every tax dollar paid on a residence in Frederick County Maryland, local government spends $1.14 on services. Farmland requires only 53 cents in services for each tax dollar paid. Agriculture is a money maker for government.
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WHY ARE COMPACTS NEEDED?

    Over the last several years U.S. dairy farmers have endured difficult economic conditions. Many dairy farmers made money last year but it was not enough to offset the losses they experienced over the two previous years and are still going out of business. The situation in the Southeast has been especially difficult and farmers have been leaving the industry at an alarming rate. At the same time the region's population continues to grow. As a result the southeast cannot even meet the fluid milk needs of the region and currently milk is imported into the region eight months of the year. USDA's annual reports show that milk production for the 13 states that have approved the Southeast Compact has declined more than 17 percent over the past decade. Factoring in the region's growth in population, all the states in the Southeast are deficit production states and most do not produce enough to meet fluid needs, Enclosure 1. Overall, per capita milk production in the Southeast has declined 22% during the 1990s. Per capita production in the Northeast fell slightly but with a decline of .1% it has remained basically static.

    Production declines have been the most severe during the past six years in the states of Kentucky and Tennessee, two of the most important areas of production for the southeast. In these states, production has dropped more than 20% and Kentucky has lost almost half of its 4,000 dairy farmers in just four years. Around the country many of the surviving dairy farmers are finding that they must expand their operation. Faced with unpredictable milk prices, producers feel one of the only ways to survive is making more milk and spreading fixed costs over more animals. Stable milk prices would reduce the need for expansion.

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    Each year more milk is imported into the Southeast and this imported milk is more expensive than locally produced milk. Even when farmers in other areas can produce the milk for less, after the cost of transportation is added in, the imported milk cost more. For example, the cost of moving milk from New Mexico to Atlanta cost $5.04 per cwt. ($.43 per gal.). The cost of production in 1997 for the Southern Plains, according to USDA, was $2.60 per cwt. less than the cost of producing milk in the Southeast, Table 1. The costs of moving milk from alternative supplies to markets in the Southeast are given in Table 2. In all cases the cost of transportation is greater than the difference in the regional costs of production. As more milk is brought into the market, the cost to the consumer will increase.

Table 5



Table 6

    Let me use the Southeast Federal order as an example of how much milk is now needed in this declining production area. In April 1996, 75.9 percent of the milk marketed in the Southeast order was produced in the market area. In just three years, the figure had declined to 64.4 percent, a drop of 10 percent. April is a flush month where production is usually higher compared to demand. The situation in the order during the fall is much worst. During September 1998, only 52.4 percent of the milk was produced within the market. In this one month, more than 210 million pounds (24.4 million gallons) of milk were brought in to meet fluid milk demand. The Southeast order covers all or part of six states, yet milk had to be brought in from 23 states to supply the market with some coming from as far as California. Local producers are paying some of this transportation cost but as the cost of supplying the market increases, the consumer will have to pay that cost.

    Some of this milk comes into the market on a year-around basis. For example, one cooperative ships 170 loads of milk each week from New York to southern markets. Supplemental milk costs one co-op $2.82 per cwt. ($.24 cents per gal) during 1998. There is another problem with bringing in your milk supply from outside the market area. That is the availability. There are times of the year when all areas are short and milk used for the fluid market must be bid away from other uses. Many times the supplier charges a give up fee to cover their opportunity cost. Last year this fee ranged from $2.00 to $5.00 per cwt. When transportation costs and give up fees are combined, the cost of supplemental milk can be $.80 per gal.
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    The consumer is already paying part of this cost. There is a program in several of the southern orders to charge processors part of the cost of bringing in supplemental milk. In 1998, more than $3.2 million was paid to milk suppliers in the form of transportation credits. These payments only covered 65 percent of the amount claimed. A compact could stabilize producer price at a level that would stop the decline in milk production in the region. Over the long run this would actually reduce the cost of supplying the region since locally produced milk is the lowest cost milk.

    Many people do not understand why dairy farmers should be treated differently from other farmers. Why are Compacts needed? The inherent characteristics of an industry with many producers supplying a perishable commodity like milk, to a more concentrated set of buyers will not yield the competitive price. Cornell University's analysis of the situation shows that ''the federal order tools of classified pricing and pooling can mitigate the impacts of an imperfect market.'' However, the current Final Rule blunts these tools and farmers are not able to make up the difference in the free market. It should be pointed out that dairy farmers in the Southeast and Northeast have always had to rely on over order prices, but it has been done with mixed results. The ability of producers to obtain adequate negotiated prices depends in a large measure on the extent to which they are organized in cooperative associations. There have always been a sizable number of producers in these areas that have not been cooperative members. In the Northeast about 80 percent of the producers are cooperatives members but in some parts of the region, less than half belong to a cooperative. Therefore, many producers must negotiate individually with processors. In this situation, over-order price negotiation has had mixed success and the resulting market prices are seldom uniform to all handlers. There is no reason to believe that producers would be able to bargain for even higher premiums required in the future but if they could, the need for compacts would be greatly reduced if they could.
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    Should Congress try to save every dairy farm? No, but Compacts could stabilize prices and reduce the wide price swings producers are experiencing and establish a regional safety net for fluid milk. Stabilizing pricing could be just as beneficial to producers as any price enhancement.

    The Compact legislation does not require that Compacts set a fixed price but that is how the Northeast Compact has functions. By setting a constant price rather than a fixed premium the Compact price becomes a safety net. The level of this safety net is set by a regional commission. This commission would have to consider both the national and regional market situations. One safe guard is the free movement of milk in and out of the compact area. If it sets the price too high, milk would be attracted from other markets. Also, local production would increase production and any surplus would result in a lower blend price. If the price is too low, sufficient milk to meet demand will not be offered. If either happens, it would be a clear sign to the commission that the price should be adjusted. The Northeast commission meets monthly but has been successful in setting a price for six months at a time.

    It is true that the Federal order price did get above the Compact price late in 1998 but this points out the nature of Compact pricing in that it is a safety net that goes up and down as the underlying Federal order price changes. When the Federal order price rose above the $16.94 Compact price, no premium was collected for the last four months of 1998 and the first three of 1999. Rather than raising the Compact price the commission determined that the prices were at profitable levels and there was no need for a further premium.

    One other point should be made here. Dairy compacts are sometimes called a ''milk tax.'' Currently we pay workers a minimum wage in this country partly because they cannot bargain effectively with large corporate entities and become price takers. No one refers to minimum wage as a ''worker tax'' or as ''subsidized wages.'' Both Compacts and minimum wages are examples of where the economic playing fields are not level for all players. In theory, both the minimum wage employees and dairy farmers could come together to bargain more effectively, but the fact is that they have not successfully done so. Is one good policy and the other one bad? That is a political question. Economically, both will do what they are designed to do—increase income.
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POTENTIAL IMPACT ON CONSUMERS

    Dairy farmers are concerned about their customers. Their future depends on the continued consumption of milk. As you know dairy farmers and processors have been working together to promote their product. Total milk consumption has grown over the past several years. However, most of that increase has been due to increased cheese sales. Consumption of fluid milk has been declining for a number of years in spite of relatively flat producer milk prices. At the same time, the CPI for all food products and fluid milk in March were 163.3 and 162.9 respectively. Generally fluid milk prices have remained in line with other food items and milk is a good buy.

    The marketing margin, or the difference between the producer price and retail price has increased significantly over time. In 1980, the dairy farmer got $0.53 cents of every dollar spent on a gallon of fluid milk. In 1998 the farmer's share had declined to $0.37. I do not know what the correct price spread is between the farmer's price and the retail price. Processors and retailers add value to a product through processing, and having the right product, in the right package, in the right place when the customer wants it. I also know that consumers have demanded more and more convenience over time. However, a gallon of whole milk has not changed much over the last decade or so.

    Enclosure 2 shows that while Georgia farm level milk prices have gone up and down over time, they have been at the same general level over the last six years. The cost of farm inputs has gone up with inflation but farmers have also increased efficiency and as a result have accepted the same price over an extended period of time. At the same time the retail price of fluid milk has also gone up and down with raw milk prices but have trended up.
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    Typically, fluid milk prices is that retail prices do not go up every time raw milk prices increase. Retailers absorb some price changes but when retail prices do go up they increase more than the raw milk price. Processors and retailers have other costs and tend to pass on other price increases at the same time. When raw milk prices fall, the retail price does not come down the same amount as producer prices and the marketing margin increases a little more. This is called a ratcheting effect. The price goes up with producer prices but does not decrease proportionally when producer prices decline. Stabilizing prices would reduce this effect.

    The real question is how will retail prices react under a dairy compact. Ken Bailey and others have suggested that retail prices will increase proportionally with producer prices. However, that has not been the experience of retail prices over the last two years in the Northeast. A General Accounting Office (GAO) study of the Northeast Compact pointed out that while retail prices increased initially, they soon declined and since that time have been below the national average price. According to A.C. Nielsen Corporation, Supermarket Scanner Update for June 1998, the price of a gallon of milk nationwide averaged $2.72. The New England price averaged $2.75 after a year of Compact operations. The data also showed that during that year U.S. fluid milk sales fell by 1.8 percent, but New England sales were down only 0.7 percent. Enclosure 3 shows that the price of whole milk in Boston increased $.20 per gallon the first month of compact pricing. Since that time retail prices have moderated and remained fairly level. When Boston retail prices are compared to Atlanta prices it can be seen that since 1996 Atlanta prices have consistently increased. On the other hand, Boston prices since July 1997 have been flat and since October 1997 Boston prices have been below Atlanta. This may not be totally due to Compact pricing but it is a major factor.

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    The next question is why would anyone expect retail prices not to go up with producer prices. The simple answer is competition. Even with concentration in the processing and retailing industries, there still is competition. Competition is the most likely reason that after an initial price increase under the Northeast Compact, retail prices have declined. However, competition has not always work to keep prices low. As stated before, the GAO found that from 1991 to 1997 the index of retail prices for whole milk increased 13.7%. During the same period the farm-level price index rose just 1.6%. In addition, milk has been very profitable at the wholesale and retail levels. For example, USDA's Commission on Small Farms in January 1998 reported that dairy products in some retail stores are the most profitable items and are often used to cover losses on other retail products. Using the measure of Direct Product Profit (profit from gross margin less direct costs of selling item), the commission quoted a Cornell University study that found that in 1990 the dairy department produced the highest profit-to-space profit in the supermarket at $11.19 per square foot of facings per week. Specifically, they found that the profitability of the fluid milk section was even higher at $16.48 per square foot.

    That Direct Product Profit is reflected into a favorable bottom line. Dr. Robert Taylor of Auburn University has reported that an indicator of concentration in economic power in the different links of the food production and delivery chain is the level of return-on-investment (ROI) for the various sectors. He cites typical ROI's for food processors of 17%, 18% for retailers, 10% for agricultural banks, and 4.5% for farmers. He concludes that there is ''considerable evidence that the economic power of global agribusiness giants has increased dramatically in the 1990's. If this power grows unchecked, a few closely knit agribusiness corporations may control the food supply and food prices.'' He was referring to all food processors and not just dairy but assuming that these figures are typical for the dairy industry also, there is room for a redistribution of industry profits without making any sector unprofitable.
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    Yes, if raw milk prices continue to rise, retail milk prices will have to increase eventually and that would hurt milk sales. The point that is overlooked is that in the Northeast Compact, the Compact price has not changed in two years. Stable prices help farmers but they also help processors. Processors can make more accurate bids for school and other contracts. This reduces the need to add a buffer in to bid to cover price risk and could reduce the relative milk cost which helps consumers.

    Let us assume that all of the compact payments are passed on to the retail level. Over the first 18 months of the Northeast Compact, it paid $46 million in premiums to producers. If all of these payments were passed on to consumers in the Compact area, the total cost would only be $3.50 per person or 17 cents per person per month. That is not an excessive price to pay to assure a sufficient supply of fresh locally produced milk for the consumers. If the same premium were to be paid out by the proposed Southern Dairy Compact, the cost to the consumers would be $1.15 per person or 6.4 cents per month. This is not much to maintain a viable industry.

CONCLUSION

    In considering Dairy Compacts Congress must look at the opportunity cost of not doing anything. Doing nothing will mean more eastern and southern dairy farmers going out of business with few new farmers entering the industry. Soon some states will lose a viable dairy infrastructure which will make them even more uncompetitive. Rural communities will lose taxes and economic activity in these communities will decline. Since many of these rural communities have few alternatives, unemployment could increase and average income fall.
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    Consumers will not only pay a dairy farmer to produce the milk but will have to pay truckers more and more to bring the milk to them. Yes, there are technological advances which could lower the cost of hauling but they are not in place and until they do the cost of supplying the market from distant sources will increase. And yes, others states can supply these markets at a price and they will usually be reliable, unless there is, for example, an ice storm in Texas, a trucking strike in Wisconsin, or a shortage of fuel nationally.

    This is another in a long history of Federal programs designed to ensure that the consumer has the best and lowest cost food in the world. Yes, there is a cost to Dairy Compacts but it is the best policy alternative available today. With rapid changes in the industry, they may or may not be the best long term solution. As markets and technology change, dairy policy must evolve also. By the time the next farm bill is written, there may be a better alternative. Today, however, it is tool that has shown over the last two years that it will work. Authorization of the Northeast and Southern Compacts can provide benefits to all sectors of the dairy industry and to consumers.

    It sounds trite, but consumers in the Southeast and parts of the Northeast have the choice of paying a little more for milk now or a lot more later. The proposed Compacts are another in the long series of safety nets that Congress has provided agriculture. This one, which is targeted at dairy farmers producing fluid milk for certain markets, a just more focused than other programs.

63851v.eps

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63851w.eps

    Mr. GEKAS. We thank you, Dr. Thomas.

    Professor Dunn.

STATEMENT OF ROBERT M. DUNN, JR., DEPARTMENT OF ECONOMICS, GEORGE WASHINGTON UNIVERSITY, WASHINGTON, DC

    Mr. DUNN. Thank you very much. It is an honor to be here to testify on this matter. I am here speaking on behalf of the International Dairy Products Association, and I am here to oppose both the extension of the New England Compact and the creation of a Southern Compact.

    I believe the main impacts of compacts are clear from research and have been noted here earlier. You have a graph that shows that in the overwhelming majority of the 24 months since the New England Compact began, retail milk prices in New England were considerably higher than those in nearby States. But I am not an agricultural economist, others have discussed this, so I will move on.

    I am an economist who is primarily interested in trade, both international and domestic. And I am particularly interested in the efficiency and welfare gains that result from such trade in large open and competitive markets. I was brought up in a dairy region of Upstate New York and therefore I am not, by background, unsympathetic to the farmers. I believe, however, that there are strong and, I hope, persuasive arguments against the extension of this compact and against the creation of a new compact in the South.
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    First, such compacts tend to Balkanize our market, costing the United States the large efficiency gains which come from large national or international markets. Adam Smith stressed this in the Wealth of Nations more than 200 years ago. Douglas North, a Nobel Prize winning economic historian, has noted that the economies of a huge market were central to the growth of this economy in its first century or thereabouts. George Stigler, another Nobel Prize winning economist, has stressed this. There is no such animal as a small, isolated, and highly efficient market.

    Next, these compacts are the type of anti-competitive arrangement for which the European Union and Japan have become so well-known and which have held back their economies, I believe, badly. During the last 20 years or thereabouts, the United States has moved to deregulate many sectors of our economy: trucking, airlines, railroads, banking through the elimination of Regulation Q, et cetera. And apparently we are about to do so in electricity generation. We have had, I believe, major gains in efficiency and economic growth from this general trend toward deregulating markets and from a movement toward more open and competitive markets in part through lower tariffs.

    The dairy compacts are a movement in the opposite direction toward regulated, anti-competitive markets, and, I believe, toward inefficiency. These compacts, I believe, set a terrible precedent for the rest of our agricultural sector. If these compacts become established in more of the country, other farm groups will want them. Do we want, for example, grain farmers in Kansas and Iowa to get together to keep out cheaper grain from other States? Do we want citrus farmers from Arizona and California to find a way to keep out cheaper frozen orange juice from Florida? If we Balkanize through compacts, our entire agricultural system, the impacts of this on the cost of food would be enormous.
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    Do you want these compacts to spread outside of agriculture? Perhaps Intel should be allowed to get together with other manufacturers of computer chips on the West Coast and keep out cheaper chips from elsewhere. I do not think that you want to see this economy Balkanized. This is a bad precedent.

    The dairy compacts are allowed to behave in a manner which we will not tolerate in international trade. If a Korean company sets a high price in Korea and then sells the same product more cheaply in the United States, that is dumping, and the International Trade Commission and the International Trade Administration of the Department of Commerce will be after that company very quickly. We absolutely will not tolerate dumping in our markets by foreign firms, but what happens with the New England Compact? It sets a higher price that discourages consumption, increases production, with the excess being dumped into the manufactured dairy products market, thereby driving the price down as was noted very eloquently this morning by a Senator and the Governor from Wisconsin.

    If it is unfair for Korean firms to dump their products at a lower price here and if we will not tolerate it, why is it fair for the compact States to dump their milk in the market for manufactured dairy products?

    Finally, the income distribution effects of the dairy compacts are very regressive. The poor are disproportionately harmed. It is clear from the data that, as people become more prosperous, the percentage of their income which they spend on food steadily declines. This is known as Engels Law after an economist who discovered it in the data a century ago. Fluid milk is not a major item in the budget of most people in this room, but it is a big item in the budget of large families, many of whom are poor.
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    The New England Compact in New England tranfers income from Roxbury, Dorchester, East Hartford, Providence, and Bridgeport to Vermont farmers, and the small farmers in Vermont do not get most of the benefits. The benefits are proportionate to production. They go primarily to the biggest, better off farmers.

    In conclusion, I believe that the list of arguments against the compact is long and, I hope, it is persuasive. I hope, therefore, that you will not extend the New England Compact and that you will not allow a new compact to be created.

    [The prepared statement of Mr. Dunn follows:]

PREPARED STATEMENT OF ROBERT M. DUNN, JR., DEPARTMENT OF ECONOMICS, GEORGE WASHINGTON UNIVERSITY, WASHINGTON, DC

    My name is Robert Dunn, and I am a Professor of Economics at the George Washington University. I was an undergraduate at Williams College, and received my M.A. and Ph.D. in economics from Stanford University.

    I have been teaching and doing research in the area of international trade and finance for thirty five years, and have been particularly interested in the great advantages of open and competitive markets. I have also been fascinated by the lengths to which interest groups will go to protect themselves against competition from imported goods and services.

    I am here on behalf of the International Dairy Foods Association in opposition to the proposed renewal of the Northeastern Dairy Compact and in opposition to the proposed approval of the Southern Dairy Compact.
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    Although there is debate over the size of the effects of a regional dairy compact such as that now operating in New England, the fundamental nature of the impacts is clear:

A. Farmers and processors from outside the region are prohibited from selling fluid milk in the region at less than the price specified by the compact. There is no price competition in the compact region market for fluid milk.

B. Prices received for fluid milk by farmers within the compact area increase, and this is passed on to consumers as higher retail prices for milk. Incomes received by dairy farmers rise, but significant losses are imposed on consumers of fluid milk within the region. These losses are largest for young families with a number of children.

C. The increased price of fluid milk encourages both an increase in regional production and a decline in consumption. The sale of the resulting surplus in the manufactured dairy products market reduces prices in that sector.

    Although it is not difficult to understand why dairy farmers in New England want the Compact to be extended and why farmers in other states would like to join, there are a number of strong arguments against passage of legislation which would allow the New England Compact to remain in operation after September 30, 1999 or which would permit the Southern Compact to come into existence. These arguments are:

    1. By prohibiting states from imposing tariffs or other barriers on imports from other states, the framers of the U.S. Constitution clearly envisioned a national market with free competition among producers in the various states, without favoritism for producers of one state or region relative to others. The dairy compacts create major regional distortions in dairy markets, benefitting New England or Southern dairy farmers over those in other areas. The compacts therefore violate the apparent intention of the framers of the Constitution that the United States have a single national market which would be openly competitive.
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    Two Nobel Prize winning economists, Douglas C. North and George J. Stigler, have stressed the importance of large markets in encouraging rapid economic growth.(see footnote 40) A large national market gains those advantages for the United States; isolated and smaller regional markets would not.

    It is widely understood among economists that an important reason for the success of the U.S. economy in recent years has been an increase in its competitiveness as markets have been deregulated and barriers to imports reduced. The deregulation of airlines, railroads, and trucking at the end of the 1970s brought down transportation costs, and the elimination of Regulation Q in the banking system helped to create a far more efficient set of financial markets in the United States. Deregulating energy markets holds the promise of increased efficiency in electricity generation and lower monthly power bills.

    The economies of the European Union and Japan, in contrast, have performed poorly precisely because they are far less open and competitive, being burdened by a range of regulations and anti-competitive institutions. The Northeastern and Southern Dairy Compacts represent exactly the type of anti-competitive arrangements that have discouraged efficiency and economic growth in Europe. If the United States wants to maintain its pattern of strong economic growth with low rates of unemployment and inflation, it must avoid institutions which reduce efficiency and artificially increase consumer prices.

    From Adam Smith and David Ricardo to the present, economists have stressed the advantages of free competition. The whole basis of Ricardo's law of comparative advantage, which remains at the core of trade theory more than 180 years after it was devised, is that an economy will be far more efficient and its citizens have higher standards of living if firms and countries gain markets on the basis of their having comparatively lower costs and therefore prices. That argument is as relevant for regions as it is for nations. The milk compacts destroy cost and price competition in the fluid milk markets in New England and the South. Farmers in other regions, who may be more efficient and therefore have lower costs, are prohibited from gaining markets in New England and the South by undercutting the prices set by the compacts.
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    2. These compacts set a bad precedent. If northeastern and southern dairy farmers are allowed to fix their regional markets for fluid milk in order to increase their incomes, why cannot dairy farmers in other regions behave in the same manner? Perhaps the entire national market for fluid milk could be taken out of the competitive market process, and managed through regional compacts.

    What about other farm products? Should we allow wheat farmers in Kansas and Iowa to eliminate competition from grain coming from other states? Should consumers in Maryland and Delaware be prohibited from purchasing less expensive produce from Florida in order to increase the incomes of farmers on the Eastern Shore? Perhaps California and Arizona citrus farmers should be able to increase their incomes by keeping inexpensive Florida frozen orange juice out of the local market.

    If this is to be allowed for food, what about other products? Perhaps Microsoft and other software firms on the west coast should be allowed to keep out less expensive software from Massachusetts. Would we allow Intel to form a compact with other California and Oregon producers of computer chips to stabilize and increase prices by keeping out chips from other regions?

    An American economy that consisted of Balkanized regional markets would be appallingly inefficient. The implications for U.S. inflation of a spreading of such compacts across our economy are obvious. What Paul Volcker and Allen Greenspan have accomplished, anti-competitive regional compacts could destroy. The advantages for the United States of a national competitive market are enormous, and that conclusion extends to agriculture.
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    3. By renewing the Northeastern Compact and approving the Southern Compact, the Congress would allow, or even encourage, behavior within a U.S. market which it does not accept in international trade. To maintain a high domestic consumer price and to sell the surplus abroad at a lower price is dumping, as is any sale of imported goods in this country at less than ''fair market value.'' When Japanese or Korean firms dump their products in the U.S. market, they are subject to large anti-dumping duties. The Congress obviously feels that it is unfair for U.S. firms to be required to compete against Japanese or Korean products which are dumped in this market, and has created a strong legal and administrative framework to discourage and counter this practice.

    Steel producing regions of the United States have been strongly opposed to the dumping of Asian steel in this market, and a case against the exporters is now underway. The computer chip industry felt that Korean chips were being dumped in the United States and vigorously pursued legal remedies. The International Trade Administration of the Department of Commerce and the International Trade Commission (ITC) are constantly dealing with dumping cases which are filed by U.S. industries that feel that they have been victimized by this behavior, and many of the cases result in the application of heavy anti-dumping duties on unfairly exported goods. According to the ITC's 1996 publication, The Year in Trade: Operation of the Trade Agreements Program in 1995, there were 292 anti-dumping orders against exporters in 55 countries in place as of 1995 (p. 128–132).

    The Northeastern and Southern Dairy Compacts, however, would do exactly what we will not tolerate in international trade. High fluid milk prices in New England or the South encourage production and discourage local consumption, creating a surplus which is dumped in the manufactured dairy product market, thereby harming farmers in other regions who compete in that market. If it is unfair for U.S. steel manufacturers to be required to compete against steel products which are dumped in market by Japanese and Korean firms, why is it fair to require dairy farmers in Wisconsin and Minnesota to compete against milk which is dumped into the manufactured dairy products market by New England or Southern farmers?
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    4. The income redistribution effects of this compact are highly regressive. It is clear in the data that the percentage of family incomes which is spent on food steadily declines as people become more prosperous. Fluid milk prices are minor issue for those with high incomes, but a far more serious matter for the poor. For low income families with many children, fluid milk prices are a major budgetary cost.

    The Compacts particularly harm poor families with young children in urban areas in the two regions. It seems particularly unfair to artificially increase fluid milk prices when the welfare reform law of 1996 is reducing government assistance to poor families with dependent children.

    In conclusion, the Northeast Dairy Compact should be allowed to expire in October, and the Southern Dairy Compact should not be approved because:

  The Compacts violate the Constitutional concept of a national competitive market, with producers across the nation being treated equally. They represent a move toward the sort of anti-competitive arrangements for which the European Union and Japan are well known.

  The Compacts set a bad precedent for other agricultural markets, and could lead to similar regional compacts in a variety of markets. This outcome would sharply increase retail food prices, seriously 7 harming poor families who spend a disproportionately high percentage of their incomes on food, and worsening U.S. inflation.

  Even as limited to milk, the compacts are particularly harmful to young families with children in Boston and other cities in the Compact regions who are required to pay significantly higher prices for a basic food item. The Compacts thereby redistributes income in a highly regressive manner.
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  The Compacts unfairly harm dairy farmers in other regions who must compete against New England and Southern surplus milk which is dumped into the manufactured dairy product market.

  The Compacts are inconsistent with our laws on international dumping, in that the Compacts are allowed to behave in a manner which the United States would not tolerate in international trade.

    There is no need for legislation on this subject. The Northeastern Dairy Compact should be allowed to pass into history and the Southern Dairy Compact should not be approved.

    Mr. GEKAS. We thank Professor Dunn for his remarks.

    We now turn to the gentleman from North Carolina who is recognized for 5 minutes.

    Mr. WATT. Thank you, Mr. Chairman. I actually was planning to spend most of my time talking to the phantom panel member who is not here, Mr. Covert from Kroger.

    Mr. GEKAS. He did appear and did testify in the previous panel. We made him an appendage of the previous panel because he had a personal commitment.

    Mr. WATT. Oh, I see. Okay. Well, I was hoping that there was somebody here from the retail industry. I wanted to make sure that he understood I wasn't beating up on the retail industry. Some of my best friends are retailers. [Laughter.]
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    Mr. GEKAS. But he did testify.

    Mr. WATT. Food Lion is actually based in my congressional district so I wanted to be clear that they didn't go away thinking that I was just being mean to retailers.

    I did have some information, though, that seemed to me to be a little inconsistent with the last panel. And I don't know who to ask the question to so I won't ask it. It seems to suggest that prices don't seem to follow at the retail level the price paid to dairy farmers, contrary to what some people on the other—okay. We will get five. All right. I will take care of that somewhere else.

    Mr. Rosenbaum, the Northeast Compact has been in effect now how long?

    Mr. ROSENBAUM. Two years.

    Mr. WATT. Has there been any litigation about the constitutionality or legality? Is there any pending litigation?

    Mr. ROSENBAUM. There was litigation that did not address the issues I have raised. There is no pending litigation of a constitutional nature. But I do hope I was making it clear that part of the arguments I was raising were not necessarily going to the question of whether a lawsuit against the compact would succeed or not, but rather the question whether the Judiciary Committee would be acting consistent with the philosophy of the Constitution in deciding to erect economic protectionism when historically that was the very reason the Constitution was adopted in the first place, namely to put an end to that.
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    Mr. WATT. Yes, but—yes, I hear what you are saying, but although we did it in kind of a backhanded way, as Ms. Baldwin indicated this morning, the Congress has already done this for a period of time. And the process typically for evaluating whether what we do is or is not constitutional is for somebody to file a lawsuit about it. And it would seem to me that if the results of the compact were as grievous as some of the witnesses have indicated they are, somebody would have tested the theory, especially if it is as clear as you say as a legal proposition that it is.

    Has anybody even given contemplation to testing this? You have researched this for some reason. Have you researched it for a client that you had to advise about whether they would win or lose a lawsuit about the issue of the constitutionality of it?

    Mr. ROSENBAUM. Well, Your Honor—I keep saying, ''Your Honor.'' I am used to being in court obviously. [Laughter.]

    Mr. WATT. I was here two-and-a-half years before I got out of that habit, Mr. Rosenbaum. I know exactly what you mean. I was addressing every chairman as ''Your Honor.'' And they like that. [Laughter.]

    The Chairs really like that. So you haven't offended anybody up here by saying, ''Your Honor.''

    Mr. ROSENBAUM. The reasons why we believe there are serious constitutional deficiencies are developed quite substantially at length in the materials submitted with my written comments.
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    Mr. WATT. But the question is, is there anybody contemplating filing a lawsuit to test this?

    Mr. ROSENBAUM. I support it but it is our hope and expectation that the compact will expire in October and that will not be necessary.

    Mr. WATT. Die a natural death rather than a litigated death.

    Mr. ROSENBAUM. That is our hope.

    Mr. WATT. Mr. Smith I think wanted to respond to that question.

    Mr. DANIEL SMITH. If I might for just 1 minute, Mr. Gekas. As the former executive director of the Compact Commission during the time when the litigation might have been brought, Mr. Rosenbaum brought suit on behalf of the International Dairy Foods Association, testing the single provision of the Secretary's finding of the compelling public interest. And there was not, in that lawsuit, any of the broader constitutional questions.

    Mr. WATT. Why did I have this feeling he wasn't doing this research, going back to the 1700's for nothing? I mean, I just knew there had to be some reason for it. I yield back, Mr. Chairman.

    Mr. GEKAS. We thank the gentleman. We turn to the lady from Wisconsin who has no questions. The Chair yields itself 5 minutes and yields part of that yield to the yielding gentleman from Virginia if he wishes to yield some commentary that will make sense. [Laughter.]
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    Mr. GOODLATTE. I don't think I could match that.

    Mr. WATT. Is that as opposed to what you just heard?

    Mr. GEKAS. The gentleman from Virginia. [Laughter.]

    Mr. GOODLATTE. Mr. Chairman, I really thank you for holding these hearings and for allowing me, a member of the full committee but not a member of the subcommittee, to participate. I just want to say that I am a representative of a district that has a lot of dairy farms. About half of the dairy farms in the State of Virginia are in my district and most of those dairy farmers strongly support having a Southern Dairy Compact. I, however, am very, very concerned about this and I heard the reference to 1700's. I don't know that we're getting into Gibbons v. Ogden or what.

    But my concern is not——

    Mr. WATT. I don't know. Mr. Rosenbaum made reference to having researched the compacts going all the way back through the history into the 1700's. I don't think he ever mentioned what the name of the case was.

    Mr. GOODLATTE. Well, let me ask him the question then. Did you find any that regulated interstate commerce?

    Mr. ROSENBAUM. Certainly not in the manner that this compact would do. By that I mean there are no compacts that purport to regulate the price that would have to be paid to an entity that is outside the compact States. And that is the guts of the issue, which is to what extent can a State or group of States benefit themselves at the expense of citizens in other States? And it was the fact the States were doing that rampantly that caused the State of Virginia in the 1780's to say we need to have a constitutional convention. We are not going to make it as a country.
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    Mr. GOODLATTE. Well, that is right. And then after we had that Constitution written, some of the States persisted in that, including the State of New York, which attempted to charge tariffs for goods shipped across the Hudson River. And I believe that was the genesis of the Gibbons v. Ogden case in which the court said the Congress has the responsibility and authority to regulate interstate commerce and not the States.

    Now I acknowledge that by passing legislation related to a compact, we may well be able to cede that authority to the States, but I think it is a very, very poor idea. The economic success of this country is built upon the notion that we have free and open enterprise across State borders. You know all the problems we have trying to open up borders and conduct trade with foreign nations. We would be going in the opposite direction of what many of us hope to accomplish with promoting international trade if we would go in the direction of allowing individual States or groups of States banding together to effectively regulate interstate commerce to the advantage of the citizens and businesses of those States to the detriment of those outside of those States.

    And I have already heard discussions about a Midwest grain compact. Well, my dairy farmers in Virginia have to purchase grain at certain times of the year to feed their dairy cows and it seems to me that this is a two-edged sword, that if you are given the authority to go ahead and have the ability to regulate interstate commerce, somebody else somewhere else is going to want to protect or cause to be grown an industry in their State at the expense of something that is produced in Virginia or North Carolina or Wisconsin or whatever the State may—Pennsylvania, whatever State may be affected by this.

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    So the problem I have is with the core issue here and it is why the gentleman from Pennsylvania has it in his subcommittee rather than I have it in my subcommittee on the Agriculture Committee. This is not really a dairy issue or an agriculture issue. This is an issue regarding the ability of the Federal Government to regulate interstate commerce and the ability of the Federal Government to determine whether a compact is entered into for the benefit of pursuing some non-economic cooperative venture between the States or whether, in this case—and I think this is with the Northeast Dairy Compact the first such example—an interstate compact that would regulate interstate commerce.

    And I think we would be headed down a very long and very difficult road if we pursue that in terms of Balkanizing the conduct of trade, not just in dairy, but in a whole host of other areas. So I strongly oppose the legislation introduced by the gentleman from Arkansas and I support the legislation introduced by the gentleman from Wisconsin.

    Mr. DANIEL SMITH. Mr. Goodlatte.

    Mr. GOODLATTE. Thank you, Mr. Chairman.

    Mr. DANIEL SMITH. If I might, again, just very briefly.

    Mr. GEKAS. Mr. Smith.

    Mr. DANIEL SMITH. Mr. Gekas—excuse me, Mr. Goodlatte—I think one point of clarification needs to be made. There are no tariffs here that operate to the benefit of the compacting States and the detriment of the citizens of the States outside the compact region. As I said before, 40 percent of the milk in the New England market comes from New York. Forty percent of the money goes to the New York State farmers. That is the difference between the situation that existed during the Articles of the Confederation and under this compact. They are not tariffs that place the States in competition with each other. This is regulation, uniform regulation, non-competitive, neutral regulation of the marketplace.
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    Just by way of one more example, as a compact executive director, I signed a check for $25.12. And we sent that to Oregon dairy farmers who were shipping milk into the compact region. A small collective of organic dairy farmers shipped some milk in. The money assessed under the compact tracked back out. Now whether that as a matter of policy is good or bad policy is a fair question for the Congress to consider, but it is not a situation, as you described, where the citizens of the States assessing the money are doing so to the detriment of competitive farmers.

    Mr. GOODLATTE. Well, Mr. Smith, I disagree with that because it has the same net effect. The further away from the market that you are and the effect of raising the prices is to have the intended effect that you want to have, which is to keep more dairy farms in operation in New England. And that is certainly a worthy goal. It is the method that you use to get there that I object to, which is allowing States to band together to set prices.

    And, yes, you impose the same price on somebody producing in New York that you would impose on processors in New England—you know, they have to pay the same price to somebody outside the region that they pay in, but it would still have the same effect on States regulating interstate commerce for the benefit, the perceived benefit—although I would argue there are trade-offs, there are detriments to the consumers in New England—but, nonetheless, the perceived benefit that you get is to create a perceived advantage for the region relative to other surrounding areas and I strenuously object to that and I think it is heading us in the direction of having more and more of these compacts. That is why we are seeing it now being pursued in the South. And if we are going to address the concerns of dairy farmers, we should do it at the Federal level if it, indeed, involves interstate commerce.
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    Thank you, Mr. Chairman.

    Mr. GEKAS. The time of the Chair has expired. The Chair wishes to extend its compliments and its gratitude to this panel and the preceding panels and all those who participated. We have created a record, I believe, that will go a long way toward a good disposition of this issue. Good for some, bad for others, no matter how we finally frame that decision. But, in the meantime, you should feel very good about the fact that you have contributed mightily to the debate.

    With that, we have no further business before the committee. The committee stands adjourned.

    [Whereupon, at 4:58 p.m., the subcommittee was adjourned.]

A P P E N D I X

Material Submitted for the Hearing Record

63851x.eps

63851y.eps


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National Grange of the
Order of Patrons of Husbandry,
Washington, DC, June 23, 1999.
Hon. GEORGE GEKAS, Chairman,
Subcommittee on Commercial and
Administrative Law,
Committee on the Judiciary,
House of Representatives, Washington, DC.

Re: H.R. 1604, a bill to reauthorize, and modify the conditions for, the consent, of Congress to the Northeast Interstate Dairy Compact and to grant the consent of Congress to the Southern Dairy Compact.

    DEAR CHAIRMAN GEKAS AND MEMBERS OF THE SUBCOMMITTEE: On behalf of the 300,000 members of the National Grange, the nation's oldest general farm organization, I would like to express the National Grange's support for H.R. 1604, the Dairy Consumers and Producers Protection Act. The National Grange was the first national farm organization to support the creation of regional dairy compacts. As such, the National Grange feels that regional dairy compacts offer the best opportunity to preserve our nation's family dairy farms.

    Dairy farmers often find it difficult to control their financial destiny because of the widely fluctuating price of milk. Regional dairy compacts can stabilize the price of Class I (fluid) milk and thereby provide dairy farmers with the opportunity to financially manage their farms for the long-term. Since 1980, retail prices for fluid milk have risen 35 percent while farm milk prices have remained static. If authorized, the dairy compacts will reduce the volatility in milk prices that has hurt both consumers and dairy farmers over the past several years.

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    Passage of this legislation will also give consumers and farmers in the affected regions of the country the opportunity to be part of their regional compact commission. As such, they will be able to participate in an open process for determining fair and equitable fluid milk prices, which will serve to provide a safety net for dairy farmers and their families.

    For example, the State of Vermont currently participates in the Northeast Dairy Compact. While Vermont is unfortunately still losing dairy farms, statistics show that the state is losing them at a much lower rate since farmers started receiving benefits from the Northeast Dairy Compact. The rate of farm attrition in Vermont is the lowest since 1991. Between January 1, 1998 and June 1, 1998, Vermont lost 3 5 dairy farms out of a total 1815 dairy farms, which translates into a 1. 9% attrition rate. The average attrition rate from 1993-1997 was 4.16%.

    The heightened interest and overwhelming support at the state level for dairy compacts is based largely on the outstanding accomplishments of the Northeast Dairy Compact. There is a clear recognition in the dairy industry that states must work together to strengthen their rural economies and ensure fresh local supplies of milk to their urban areas. The Northeast Dairy Compact has been extremely successful in balancing the interests of processors, retailers, consumers, and dairy farmers. It deserves to be reauthorized.

    Establishing a Southern dairy compact would provide dairy farmers in that region with a more stable price structure for the milk they produce while ensuring the region has a viable supply of locally produced milk. In the Southeast, when we consider the increasing loss of dairy farms and overall population growth, there is an overwhelming need for more locally produced milk, not less. Authorizing the creation of a new Southern dairy compact is critical to the maintenance of a strong and financially healthy dairy industry in the Southeast.
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    Furthermore, regardless of the region they operate in, dairy compacts work in harmony with the Federal Milk Marketing Order system and operate at no government expense. Domestic nutrition programs such as WIC are also exempted from fluid milk pricing decisions made by compact commissions.

    For these reasons, the National Grange strongly supports the adoption of H.R. 1604. We look forward to working with you and all of the members of the Committee to see that this important legislation passes during the 106th Congress.

    I would appreciate this letter being made a part of the record of the hearing held on June 17, 1999 regarding H.R. 1604.

Sincerely

Kermit W. Richardson, Master (President).












(Footnote 1 return)
CFA is a non-profit association of some 260 pro-consumer groups, with a combined membership of more than 50 million, that was founded in 1968 to advance the consumer interest through advocacy and education.


(Footnote 2 return)
See, for example, written opinions of Professor William Van Alstyne at Duke University Law School and Professor Burt Neuborne at New York University Law School.


(Footnote 3 return)
Evidence of the pass through is seen in a comparison of retail milk prices for New England and the Mid-Atlantic states from supermarket scanner data. Prior to the beginning of the Northeast compact in July 1997, the data show, average retail milk prices in the two regions were virtually identical. Once the compact went into effect, however, New England retail milk prices increased and remained at or near those higher levels. Retail prices in the Mid- Atlantic region, on the other hand, did not increase when the compact began and actually declined substantially on a number of occasions. In short, the Northeast Dairy Compact prevented consumers from experiencing retail milk price declines that occurred outside of New England.


(Footnote 4 return)
This estimate is based on an $11.40 per 100 pounds basic formula price and the $16.94 per 100 pounds ($1.46/gal.) over-order price now in effect in New England.


(Footnote 5 return)
The maximum 1999 compact price allowed by law is $22.28 per 100 pounds ($1.92/gal.).


(Footnote 6 return)
CFA stands ready to work with all sides in finding a rational solution to this problem and would not rule out a means-tested program to support small family farms.


(Footnote 7 return)
I serve the Committee as its counsel with regard to constitutional issues and textual matters involving the Compact legislation. By way of biographical background: I served as Founding Executive Director of the Northeast Dairy Compact Commission, 1996–1998. Prior to my service with the Compact Commission, I assisted with developing and drafting the Northeast Interstate Dairy Compact, 1988–1992, as Counsel to the Vermont House and Senate Agriculture Committees. (Honorable Robert A. Starr, Chair of the Vermont House Agriculture Committee and Honorable John McHugh, New York State Senator (now Congressman) were the original legislative sponsors of the Northeast Compact.) Their text is also the principle model for the Southern Dairy Compact. I also served as Executive Director of the Northeast Interstate Dairy Compact Committee, 1992–1996, the collective group of New England's commissioners of agriculture and dairy industry leaders which oversaw adoption of the Compact by the six New England states and approval by Congress.


(Footnote 8 return)
Article 1, Section 10, Clause 3.


(Footnote 9 return)
Cuyler v. Adams, 449 U.S. 433, 440 n. 8 (1981) (quoting United States Steel Corp. v. Multistate Tax Commission, 434 U.S. 452, 485 (White, J., dissenting) (1978)).


(Footnote 10 return)
United States Steel Corp. 434 U.S. at 473.


(Footnote 11 return)
My testimony does not dwell at all on the question of whether these compacts are constitutionally permissible in the first instance. To the extent the opponents raise such an objection, Congress' ability to so act constitutionally is irrefutably established. See the analysis provided in the statement of Professor Richard H Fallon, Jr., Harvard Law School, appended to my testimony.


(Footnote 12 return)
In addition to reliance upon Professor Fallon's statement, my analysis in this section also draws upon a statement presented to this Subcommittee's predecessor in 1994 by the Honorable Dave Frohnmayer, then Dean of the School of Law (now President) of the University of Oregon. His statement is contained within the appendix to my testimony.


(Footnote 13 return)
New Ice Co. v Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).


(Footnote 14 return)
F. Frankfurter, J. Landis, The Compact Clause of the Constitution—A Study in Interstate Adjustments, 34 Yale Law Journal, 685, 695 (1925).


(Footnote 15 return)
Frankfurter and Landis, supra, 34 Yale Law Journal at 729.


(Footnote 16 return)
See the attached letters from the diverse state officials contained in the appendix to my testimony, particularly the letter of Representative Stephen Anderson of Rhode Island.


(Footnote 17 return)
Source: Compilation memorandum by Robert Gray, States Ratification Committee, in the appendix to my testimony.


(Footnote 18 return)
Citing Gregory v. Ashcroft, 501 U.S. 452, 458 (1991).


(Footnote 19 return)
Gregory v. Ashcroft, 501 U.S. at 458.


(Footnote 20 return)
Cuyler v. Adams, 449 U.S. 433, 440 n. 8 (1981) (quoting United States Steel Corp. v. Multistate Tax Commission, 434 U.S. 452, 485 (White, J., dissenting) (1978)).


(Footnote 21 return)
United States Steel Corp. 434 U.S. at 473.


(Footnote 22 return)
I would also repeat that Congress' ability to so act constitutionally is irrefutably established in accordance with the reasoning described in Professor Fallon's Statement.


(Footnote 23 return)
See e.g. Milk Industry Foundation v. Glickman, 132 F.3d 1467, 1471 (D.C. Cir. 1998)


(Footnote 24 return)
Frankfurter and Landis, supra, 34 Yale Law Journal at 729, 704. Again, I draw liberally upon Professor Fallon's scholarship by this citation.


(Footnote 25 return)
F. Frankfurter, J. Landis, The Compact Clause of the Constitution—A Study in Interstate Adjustments, 34 Yale Law Journal, 685, 695 (1925).


(Footnote 26 return)
The seven hundred member companies of IDFA hail from twenty-two nations, and represent 85% of the dairy products consumed in the United States. Dairy foods are a $70 billion industry.


(Footnote 27 return)
Minimum wage legislation is the converse, a transfer of wealth from employers who could hire at a lower wage under unregulated market conditions to low-income workers. I believe that minimum wages are an important constraint on the unregulated labor market. But I believe that the decision about minimum wage must be made by a politically accountable body. It would be a terrible idea to shift the decision about minimum wages to a politically insulated body acting pursuant to an interstate compact.


(Footnote 28 return)
The West Lynn Court noted that attempts to protect local dairy farmers had provoked numerous Supreme Court challenges. Schollenberger v. Pennsylvania, 171 U.S. 1 (1898); Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511 (1935); H.P. Hood & Sons, Inc. v. DuMond, 336 U.S. 525 (1949); Dean Milk Co. v. Madison, 340 U.S. 349 (1951); Polar Ice Cream & Creamery Co. v. Andrews, 375 U.S. 361 (1964); Great Atlantic & Pacific Tea Co. v. Cottrell, 424 U.S. 366 (1976); West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994).


(Footnote 29 return)
Pursuant to Congressional prodding, the Secretary is reconsidering the current cumbersome federal pricing system that recognizes 31 separate pricing areas.


(Footnote 30 return)
Despite the internal political safeguard, if Congress agrees to such a regime of hard core protectionism, perhaps because of complex political trade-offs, the Constitution imposes substantive checks on the power to enact protectionist legislation. See Metropolitan Life Insurance Co. v. Ward, 470 U.S. 869 (1985). See infra, Point IV.


(Footnote 31 return)
Once again, the states' power to regulate pursuant to Congressional waiver of the negative Commerce Clause is limited by the equality provisions of the Constitution. Metropolitan Life Insurance Co. v. Ward, 470 U.S. 869 (1985)(invalidating discriminatory tax despite waiver of negative Commerce Clause); United Bldg. & Constr. Trades v. Camden, 465 U.S. 208 (1984)(invalidating residential quota for public works jobs); Hicklin v. Orbeck, 437 U.S. 518 (1978)(invalidating Alaska hire law requiring employment preferences for Alaska residents in certain jobs); Supreme Court of New Hampshire v. Piper, 470 U.S. 274 (1985)(invalidating ban on non-resident practice of law). See infra, Point IV.


(Footnote 32 return)
Irresponsible behavior by a majority of the states acting individually is unlikely, first, because self-interest will rarely persuade a majority of the states to act in a protectionist manner when the option of national regulation is present; and, second, because the equality provisions of the Constitution place limits on state protectionism. See infra, Point IV.


(Footnote 33 return)
When coordinated state action does not infringe on federal sovereignty, states may enact cooperative legislation without Congressional consent. See United States Steel Corp. v. Multistate Tax Commission, 434 U.S. 452 (1978)(reciprocal legislation designed to enhance tax administration not an interstate compact); Bode v. Barrett, 344 U.S. 583 (1953)(reciprocal exemptions on non-resident motorists from highway use tax not an interstate compact). Since the hard core protectionism contemplated by the Northeast Regional Dairy Compact strikes at the core of the constitutionally protected national free market, it unquestionable requires formal Congressional approval. As with other forms of Congressional action, the authorization of a protectionist interstate compact must be measured against the limits on Congressional action imposed by the equality provisions of the Constitution. See Point IV, supra.


(Footnote 34 return)
Peaceful resolution of the numerous boundary disputes that existed between the original states has been deemed the principal reason for the Compact Clause. See Felix Frankfurter & James M. Landis, The Compact Clause of the Constitution—A Study in Interstate Adjustment, 34 Yale L. J. 685 (1925). Neither the Farrand notes on the debates at the Constitutional Convention, nor the Federalist Papers discuss the Compact Clause.


(Footnote 35 return)
Minimum wage legislation is the converse, a transfer of wealth from employers who could hire at a lower wage under unregulated market conditions to low-income workers. I believe that minimum wages are an important constraint on the unregulated labor market. But I believe that the decision about minimum wage must be made by a politically accountable body. It would be a terrible idea to shift the decision about minimum wages to a politically insulated body acting pursuant to an interstate compact.


(Footnote 36 return)
Since commitment to a national free market is at the core of the Commerce Clause, I believe that Congress would lack power under the Commerce Clause to establish a program of state customs duties aimed at the produce of sister-states.


(Footnote 37 return)
A similar restriction limits Congress's affirmative power under the Commerce Clause. When Congressional legislation ostensibly designed to regulate interstate commerce is more accurately described as an effort to exercise a forbidden national police power, the Supreme Court has invalidated the Congressional statute as violative of the 10th Amendment. See United States v. Lopez, 514 U.S. 549 (1995); Printz v. United States, 117 S.Ct. 2365 (1997).


(Footnote 38 return)
The issue is somewhat complicated by the Court's action in Northeast Bancorp, Inc. v. Bd. of Governors, 472 U.S. 159 (1985). In Northeast Bancorp, Congress had imposed a general ban on interstate bank acquisitions under the Bank Holding Company Act of 1956, subject to a state power to waive the federal prohibition. When several New England states enacted legislation conditionally waiving the federal ban, but only vis a vis states that granted reciprocal waivers, the legislation was challenged under the Equal Protection Clause. The Court upheld the state statutes, reasoning that they were motivated by a legitimate desire to foster local ownership of banks, and did not unreasonably discriminate since they were keyed to reciprocity.


(Footnote 39 return)
The clause states: ''The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States''.


(Footnote 40 return)
See North, Douglas C., The Economic Growth of the United States: 1790–1860 (New York: Norton) 1966, pp. 2–10 and Stigler, George J., ''The Division of Labor is Limited by the Extent of the Market,'' Journal of Political Economy, June 1951, pp. 185–193.