[Senate Hearing 105-131]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 105-131

 
ALTERNATIVES TO THE NATIONAL CHEESE EXCHANGE AS PART OF THE DAIRY                              PRICING SYSTEM

=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                               __________

         Printed for the use of the Committee on Appropriations


                   U.S. GOVERNMENT PRINTING OFFICE
42-397 cc                 WASHINGTON : 1997

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



                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman

THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington             DALE BUMPERS, Arkansas
MITCH McCONNELL, Kentucky            FRANK R. LAUTENBERG, New Jersey
CONRAD BURNS, Montana                TOM HARKIN, Iowa
RICHARD C. SHELBY, Alabama           BARBARA A. MIKULSKI, Maryland
JUDD GREGG, New Hampshire            HARRY REID, Nevada
ROBERT F. BENNETT, Utah              HERB KOHL, Wisconsin
BEN NIGHTHORSE CAMPBELL, Colorado    PATTY MURRAY, Washington
LARRY CRAIG, Idaho                   BYRON DORGAN, North Dakota
LAUCH FAIRCLOTH, North Carolina      BARBARA BOXER, California
KAY BAILEY HUTCHISON, Texas

                   Steven J. Cortese, Staff Director

                 Lisa Sutherland, Deputy Staff Director

               James H. English, Minority Staff Director

                                 ______

  Subcommittee on Agriculture, Rural Development, and Related Agencies

                  THAD COCHRAN, Mississippi, Chairman

ARLEN SPECTER, Pennsylvania          DALE BUMPERS, Arkansas
CHRISTOPHER S. BOND, Missouri        TOM HARKIN, Iowa
SLADE GORTON, Washington             HERB KOHL, Wisconsin
MITCH McCONNELL, Kentucky            ROBERT C. BYRD, West Virginia
CONRAD BURNS, Montana                PATRICK J. LEAHY, Vermont
TED STEVENS, Alaska
  ex officio

                           Professional Staff

                             Rebecca Davies

                        Martha Scott Poindexter

                       Galen Fountain (Minority)

                         Administrative Support

                        C. Rachelle Graves-Bell

                                  (ii)


                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening remarks of Senator Cochran...............................     1
Statement of Senator Specter.....................................     2
Statement of Senator Kohl........................................     3
Statement of Senator Feingold....................................     3
    Prepared statement...........................................     6
Alternative price for cheese free from manipulation..............     9
Establishing a price floor.......................................    10
Statement of Hon. Dan Glickman, Secretary of Agriculture.........    11
    Prepared statement...........................................    15
Seasonal-base plans..............................................    19
Cheddar cheese prices............................................    35
Milk marketing orders............................................    39
Statement of Alan T. Tracy, secretary, Wisconsin Department of 
  Agriculture....................................................    41
Governor's Task Force on Cheese Pricing..........................    42
Cheese Pricing: A Study of the National Cheese Exchange..........    51
Task force recommendations.......................................    75
Prepared statement of Alan T. Tracy..............................    78
Status of the National Cheese Exchange...........................    79
Statement of Harold J. Howrigan, president, St. Albans 
  Cooperative Creamery, Inc......................................    83
    Prepared statement...........................................    84
National survey of cheese prices.................................    89
Statement of Arden Tewksbury, manager, Progressive Agricultural 
  Organization...................................................    90
    Prepared statement...........................................    93
Statement of Kenneth E. Zurin, dairy farmer......................    97
    Prepared statement...........................................    98
Statement of Buckey M. Jones, board of directors, Mid-America 
  Dairymen, Inc..................................................    98
    Prepared statement...........................................   101
Statement of Bill Brey, president, Wisconsin Farmers Union.......   103
    Prepared statement...........................................   106
Price of cheese long-term solution...............................   108
Statement of E. Linwood Tipton, president and CEO, International 
  Dairy Foods Association........................................   110
    Prepared statement...........................................   113
Statement of Edward T. Coughlin, acting CEO, National Milk 
  Producers Federation...........................................   119
    Prepared statement...........................................   122
Request to establish price floor.................................   122
Submitted questions..............................................   126

                                 (iii)

  


   ALTERNATIVES TO THE NATIONAL CHEESE EXCHANGE AS PART OF THE DAIRY 
                             PRICING SYSTEM

                              ----------                              


                        THURSDAY, MARCH 13, 1997

                           U.S. Senate,    
         Subcommittee on Agriculture, Rural
                 Development, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 2:38 p.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Thad Cochran (chairman) presiding.
    Present: Senators Cochran, Specter, Bumpers, Kohl, and 
Leahy.
    Also present: Senator Santorum.

                        CONGRESSIONAL WITNESSES


                   opening remarks of senator cochran


    Senator Cochran. The subcommittee will please come to 
order.
    We are pleased today to convene a meeting of the 
Agriculture Appropriations Subcommittee for the purpose of 
reviewing the Department's plans for dairy pricing.
    This hearing is being held at the request of the 
distinguished Senator from Pennsylvania, Senator Specter, who, 
during our hearing with the Secretary of Agriculture on the 
subject of the President's budget request, asked if we would 
schedule this special hearing to discuss the alternatives to 
the National Cheese Exchange as a part of the dairy pricing 
system.
    I was happy to consent to that request, and today we are 
here keeping our commitment to hold a hearing on this subject. 
We appreciate very much Senators' attendance at the hearing, 
the Secretary of Agriculture's attendance, and that of others 
who we have asked to be here today to help us better understand 
the alternatives and the options available to the Government on 
this very important issue.
    Let me point out, too, that we have problems in Mississippi 
and across the South with dairy pricing formula issues. While 
not specifically the subject of the hearing the milk marketing 
orders and seasonal base plans are an integral mechanism to 
encourage milk producers to even out their seasonal milk 
production over the year.
    The authorization for these plans was not included in the 
Federal Agriculture Improvement and Reform [FAIR] Act, and we 
are concerned about that. We understand there are some 
witnesses who will be here to discuss this, and we hope the 
administration will work hard to address this problem as it 
endeavors to make needed changes to the dairy program.
    At this point I am going to yield to my distinguished 
colleagues here on the committee for any opening statements 
they may have, and then we will proceed to hear from our first 
witness, Senator Feingold.
    Senator Specter.


                      statement of senator specter


    Senator Specter. I thank you very much, Mr. Chairman, and 
thank you for convening this hearing as you have stated we 
would when we heard earlier from the Secretary of Agriculture 
on our regular appropriation hearing.
    In my judgment, there is a real crisis in the milk industry 
today, with prices being so very low. The formula is determined 
with an input from cheese, and for every 10 cents the price of 
cheese goes up, the price of milk per hundredweight goes up by 
$1. There are some indications that the price of cheese which 
has been established is not the realistic fair market price. It 
is determined by the Wisconsin Cheese Exchange, and without 
getting into any of the details as to how that exchange 
functions, suffice it to say that it may not be the accurate 
market price in the country.
    Secretary of Agriculture Glickman traveled to northeastern 
Pennsylvania a few weeks ago to meet with a large group of 
Pennsylvania farmers, about 500 gathered into a large field 
house that day to express real displeasure at what was 
happening with milk prices.
    At that time, it was stated that the Secretary would review 
the situation to make a determination as to whether he would 
exercise the authority which he has unilaterally to establish a 
different price of cheese after due consideration of market 
factors which would, in turn, raise the price of milk.
    Collaterally, the Department of Agriculture had been 
undertaking a rulemaking process, which takes considerable 
time, but the Secretary acknowledged that he had the authority 
to do it unilaterally and said he would take a look to see if 
market forces, the market price of cheese would warrant that 
kind of increase.
    Since that meeting, the Secretary has been surveying the 
price of cheese across the country as he testified here, and 
the collateral proceeding on rulemaking has been going on.
    We did discuss this matter to some extent when he was here 
before, but time did not permit the full discussion, which is 
why this meeting has been convened, so I am looking forward to 
hearing from Secretary Glickman and his associates as to what 
else has been done on the subject.
    We also have the cheese purchasers here, very distinguished 
witnesses, Mr. Linwood Tipton, Mr. Ed Coughlin--I have 
consulted with Mr. Tipton in some detail on this question 
earlier, and we have a number of witnesses here who are dairy 
farmers, Arden Tewksbury, manager of the Progressive 
Agricultural Organization, and a very forceful advocate for 
milk farmers in his section of the State, for the full State 
and the country, and Mr. Ken Zurin, dairy farmer from 
Lancaster, PA. We have other farmers here as well.
    So I think this promises to be a very worthwhile hearing, 
and I again thank you, Mr. Chairman.
    Senator Cochran. Thank you, Senator Specter. Senator Kohl.


                       statement of senator kohl


    Senator Kohl. Mr. Chairman, we thank you for holding this 
hearing on the issue of alternatives to the National Cheese 
Exchange, and we thank all who have come to testify, especially 
those of you who have flown in from far away.
    There has been a great deal of debate over the past 2 years 
about the National Cheese Exchange, about the flaws of that 
market and about the inappropriate influence it has had on 
farmers' milk checks and on cheese prices nationally.
    To his credit, Secretary Glickman recently announced that 
he was seeking public comment on the proposal to delink the 
USDA calculation of the basic formula price on the National 
Cheese Exchange, and I think there is wide agreement that the 
delinking should take place, but the purpose of this hearing is 
not to rehash the debate about the shortcomings of the National 
Cheese Exchange, which unfortunately has been an acrimonious 
debate. The purpose of this debate is to look forward to try to 
reach common ground, and to focus on where we go from here.
    As we will hear in testimony today, plans are underway to 
create a new market for cheese to be an alternative to the 
National Cheese Exchange. One of the things I would like to 
explore in this hearing is how to avoid merely repeating the 
flaws of the National Cheese Exchange.
    Before we start, there are a couple of points that I 
believe need to be clarified. First, a more credible price 
discovery mechanism for dairy is an important prerequisite for 
the larger dairy pricing reforms that are taking place now at 
the USDA, but it is not a panacea for the low milk price 
problems that farmers have been experiencing. That is a 
separate debate and an important debate, and one that I have 
discussed with Secretary Glickman in the past, but it is not 
the subject of this hearing.
    Second, we all want to find an alternative to the cheese 
exchange as quickly as possible, but I believe we need to be 
careful not to insist that USDA link its pricing system to any 
new market until that new market becomes viable, and has proven 
its credibility. We need to act as quickly as possible, but we 
should not make matters worse.
    So we welcome everybody here today, and we look forward to 
your testimony.
    Senator Cochran. Thank you, Senator Kohl. Senator Feingold, 
you may proceed.
STATEMENT OF HON. RUSS FEINGOLD, U.S. SENATOR FROM 
            WISCONSIN
    Senator Feingold. Thank you very, very much, Mr. Chairman. 
I want to thank Senator Specter for his leadership and 
attention to this issue, and particularly thank Senator Kohl. 
He and I are partners on this issue, and agree I think in 
almost every respect on the dire need to find a different way 
to address this issue of cheese and milk pricing.
    Mr. Chairman, thank you for holding this hearing and giving 
me an opportunity to testify on a very important matter to 
dairy farmers in Wisconsin and throughout the Nation, the 
National Cheese Exchange. I will submit a longer statement for 
inclusion in the hearing record if the chairman will permit.
    Senator Cochran. Without objection, it will be included in 
the record.
    Senator Feingold. Thank you, Mr. Chairman.
    The question of whether traders on the National Cheese 
Exchange have actually used this market to manipulate milk and 
cheese prices has been the subject of a lot of debate, but the 
more important issue at hand here, as Senator Kohl has 
indicated, is the resolution of problems that the exchange has 
created. To do that, we have to understand what the problems 
are.
    Many economists, dairy farmers, and market observers agree 
that the exchange is a badly flawed market. It has low trading 
volume, few active traders, brief trading periods, infrequent 
trading sessions, and tends to be highly volatile, overreacting 
to market conditions. Those characteristics make it very easy 
for one single trade to affect the opinion price of the 
exchange, but that is not the fundamental problem.
    While the flawed nature of the cheese exchange gives 
traders the ability to manipulate prices, it is the role of the 
exchange in setting milk prices that appears to provide them 
with the incentive to do so. The combination, then, of these 
two factors is the crux of the problem.
    To solve the problem, we must address both the flaws of the 
market and its influence over milk prices. The National Cheese 
Exchange has a strong and indirect influence on milk prices 
paid to farmers throughout the Nation. USDA sets the basic 
formula price for milk, which under Federal milk marketing 
orders is based on two components: First, a survey of prices 
paid to producers by 160 milk manufacturing plants, and second, 
an adjustment factor linking the National Cheese Exchange 
prices to the BFP.
    Recent efforts to address the cheese exchange problem by 
breaking the direct link between the Cheese Exchange and the 
basic formula price, as Senator Kohl has indicated, only 
addresses part of the problem. While USDA should delink the BFP 
from the exchange and fortunately Secretary Glickman has taken 
the first steps toward doing that, doing so will not eliminate 
the influence of the Cheese Exchange on farmer milk prices.
    The more fundamental problem is the role the exchange plays 
in setting milk prices for the first half of USDA's BFP 
formula, that plant survey component that I have mentioned. As 
the exchange is the only existing source for consistent price 
information on cheese, most cheese sellers surveyed by USDA 
link their forward contract prices for cheese to the price of 
the National Cheese Exchange, so this indirect linkage caused 
by the role the exchange plays as the price benchmark for the 
industry is actually the more pervasive and difficult problem 
to solve here. It will not be solved until new and reliable 
sources of price information which cannot be manipulated by one 
large buyer or seller are developed, maintained, and utilized.
    Mr. Chairman, I caution members of this committee and the 
Department of Agriculture not to consider the creation of any 
single National Cheese Exchange replacement or any one 
particular alternative source of price information as the sole 
solution to this problem. Relying on a single alternative to 
the exchange accomplishes nothing if the alternative market is 
merely in effect the recreation of the National Cheese Exchange 
by a different name.
    I think, and I believe Senator Kohl agrees, if I may say 
so, the problem is better approached from several different 
angles at once. As he has said, first eliminating the formal 
link between the BFP and the NCE.
    Second, creating and encouraging many different sources of 
price discovery, including increasing USDA cheese price 
reporting for off-exchange transactions, increasing trading 
volume on cheese and milk future markets, and creating 
alternative and potentially competing cash markets for cheese.
    But there is then a third approach that has to be taken to 
make this all work, and that is regulating and overseeing at 
the Federal and State level any cash market that directly or 
indirectly affects milk prices regulated under Federal Milk 
Marketing Orders.
    To this end, I have introduced legislation, the Milk Price 
Discovery Improvement Act, S. 258, which would require USDA to 
implement many of these solutions. I am very pleased that 
Secretary Glickman has agreed to implement some of these 
initiatives, such as price reporting for off-exchange cheese 
transactions independent of a congressional mandate.
    The Secretary has also opened up a comment period to begin 
the process of delinking the cheese exchange from the basic 
formula price for milk. But I caution both the Secretary and 
members of this committee not to prematurely substitute an 
alternative market price for the cheese exchange in the BFP 
until that market is found to be free from manipulation.
    So these options, changing the calculation of the BFP, 
creating new cash markets, improving USDA cheese price 
reporting, and increasing regulation and oversight, are not 
exclusive of one another. They can and should be implemented 
simultaneously.
    So to conclude, Senator Kohl and I, as well as others in 
the Wisconsin congressional delegation, have been working very 
hard on this issue of the National Cheese Exchange for many 
years, and particularly in the last year. We welcome the 
interest and participation of this committee and other Senators 
in ensuring that dairy farmers are no longer held hostage to a 
market which cannot be relied upon to return a fair and 
competitive price to farmers.
    And again, thank you very, very much, Mr. Chairman, for 
permitting me to testify and for holding this hearing.


                           prepared statement


    Senator Cochran. Thank you, Senator, for your statement and 
your contribution to this hearing. Your complete statement will 
be made part of the record.
    [The statement follows:]

              Prepared Statement of Senator Russ Feingold

    Mr. Chairman and Members of the Agriculture Appropriations 
Subcommittee, thank you for holding today's hearing and for this 
opportunity to testify on the problems created by the National Cheese 
Exchange and the lack of reliable pricing information in the dairy 
industry.
    As many Committee members are aware, the National Cheese Exchange 
controversy has recently received national attention due to the recent 
dramatic and unprecedented plunge in milk prices which followed sharp 
drops in cheese prices at the Exchange.
    What some members of this Committee may not know, is that the 
controversy surrounding the Cheese Exchange, located in Green Bay, 
Wisconsin has been raging in my state for several years. I have been 
working with my colleague, the senior Senator from Wisconsin [Mr. 
Kohl], for many years to resolve some of these problems.
    Wisconsin farmers have alleged, and a March 1996 study by the 
University of Wisconsin and the Wisconsin Department of Agriculture, 
Trade and Consumer Protection (DATCP) concluded, that cheese prices on 
the National Cheese Exchange are vulnerable to manipulation for the 
benefit of traders on the Exchange and frequently to the detriment of 
dairy farmers. Contrary to popular belief, concern about the National 
Cheese Exchange has persisted in Wisconsin regardless of the milk price 
level. Senator Kohl and I were working on the National Cheese Exchange 
issue on behalf of dairy farmers when milk prices were at their peak 
last year.
    Following release of the UW/DATCP report, Senator Kohl and I asked 
federal antitrust authorities to look into those allegations. The 
fundamental conclusion of the Department of Justice and the Federal 
Trade Commission is that the type of manipulation that is alleged to 
have occurred at the National Cheese Exchange is not a violation of 
federal antitrust law. That is obviously a difficult answer for dairy 
producers to hear. Farmers correctly conclude that just because such 
manipulation may be legal, doesn't mean the problems that might lead to 
manipulation shouldn't be corrected.
    In order to determine how to solve those problems, it is important 
that members understand what this whole controversy is about, and what 
it is not about.
    Many economists, dairy farmers and market observers agree that the 
Exchange is a badly flawed market. It has low trading volume, few 
active traders, brief trading periods, infrequent trading sessions, and 
tends to be highly volatile overreacting to market conditions. Those 
characteristics make it very easy for one single trade to affect the 
opinion price of the Exchange. But that is not the fundamental problem.
    While the flawed nature of the Cheese Exchange gives traders the 
ability to manipulate prices, it is the role of the Exchange in setting 
milk prices that appears to provide them with the incentive to do so. 
The combination of these two factors--the ability and the incentive to 
manipulate--is the crux of the problem.
    Fundamentally, the resolution of the problem of the National Cheese 
Exchange lies in ensuring dairy farmers that the price they receive for 
milk they produce cannot be manipulated by those with the power and 
incentive to do so. To solve the problem, we must address both the 
flaws of the market and its influence over milk prices.
    The Exchange affects milk prices because of the way the federal 
government sets milk prices under Federal Milk Marketing Orders. The 
Basic Formula Price is calculated each month by USDA and is used to set 
the base price for milk for all farmers regulated by Federal Orders. 
The BFP has two components. The first is a survey of actual prices paid 
to producers by roughly 160 manufacturing plants receiving grade B 
milk--which is unregulated by the Federal government. The second 
component is an adjustment factor based in large part on the price at 
the National Cheese Exchange.
    It is this second factor, the direct linkage between the National 
Cheese Exchange and the Basic Formula Price that has garnered a lot of 
attention. Many have suggested that if we break this link, and we 
should, that the influence of the Cheese Exchange on milk prices will 
be eliminated. I, and many others, including the Senator from 
Pennsylvania [Mr. Specter], have proposed to do that and as you may 
know, Secretary Glickman has taken the first steps toward breaking that 
link by opening up a comment period on the issue.
    However, breaking that direct link will only solve part of the 
problem. The more fundamental problem is the role the Exchange plays in 
setting milk prices for the first half of USDA's BFP formula--the plant 
survey component.
    The plants that are surveyed by USDA pay farmers milk prices based 
on the price they receive for the cheese they manufacture. That price 
is determined by the prices at the National Cheese Exchange. Since the 
Exchange is the only existing source for consistent price information 
on cheese, most cheese sellers surveyed by USDA, and indeed most cheese 
sellers and buyers nationally, link their forward contract prices for 
cheese to the price at the National Cheese Exchange. This indirect 
linkage caused by role of the Exchange as the only source of price 
discovery is the more pervasive and difficult problem to solve.
    Solving this problem requires that new and reliable sources of 
price information that cannot be manipulated by one large buyer or 
seller are developed, maintained and utilized by the dairy industry. I 
caution members of this Committee and the Department of Agriculture not 
to consider any single National Cheese Exchange replacement or any one 
particular source of price information as the sole solution to this 
problem. Many options are needed and the more price information, the 
more fair the marketplace will be for dairy farmers.
    Since the release of the University of Wisconsin/DATCP report, I 
have proposed tackling this problem from every possible angle 
including:
  --Creation of voluntary internal reform of practices at the National 
        Cheese Exchange to increase trading volume and reduce both 
        price volatility and the influence of individual traders on 
        overall price levels. Reforms could include limitations on 
        daily price movements, movement toward electronic trading, and 
        a prohibition of certain trading practices.
  --Increased price reporting by USDA for off-Exchange bulk cheese 
        transactions to reduce the role of the Exchange as the only 
        source of price information thereby hopefully reducing the 
        indirect influence of the Cheese Exchange on milk prices;
  --Elimination of the direct link of the National Cheese Exchange to 
        USDA's Basic Formula Price;
  --Creation of a new cash market or markets that do not share the 
        flaws of the National Cheese Exchange;
  --Increased federal efforts in improving milk price discovery 
        generally, such as encouraging greater trading on futures 
        market and exploring the creation electronic markets; and,
  --Increased federal and state regulation and oversight of any cash 
        market, including the National Cheese Exchange, that 
        fundamentally influences milk prices paid to producers.
    These options are not exclusive of each other. And in fact, if they 
were all implemented, we might be well on our way to solving the 
fundamental problem of the lack of price discovery in cheese and dairy 
markets. In fact, relying on one option alone will not resolve these 
problems.
    I have introduced legislation to implement several of these 
options. My bill, the Milk Price Discovery Improvement Act (S. 258) 
requires USDA to begin consistent weekly reporting of cheese prices for 
off-Exchange transactions, requires USDA to eliminate the direct link 
between the milk prices and the National Cheese Exchange or its 
replacement market, requires increased USDA oversight of any cash 
markets that affect milk prices under Federal Milk Marketing Orders, 
and requires USDA to explore additional ways of improving price 
discovery such as encouraging increased trading volume in futures 
market.
    I am extremely pleased that Secretary Glickman has taken steps to 
implement a number of the provisions in my bill without a Congressional 
mandate.
    In fact, this week marks the first week of USDA's weekly reporting 
of cheese prices for off-Exchange transactions--something I first 
proposed in June 1996 as part of Senator Daschle's Cattle Industry 
Improvement Act and which I later urged Secretary Glickman to implement 
using existing administrative authority.
    The success of this new price series as a reliable source of price 
discovery depends upon the cooperation of cheese manufacturers and 
processors reporting prices, as well as upon the integrity of those 
reported prices. It will take the agency some time to determine whether 
or not this has been achieved. However, it is an excellent start toward 
improving price discovery. If the Department believes that accurate and 
statistically reliable price collection can only be achieved through 
mandatory data collection, I urge the Secretary to notify Congress as 
soon as they make that determination.
    Secretary Glickman has also taken the first step toward delinking 
the price of the Exchange from the Basic Formula Price by taking public 
comments on whether that link should be broken. An additional question 
facing the Department is whether or not they should find an alternative 
price to replace the role of the Exchange in the BFP. I urge the 
Department not to rush to judgment on a new indicator of cheese price 
value in this formula. If necessary, the Department should consider in 
the short run, not replacing the adjustment component of the BFP.
    Senator Kohl and I have also been working to encourage the 
development of new cash cheese markets that would have sufficient 
protections against intentional manipulation of prices and which might 
garner greater federal oversight. Specifically we have talked with the 
Coffee, Sugar and Cocoa Exchange to understand how they might structure 
a sound and efficient cash market for cheese.
    I understand that the cheese processing industry has also 
aggressively sought new markets by soliciting bids from major commodity 
exchanges for the creation of a new cheese trading mechanism. It has 
been suggested that the Exchange may cease operation in Wisconsin on 
May 1st due to the scrutiny it has been under and because of potential 
increased regulation by the State of Wisconsin. Efforts by private 
industry to establish an alternative market are apparently in response 
to that likely outcome.
    I caution members of this Committee and the USDA to avoid the 
temptation to prematurely substitute prices from a new market for the 
Cheese Exchange in the BFP before it can be shown that the market is 
reliable and free from manipulation. We must not attempt to solve the 
problem of the National Cheese Exchange's influence on milk prices by 
merely creating a new problem. If the Cheese Exchange is merely 
recreated under a different name, we will have accomplished nothing.
    It continues to be absolutely critical that any market mechanism 
that can so severely impact regulated milk prices, directly or 
indirectly, is overseen and regulated by those federal and state 
entities with the expertise to do so. My legislation gives USDA 
authority to prohibit anticompetitive activities on cash markets that 
affect milk prices. This authority is similar to that which the agency 
has over livestock auction markets under the Packers and Stockyards 
Act. So long as regulated prices are affected by private markets, USDA 
has a fundamental responsibility to exercise oversight. I have also 
cosponsored legislation offered by the senior Senator from Wisconsin 
which increases the Commodity Futures Trading Commission role in 
overseeing certain cash markets.
    Ultimately, we must address the fundamental problems of the lack of 
adequate price discovery in the dairy industry by continuing to 
approach this problem from every angle possible. USDA can and should 
break the direct link between the National Cheese Exchange and milk 
prices. Congress can and should increase regulation and oversight of 
markets that indirectly affect milk prices under Federal Orders to 
ensure that farmers' prices are not being manipulated. But neither the 
Congress nor the Federal government can prohibit the dairy industry 
from relying on poor pricing mechanisms. We must continue to work to 
create more and better price information to provide more pricing 
options for the industry and to ensure dairy farmers that their milk 
prices cannot be manipulated.
    Senator Kohl and I, as well as others in the Wisconsin 
Congressional delegation have been working very hard on these problems 
for some time. We welcome the interest and the participation of this 
Committee and other Senators in ensuring that dairy farmers are no 
longer held hostage to a market which cannot be relied on to return a 
fair price to farmers.
                                 ______
                                 

Feingold Testifies on National Cheese Exchange in First Senate Hearing 
                                on Issue

    WASHINGTON, D.C.--U.S. Senator Russ Feingold testified before the 
U.S. Senate Appropriations Subcommittee on Agriculture today on the 
need for a meaningful solution to the problems posed by the National 
Cheese Exchange (NCE). This is the first U.S. Senate hearing focused on 
the role of the NCE.
    Senator Feingold used the opportunity to inform his colleagues 
about the problems the Cheese Exchange imposes on farmers in Wisconsin, 
and nationally, and to caution them against the pit-fall of an easy fix 
that simply delinks the NCE from USDA's milk price formula. Feingold 
advocated a more comprehensive approach addressing the pervasive 
influence the Exchange has on milk prices.
    ``Wisconsin farmers know the crux of the problem is that the 
structure of the Cheese Exchange makes it easy for someone to 
manipulate prices and the role of the Exchange in setting milk prices 
creates an incentive to do so. That is why I have introduced a 
comprehensive bill which will not only delinks the Cheese Exchange from 
the Basic Formula Price, but also creates alternative sources for price 
information and increases USDA oversight over markets that influence 
milk prices,'' said Feingold, referring to S. 258, which was introduced 
on February 4, 1997.
    The hearing is the latest in a series of developments in the dairy 
industry. Last Friday, the USDA released options for reform of milk 
marketing orders addressing inequities suffered by mid-west producers. 
Comments on these recommendations will be accepted until June 1. The 
final USDA proposal is due by the end of the year.

          Alternative Price for Cheese Free From Manipulation

    Senator Cochran. Senator Kohl, this is a great opportunity 
for you to put a tough question to your colleague, if you want 
to take advantage of it.
    Senator Kohl. Well, as Senator Feingold indicated, he and I 
are in basic agreement on the dimensions of this problem, and 
on some of the things that need to be done. I am not going to 
ask him again to say the extent to which he and I agree. He has 
said it three or four times. But I am delighted that he is 
here. I have enjoyed working with him, and he is very 
constructive in his suggestions, and he is most diligent in his 
effort to get this matter resolved.
    Because what happens to dairy in Wisconsin is of great 
significance. The dairy industry is our biggest industry, and 
it is something about which we in Wisconsin are all very 
sensitive, very concerned, and I appreciate the opportunity to 
work with Senator Feingold, and I think we are going to get 
something done.
    Senator Cochran. Thank you. Senator Specter.
    Senator Specter. Secretary Glickman is here, so I will just 
ask two very brief questions. Senator Feingold, you say an 
alternative price should not be established for cheese unless 
we know the market is free from manipulation, but if we could 
establish an alternative price for cheese free from 
manipulation, would you see any reason for delaying doing that?
    Senator Feingold. No; if we can be assured that there might 
be an alternative market at the Coffee, Sugar, and Cocoa 
Exchange, or perhaps the Chicago Mercantile Exchange that 
cannot be easily manipulated. If we knew we had the power 
through the Federal regulators to prohibit anticompetitive 
practices at an alternative market, then I think that is 
something we want to move to. But we need to get those kinds of 
assurances, and the legislation has to be in place to empower 
the Federal Government to do that.
    To just simply create it and merely reproduce the problems 
of the National Cheese Exchange that have occurred so far, I 
think, would be a mistake.
    Senator Specter. How about a survey by the Secretary across 
the country establishing what the market is, which may be 
different from the Green Bay Cheese Exchange?
    Senator Feingold. I believe the Secretary is already moving 
in that direction. I asked him last fall to start gathering 
cheese price information for off-exchange transactions, and he 
started to do it on a monthly basis. I believe he has now moved 
to a weekly basis. I hope I am not speaking out of school on 
that, but I believe that is something that is beginning this 
week.
    I feel the Secretary is very concerned and responsive to 
exactly what you have just said, the need to look at all the 
possible information that we have so that we do not continue to 
have our current problems, which is a cheese exchange that 
really is involved with 1 or 2 percent of the cheddar cheese in 
the country, and that does not really reflect the broad scope 
of cheese transactions in the country.
    Senator Specter. Well, he has been working at that. The 
concern that I have and that my Pennsylvania farmers have is 
the delay which has occurred.
    Mr. Tewksbury just commented to me that it has been 3 
months since the first meeting with the Secretary, so we want 
to see if we can establish the alternative.

                       Establishing a Price Floor

    Let me ask you one other subject matter very briefly, and 
that is, a number of Senators, as I understand it, led by 
Senator Breaux, wrote to Secretary Glickman asking him to 
establish a price floor of $13 per hundredweight, and I have 
written to the same effect on a temporary action because the 
farmers are in such dire straits. What would your sense of that 
be?
    Senator Feingold. Well, I think the Secretary is in the 
process of looking at a number of options with respect to milk 
prices. Basic milk pricing reform, which I think is broader 
than the scope of this hearing is something USDA is in the 
process of proposing. The Secretary just issued potentially six 
different alternative reform options that he is looking at with 
regard to the Milk Marketing Order system. Flooring the basic 
formula price is one issue that has come up.
    I have indicated that I think he ought to look at all 
different options, including the possibility that you have just 
mentioned, but I really think this should be done in the 
process of the comment period, listening to dairy farmers. A 
lot of my farmers would tell you that $13 is not enough. That 
is not adequate. The figure that has been bandied about in 
Wisconsin is $14 or higher.
    Senator Specter. Well, we can always listen to a 
counterproposal, but that is better than what we have now. Do 
your farmers have a sense of immediacy about getting something 
done now because of the crunch on rising prices and falling 
milk prices, the rising cost of production and falling milk 
prices?
    Senator Feingold. In the 14 years that I have been either a 
State senator or a U.S. Senator working on agricultural issues 
I have never seen a greater sense of immediacy, and that is why 
all of us and our Governor met with the Secretary of 
Agriculture recently with a number of our dairy farmers.
    The decline that occurred in prices in November and 
December was a real jolt. Senator Kohl and I had raised issues 
about the cheese exchange last July in Madison. We indicated 
that if we did not do something about this, something like this 
might happen, and it did happen, and the reaction in Wisconsin 
to the sharp decline from about $15 per hundredweight down to a 
little over $11 per hundredweight in just a few weeks was a 
very jarring experience not just for our farmers but for 
everyone in the State.
    So there is a feeling of tremendous urgency, and that is 
why I believe the Secretary should move as fast as he can to 
delink the Cheese Exchange from milk prices and assist in 
identifying alternative markets, and in passing legislation 
that will guarantee that we do not just end up with the same 
problems. We should have the Federal ability to regulate that 
which obviously needs to be regulated.
    Senator Specter. Thank you very much, Senator Feingold.
    Senator Cochran. Thank you, Senator. Thank you, Senator 
Feingold.
    Senator Feingold. Thank you, Mr. Chairman.
                       DEPARTMENT OF AGRICULTURE

STATEMENT OF HON. DAN GLICKMAN, SECRETARY OF 
            AGRICULTURE
ACCOMPANIED BY:
        MIKE DUNN, ASSISTANT SECRETARY, MARKETING AND REGULATORY 
            PROGRAMS
        KEITH COLLINS, CHIEF ECONOMIST

                        Introduction of Witness

    Senator Cochran. The Secretary of Agriculture has kindly 
agreed to appear at our hearing today. We want to welcome the 
Hon. Dan Glickman, Secretary of Agriculture. Just recently he 
was before the committee discussing the President's budget 
request for the next fiscal year, and it was during that 
testimony that Senator Specter requested that we have a special 
hearing of the committee on the subject of dairy pricing.
    We are very happy that the Secretary could arrange his 
schedule to be with us today. Mr. Secretary, welcome to the 
committee. Thank you very much for your cooperation in this 
effort. You may proceed.

                    Statement of Secretary Glickman

    Secretary Glickman. Thank you, Senator Cochran, Mr. 
Chairman, Senator Kohl, Senator Specter, Senator Santorum.
    I bring with me today two folks who have been with me 
before on occasion, or at least separately before the 
committee, Keith Collins, who is our chief economist, and Mike 
Dunn, who is the Assistant Secretary for marketing and 
regulatory programs, and they have followed this subject very, 
very carefully over the years.
    Now, first of all, I think this is an important hearing. It 
has obviously gotten a great deal of interest, and we have a 
great deal of interest in the Department about this hearing, 
and you have a good diversity of witnesses afterward.
    I want to thank Senators Kohl and Leahy, Specter, Feingold, 
Santorum, Jeffords, and all the others, including yourself, Mr. 
Chairman, for your interest in this issue and the volatility of 
dairy prices.
    I have an oral statement which I would like to read, and 
then there is a longer written statement which I would like to 
include in the record.
    I would like to begin with a brief description of recent 
events in milk markets, then I would like to discuss how the 
Department uses the National Cheese Exchange prices in 
administering its Federal milk marketing order program, and 
then finally review--and I think this was the purpose Senator 
Specter asked originally for the hearing--review the actions we 
have taken to address concerns about National Cheese Exchange 
prices and what we might do in the future.
    First of all, the current dairy situation. A series of 
unusual events combined to make 1996 a year dairy farmers will 
long remember and perhaps would like to forget.
    Producers faced record high feed costs, high forage prices, 
low forage quality, and low cull cow and calf prices.
    Milk prices were record high but were also extremely 
volatile last year. During late spring and summer, milk prices 
rose as milk production declined, and dairy product prices 
reached record high levels.
    Suddenly, as milk production began to recover and 
commercial stocks of dairy products exceeded year earlier 
levels, dairy product prices plummeted, causing the basic 
formula price to drop by over $4 per hundredweight in just 3 
months, September to December.
    On January 7, I announced a series of actions to help 
stabilize farm milk prices, including (1) purchasing additional 
cheese for use in the domestic food assistance programs, (2) 
working to increase the flow of dairy products into our 
international food assistance programs, (3) stepping up 
activity under the dairy export incentive program, and (4) 
conducting a national survey of cheddar cheese prices in 
response to concerns about the accuracy of reported prices.
    We also later on increased our purchases under the 
commodity supplemental food program, which is a program for 
seniors and low-income folks that we provide commodities for, 
and total cheese purchases this year by the Department are up 
considerably, about 40 percent. So there is an effort to try to 
deal with the problem on the demand side, and we believe these 
actions have been helpful and the price picture is improving.
    Since December, the basic formula price increased by over 
$1 per hundredweight and is now very near last year's level. 
Our analysts expect the all-milk price to strengthen throughout 
the year and average $13.75 per hundredweight for all of 1997, 
despite the lower prices at the start of the year, so we will 
see, I think, without being overly Pollyannish about it, 
improved milk prices for the rest of the year both in terms of 
the various classes, and that will be reflected in the basic 
formula price. As I said, it is up about $1 since the low.
    The use of National Cheese Exchange prices in Federal 
orders is obviously key to our concern and yours as well. Under 
Federal milk marketing orders, which regulate the marketing of 
about 70 percent of the milk produced in the United States, the 
minimum price a processor or handler must pay for milk varies 
with how the milk is used.
    Milk used in manufacturing hard products such as cheese is 
referred to as class III. Generally, the class II price in each 
order equals the class III price plus about 30 cents a 
hundredweight, while the class I price equals the class III 
price plus a differential that varies by location, and this is 
the issue that Senator Kohl and others have raised so often. 
This differential has caused some people to believe that there 
is an unfairness in the pricing system and is something we are 
looking at right now.
    Prior to May 1995, or less than 2 years ago, the Minnesota-
Wisconsin price series--it is called the M-W price--was used to 
establish the minimum class III price under Federal orders. 
That is the milk price used for cheese and other hard products.
    The M-W price depended on two factors: (1) the average 
price paid by about 170 plants for manufacturing grade or Grade 
B milk in Minnesota and Wisconsin during the previous month, 
and (2) an estimate of the change in the price from the 
previous month to the current month.
    Over time, statisticians at USDA became increasingly 
concerned that not enough data was available to reliably 
estimate the change in price from the previous month, the 
second part of that calculation.
    By early 1995, just 61 manufacturing plants, or about one-
third of those that we expected to participate, were being used 
to estimate the price change from the previous month.
    Following a national hearing and formal rulemaking, USDA 
replaced the M-W--Minnesota-Wisconsin price--with the BFP, or 
basic formula price, which we use now.
    The BFP starts with the same base month, M-W price survey, 
but updates that survey using changes in wholesale dairy 
product prices. In updating the M-W price to the current month, 
the change in the price of cheese on the National Cheese 
Exchange receives about 90 percent weight, and the change in 
butter and nonfat dry milk prices receive about 10 percent 
weight, and Mr. Collins can explain why that is the way it is, 
but I think there is no question that the price of cheese on 
the cheese exchange has a considerable amount to do with what 
the basic formula price actually becomes.
    The National Cheese Exchange is often described as a thin 
market. That is, the volume traded on the exchange is very 
small relative to total cheese sales. Thin markets generally 
raise questions about their ability to accurately reflect 
supply and demand conditions in a market, and the potential for 
manipulation.
    This has led to concerns that the use of the National 
Cheese Exchange prices in determination of the basic formula 
prices could adversely and perhaps unintentionally affect 
producers through lower minimum prices under the orders, and 
through increased price volatility.
    To determine whether the basic formula price, which has the 
NCE component, is accurately reflecting the volume of milk, we 
have tracked the BFP and the old M-W pricing system. Averaged 
over the 21-month period from May 1995 through January 1997, 
the BFP and the M-W price have been almost exactly equal. 
However, during the last quarter of 1996, the time of the great 
fall, a period of rapidly declining milk prices, the BFP, the 
basic formula price, averaged 32 cents per hundredweight lower 
than the M-W price, so there was some difference during that 3 
months, as I said, about 32 cents per hundredweight.
    This divergence does raise the question whether the BFP is 
overly sensitive to changes in the National Cheese Exchange 
prices. At this time, we are in the process of determining 
whether there exists an alternative to NCE prices for 
administering Federal milk marketing orders, and we are engaged 
in a dialog with the dairy industry to examine alternatives and 
develop additional markets for cheese.
    The Department is seeking public comment until about 2 
weeks from now on whether there exists an alternative to 
National Cheese Exchange prices in establishing the basic 
formula price. Based on the comments received and other 
information available, USDA will determine whether to replace 
National Cheese Exchange prices in establishing the BFP.
    We are also reviewing the basic formula price as part of 
the 1996 farm bill's mandate to consolidate and reform orders, 
and as Senator Feingold said, just last week, I issued a series 
of options on how we might do that in terms of the pricing 
mechanism, and we anticipate releasing a report on the BFP 
shortly after the March 31 date.
    On January 7, I announced that USDA would conduct a 
national survey of cheese prices. I am happy to announce that 
this week our National Agricultural Statistics Service has 
started a weekly survey of cheddar cheese prices, and I would 
tell you in all honesty that I think your involvement has 
helped move that thing along faster.
    We are encouraging all cheese plants to participate in the 
survey, and are working with interested parties to ensure that 
the data collected are accurate, timely, reliable, and of value 
to the dairy industry. It is too early to determine if this is 
the appropriate candidate for pricing cheese, in the basic 
formula price as an NCE replacement. We are testing it to see 
if it is a good candidate.
    This will depend on the level of participation. Right now, 
this is a voluntary-based effort, and we will see whether that 
volunteerism works to get the reporting that we need. If it 
does not, we may have to come back and ask you for the 
authority to require the participation, but right now we are 
seeing if the voluntary effort does work. We are encouraging 
all cheese plants to participate in the survey, and are working 
with interested parties to assure that the data collected are 
accurate.
    Both the Chicago Mercantile Exchange and the Coffee, Sugar, 
and Cocoa Exchange are exploring the possibility of starting a 
cash market for cheddar cheese. We are committed to working 
with the exchanges and the dairy industry to further develop 
such markets to the benefit of producers and processors.
    In conclusion, let me just say that we, along with you, 
have followed closely the concerns expressed originally by 
Senators Kohl and Feingold and more recently during my trip up 
to Pennsylvania with Senator Specter, concerns over NCE prices 
and their use in pricing under Federal milk marketing orders.
    As I have said, our study has indicated that there is a 
slight but perceptible difference between the pricing mechanism 
under the BFP, which uses the cheese exchange, and the way we 
would have calculated it under the old M-W system. Basically 
they track each other, except the last 3 months of the year the 
BFP was somewhat lower, about 32 cents a hundredweight lower, 
on average.
    So this concerns us. It is some evidence that this is not 
the process that we would want to have certainly in the future, 
but we need to develop the evidence. We welcome any evidence 
that will help promote reform and contribute to opportunities 
for growth and stability for our Nation's dairy producers.
    So I would say that completes my testimony, Mr. Chairman, 
and I have my two experts with me that will try to work 
together with you in trying to resolve this problem.

                           Prepared Statement

    Senator Cochran. Thank you very much, Mr. Secretary. We 
appreciate very much your cooperation with our committee. Your 
complete statement will be made part of the record.
    [The statement follows:]
                   Prepared Statement of Dan Glickman
    Mr. Chairman and members of the Subcommittee, I welcome the 
opportunity to discuss the current dairy situation and related policy 
issues.
    I would like to begin with background on the current situation in 
milk markets and the role of minimum pricing under Federal milk 
marketing orders. Then I will discuss how the U.S. Department of 
Agriculture (USDA) uses National Cheese Exchange (NCE) prices in 
administering its Federal milk marketing order program. Finally, I will 
review USDA's actions to date to address concerns about NCE prices.
                 the current market situation for milk
    The all-milk price averaged a record $14.74 per cwt. in 1996, up $2 
per cwt. from the previous year and exceeded the previous annual record 
by about $1 per cwt (figure 1). However, this average masks the unusual 
volatility in milk prices during 1996. During the first 3 quarters of 
1996, milk prices averaged well above previous-year levels but declined 
sharply during the fourth quarter.
    The Basic Formula Price (BFP), which USDA uses to establish minimum 
prices handlers must pay for milk according to use under Federal milk 
marketing orders, dropped from a record $15.37 per cwt. in September to 
$11.34 in December. In addition to this sharp decline in milk prices, 
dairy producers had to cope with record high feed costs, high forage 
prices, low forage quality and low cull cow and calf prices this past 
year.
    The variability in farm-level milk prices in 1996 reflected 
movements in wholesale dairy product prices. During late spring and 
summer, wholesale dairy product prices surged to record highs, as milk 
production declined 2-3 percent some months from 1995 levels. However, 
as milk production began to recover and commercial stocks of dairy 
products greatly exceeded year-earlier levels by the fall, wholesale 
dairy product prices started to plummet. From early October to mid-
December, the price of 40-pound blocks of cheddar cheese on the NCE 
fell 30 percent from its record high. The price of Grade A butter on 
the Chicago Mercantile Exchange (CME) dropped 56 percent from early 
October to mid-November.
    On January 7, 1997, I announced that USDA would take a series of 
actions to help strengthen farm-level milk prices. Those actions 
included:
  --purchasing an additional $5 million of cheese for use in domestic 
        food assistance programs in addition to the accelerated school 
        lunch purchases already underway;
  --working with private voluntary groups to increase the flow of dairy 
        products into international food assistance programs;
  --reactivating the Dairy Export Incentive Program (DEIP) for 
        butterfat, which had been idle since mid-1995, coupled with 
        stepped-up DEIP sales for non-fat dry milk to stimulate exports 
        of dairy products; and
  --conducting a national survey of cheddar cheese prices in response 
        to concerns about the accuracy of reported prices.
    Since this announcement, both dairy product and farm-level milk 
prices have rebounded considerably. The wholesale price of butter is up 
64 percent from its late 1996 low, and the wholesale price of cheddar 
cheese is up 12 percent from its low, despite continued large cheese 
inventories. These wholesale price increases have raised milk prices. 
Since December, the BFP has increased by $1.12 per cwt., reaching 
$12.46 in February. Compared with one year ago, the BFP for February is 
down $0.13 per cwt., and the preliminary all-milk price for February of 
$13.30 is down $0.50 per cwt.
    In 1997, USDA expects milk production to increase less than 1 
percent. Milk production per cow will increase while cow numbers will 
continue their long-term decline. USDA expects milk production to 
decline about 1 percent during the first quarter but increase about 1 
percent the remainder of the year, reflecting improved pasture 
conditions and lower grain and forage prices.
    The modest increase in milk production is expected to contribute to 
a steady improvement in milk prices over the course of the year, with 
the all-milk price averaging in the low-to-mid $13 per cwt. range 
during the first half of 1997 and slightly above $14 during the second 
half. For all of calendar 1997, the all-milk price is projected to 
average $13.75 per cwt., $0.83 above the 1990-95 average.
         role of federal milk marketing orders in pricing milk
    Federal milk marketing orders regulate the marketing of only Grade 
A milk and in only certain areas of the country. Presently, there are 
32 Federal milk marketing orders covering about 70 percent of the milk 
produced in the United States. Before an order can go into effect in a 
particular area, two-thirds of the dairy farmers voting in a referendum 
must approve it.
    Under all Federal milk marketing orders, milk is classified 
according to its use which determines the minimum price a processor or 
handler must pay for milk. Milk used in fluid milk products is referred 
to as Class I and is assigned the highest minimum price. Milk used in 
soft dairy products, such as ice cream and yogurt, is classified as 
Class II; and milk used in hard, storable products, such as cheese, 
butter and nonfat dry milk, is classified as Class III and is assigned 
the lowest minimum price.
    Minimum Class II and Class III prices are essentially uniform 
nationally, while minimum Class I prices under Federal orders vary 
geographically. This difference in pricing structure between Class I 
and the other classes of milk reflects the added cost of moving milk in 
fluid form from surplus to deficit areas. Generally, the Class II price 
in each order equals the Class III price plus $0.30 per cwt., while the 
Class I price equals the Class III price plus a differential that 
varies by location. Producers in each order receive a blend price for 
their milk--the weighted average of the prices and uses of all milk 
within the order.
                the use of nce prices in federal orders
    Prior to May 1995, the Minnesota-Wisconsin (M-W) price series was 
used to establish the minimum Class III price under Federal orders. The 
M-W price for a given month depended on two factors: (1) the average 
price paid by about 170 plants for manufacturing grade (Grade B) milk 
in Minnesota and Wisconsin for the previous or base month and (2) an 
estimate of the change in the price from the base month to the current 
month. The estimated price change from the base to the current month 
was based on a very small sample of plants that paid dairy producers 
twice a month. The prices paid producers for the first half of the 
month were the primary basis for the estimated change in the M-W price 
from the base month. By early 1995, USDA was using price information 
from just 61 manufacturing plants to estimate the price change from the 
base month to the current month.
    Because of concerns expressed within the dairy industry about the 
representativeness and applicability of the M-W price series, USDA held 
a national hearing to consider a replacement for the M-W price series, 
and, based on the hearing record, replaced the M-W price with the BFP. 
The BFP starts with the same base month M-W survey price from Grade B 
manufacturing plants but updates that survey information to the current 
month using information on monthly changes in wholesale prices of 
butter, cheese and nonfat dry milk. In updating the M-W price to the 
current month, the change in the price of cheese from the base to the 
current month on the NCE receives about 90 percent weight and the 
change in butter and nonfat dry milk prices, as reflected in the prices 
of Grade AA butter on the CME and West Coast f.o.b. low/medium heat 
nonfat dry milk, respectively, receive about 10 percent. Those weights 
reflect product yields from 100 pounds of milk and the relative amount 
of milk used in the production of each product.
    NCE prices are also used in 10 Federal orders with component 
pricing provisions. In those orders, cheese prices determine the value 
of protein in milk. The purpose of component pricing is to allocate 
receipts in each Federal order pool according to the composition of 
each producer's milk. Component pricing does not change total producer 
receipts in an order, only the distribution of receipts among producers 
in an order. The effect, for example, of lower cheese prices is to 
reduce protein prices to producers. However, component pricing formulas 
also include a residual value component which equals the BFP minus the 
value of fat and protein in producer milk. This means that an over-
estimate of the protein value would lead a corresponding decrease in 
the residual value component, resulting in no change in the total value 
of producer milk that is pooled in the Federal order. Likewise, an 
underestimate of the protein value would lead to a higher residual 
component.
             usda concerns regarding the bfp and nce prices
    Although USDA does not have any oversight authority, either under 
the Agricultural Marketing Agreement Act of 1937 or the Capper-Volstead 
Act, for trading activities on the NCE, we are very interested in NCE 
prices because of their use in Federal milk marketing orders and by the 
dairy industry to price cheese. The cheese industry relies on NCE 
prices for pricing cheese marketed in the United States. An estimated 
90-95 percent of bulk cheese is sold on a committed basis with the 
price tied to NCE prices. In addition, when the USDA held formal 
hearings to consider a replacement for the M-W price series, the 
hearing record strongly supported using NCE prices in determining the 
value of bulk cheese. However, the NCE is a ``thin'' market, that is, 
the volume traded on the exchange is very small relative to total 
cheese sales. Thin markets generally raise questions about their 
ability to accurately reflect supply and demand conditions in a market 
and the potential for manipulation. This leads to concerns that the use 
of NCE prices in determination of the BFP could adversely, and 
unintentionally, affect producers through lower minimum prices under 
the orders and through increased price volatility.
    To determine whether the BFP is the functional equivalent of the M-
W price, we have tracked the base month M-W price and the BFP for the 
same month since May 1995 (figure 2). Over the 21-month period from May 
1995 through January 1997, the BFP exceeded the base month M-W price in 
11 months by an average of $0.13 per cwt. The BFP fell below the base 
month M-W price in 9 months by an average of $0.19 per cwt. The base 
month M-W price has averaged $12.79 and the BFP has averaged $12.78 per 
cwt., or just $0.01 per cwt. lower since May 1995. Thus, it would 
appear that use of NCE prices to update the base month price M-W has 
not resulted in any apparent long-term distortion in minimum Federal 
order prices to producers.
    We are also concerned that NCE prices may be causing minimum order 
prices to become more volatile. The BFP has generally exceeded the base 
month M-W price during the spring and summer months but has been 
significantly below the base month M-W price during the last quarter of 
the year. During the last quarter of 1996--a period of rapidly 
declining milk prices--the BFP averaged $0.32 per cwt. below the base 
month M-W price. This divergence between the BFP and the base month M-W 
price during this period raises the question whether the BFP is overly 
sensitive to changes in NCE prices.
    The use of NCE prices in the determination of the BFP emerged as a 
broad concern following publication of a University of Wisconsin study, 
which concluded that the NCE was not an effective competitive price 
discovery mechanism during 1988-93 and the NCE appears to facilitate 
manipulation of cheese prices. The study led to a Congressional hearing 
in May 1996 and the creation of a Task Force on Cheese Pricing by 
Wisconsin Governor Thompson. The Governor's Task Force recommended in 
January 1997 that USDA no longer use the NCE price in determining the 
BFP.
    Subsequently, bills were introduced in Congress that would require 
the Commodity Futures Trading Commission (CFTC) to regulate the NCE or 
require USDA to eliminate its use of NCE price data in setting the BFP. 
The Senate passed a sense of the Senate resolution asking USDA to 
consider replacing the NCE price in the BFP as soon as possible.
    More recently, CFTC approved a cash settled futures contract for 
fluid milk that uses the BFP as the settlement price. In so doing, the 
CFTC issued a report indicating that price manipulation or distortion 
on the NCE was not of sufficient concern to disapprove the new 
contract. At this point, we believe the best approach is to work in 
partnership with the dairy industry to develop a price series that the 
industry has confidence in and that will not disrupt the conduct of 
business among producers, processors and retailers.
                              usda actions
    At this time, we are trying to determine whether there exists an 
alternative to NCE prices for administering Federal milk marketing 
orders, and we are engaged in a dialogue with the dairy industry to 
examine alternatives and develop additional markets for cheese. On 
January 29, USDA announced that it would seek public comment on whether 
NCE price data should be used in the determination of the BFP. Comments 
must be postmarked by March 31, 1997. Based on the comments received 
and other information available, USDA will determine whether to replace 
NCE prices in establishing the BFP. If USDA determines that the NCE 
price is no longer functioning as intended, ``price equivalency 
provisions'' in Federal order regulations permit an alternative cheese 
price series to be substituted for the NCE price.
    USDA would also like to provide additional data on cheese prices to 
augment NCE price information. USDA's National Agricultural Statistics 
Service (NASS) has initiated a national survey of weekly cheddar cheese 
prices. This voluntary survey begins this week. USDA is encouraging all 
cheese plants to participate in the survey and is working with 
interested parties to ensure that the data collected are accurate, 
reliable, timely and of value to the dairy industry. As with any new 
survey, a period of time will be needed to validate its accuracy and 
reliability before we can begin publishing the data and expect it to be 
accepted by the dairy industry.
    A common criticism of existing cash and futures markets for milk 
and dairy products is their thinness or lack of volume. Currently, the 
Coffee, Sugar and Cocoa Exchange (CSCE) trades futures in cheddar 
cheese, nonfat dry milk, fluid milk and butter, and the CME trades 
futures in fluid milk and butter, all of which have limited volume. The 
CSCE recently announced a futures contract for fluid milk that is cash 
settled using the BFP. Both the CME and CSCE are exploring the 
possibility of starting a cash market for cheddar cheese. USDA is 
committed to working with the Exchanges and the dairy industry to 
further develop such markets to the benefit of producers and 
processors.
    The announced action to seek public comment on the use of NCE price 
data in determination of the BFP is in addition to the longer term 
process currently underway in USDA to consolidate and reform Federal 
milk marketing orders by April 1999. USDA will continue to review the 
BFP as part of Congress' mandate in the 1996 Farm Bill to consolidate 
and reform orders. Last Friday, USDA released several reports 
addressing options for milk order reform, including long-term pricing 
issues. We anticipate releasing an additional report on the BFP in the 
very near term.
    In conclusion, USDA has followed closely the concerns over NCE 
prices and their use in pricing under Federal milk marketing orders. We 
recognize the significant and valuable contribution of the nation's 
dairy farmers to U.S. agriculture and to the overall economy. Last 
year, the nation's dairy farmers accounted for over $22 billion in farm 
receipts and over 10 percent of total farm sales. Changing the Federal 
order pricing system could have broad and substantial consequences for 
producers and processors. That is why USDA is now in the process of a 
thorough evaluation of alternatives and positive reform measures for 
Federal milk marketing orders. We welcome any evidence that will help 
promote reform and contribute to opportunities for growth and stability 
for our nation's dairy producers.
    Mr. Chairman, this completes my testimony and I'll be happy to 
answer any questions.

[GRAPHIC] [TIFF OMITTED] T01MA13.001

[GRAPHIC] [TIFF OMITTED] T01MA13.002

                          Seasonal-Base Plans

    Senator Cochran. In my opening statement, I mentioned that 
it is very important in the South that we understand the 
importance of milk marketing order seasonal-base plans as an 
integral part of the mechanism to encourage milk producers to 
average their seasonal milk production over the year.
    There is nothing in this plan, is there, that would have 
these as mutually exclusive ways of establishing prices, 
particularly in view of the fact that we have had experience 
with this program which previously has been authorized? We 
understand that the plans were not included in the FAIR Act, 
but there is some testimony that we will receive today on this 
subject, and we hope you will carefully consider those views 
and will address them in your testimony today.
    Secretary Glickman. We will. Perhaps Mr. Dunn may want to 
comment, but we have supported efforts to make some legislative 
changes on the seasonal basis issue.
    Senator Cochran. You may proceed.
    Mr. Dunn. Mr. Chairman, we are, in fact, in favor of 
seasonal-based pricing.
    Senator Bumpers. Would you pull the microphone closer?
    Mr. Dunn. We are, in fact, in favor of the seasonal-based 
pricing, Mr. Chairman, and we did push for it in the FAIR Act. 
Time simply ran out on us, and we will work very closely with 
Congress to ensure that we get that back in.
    Senator Cochran. Thank you very much.
    Senator Specter. We do have other Senators who want to 
question witnesses, so we will start off with a 10-minute time 
limit, and then we can come back to Senators who want to 
question witnesses further if that is satisfactory. Is there 
any problem with that?
    [No response.]
    Senator Cochran. Senator Specter.
    Senator Specter. Thank you very much, Mr. Chairman.
    Mr. Secretary, again I thank you for going to northeastern 
Pennsylvania and for the special attention you are paying to 
this issue.
    When you say that you have started the weekly survey of 
cheese prices, when do you expect that you would have responses 
from that survey so that you might establish a different cost 
of cheese from the Green Bay Exchange price which, in turn, 
might raise the price per hundredweight of milk?
    Secretary Glickman. I will ask Mr. Collins to respond.
    Mr. Collins. Senator Specter, we are receiving 
questionnaires this week. The first collection date will be the 
price for the first week of March, the week that ended this 
past weekend. The questionnaires have been coming in Tuesday 
and Wednesday and today.
    Senator Specter. So you have already had some come in?
    Mr. Collins. Yes, we have.
    Senator Specter. What are the initial results?
    Mr. Collins. I have not looked at the questionnaires. They 
are being compiled by our statisticians, so I do not know what 
they show, but I can tell you what we did.
    Senator Specter. Well, I only have 10 minutes. I want to 
know what they show. When do you think you will have an idea as 
to what the results are so we might expect a change in the 
price of milk?
    Mr. Collins. I do not think you can expect anything for a 
couple of months. We do not start any data collection effort 
like that, a national data collection effort, based on a 
probability sample and then report those results immediately. 
We go through several weeks of testing, so it is going to be a 
while before we make anything public.
    Senator Specter. Well, several weeks will be different than 
several months. What I would like to know, Mr. Secretary, is 
when is the earliest we might expect to know what those results 
are so we can see if there will be a change in price?
    Secretary Glickman. I am going to give you a nonscientific 
rule of thumb here. I would say in about 6 weeks we will know 
whether the questionnaires are producing the volume of 
information necessary to determine whether we are getting the 
data that we need to make that judgment, so the problem, 
Senator Specter, is that if we do not get the full 
participation from people in the industry the survey is not 
going to produce the value that we need to have it produce to 
change the price, so that is why we have to do the outreach and 
work it and get people, some of whom are here in this room, to 
come forth and give us the information.
    Senator Specter. So if you do not receive it on a voluntary 
basis, then you are going to need legislation to compel people 
to give you the answer?
    Secretary Glickman. I would say the answer to that is yes. 
I do not think we have the legal authority to compel.
    Senator Specter. Well, then, would it be helpful to you if 
we initiated that legislative process as a fallback position so 
that we do not have to start it--I know the answer to that is 
yes. We will start the legislative process going so that we 
have it as a fallback.
    Mr. Secretary, on the question of, I note a difference 
between the BFP, basic price formula, and the M-W, the 
Minnesota-Wisconsin. You say there already has been a 
noticeable difference of 32 cents per hundredweight. Does that 
indicate to you that the existing pricing mechanism is, in 
fact, efficient?
    Secretary Glickman. I am trying to look at the chart here.
    Senator Specter. I thought that is what you had suggested 
in your testimony.
    Secretary Glickman. The interesting thing is, if you look 
at the charts, 32 cents is a somewhat significant difference. 
If you track it over the last 2 years the prices almost track 
each other identically.
    There was a period in November and December 1995 and 
January 1996, when the M-W price exceeded the BFP, and then 
there was a period in 1996 when the BFP exceeded the M-W price 
by a few cents, but certainly during the fall of 1996 the 
reverse occurred.
    I am not sure why this happened, but I bring it to your 
attention that there is a 32-cents-a-hundredweight difference, 
and that is why, among other reasons, we are trying to go 
through this comment period to see whether there is a better 
way to price milk than this, whether to go back to the M-W 
pricing system or use our own statistical surveys to get it 
done.
    Senator Specter. Mr. Secretary, what concerns me is the 
time delay. I can understand the need to establish a market on 
cheese different from the Green Bay, and you have an indication 
that it may be at least 32 cents per hundredweight low.
    I am speculating or wondering about some action to 
establish a floor price at $13.50 per hundredweight now. We 
have a couple of Pennsylvania milk farmers who are here today 
that I chatted with just a few minutes ago. Mr. Arden Tewksbury 
pointed out to me that it has been some 3 months since he met 
with you with a group of some 20 farmers, and the price of milk 
has gone down and the costs of production have gone up, and 
there is a real sense of urgency.
    Senator Feingold commented about the same sense of urgency, 
and I know of your reluctance to establish a floor price, but I 
am wondering if that might not be an appropriate action to take 
on a temporary, immediate basis.
    I understand that a group of Senators wrote to you, led by 
Senator Breaux, last week on the subject, and I wrote you a 
letter dated March 10, and how about doing something like that 
to stem the floodgates at a time when we are trying to 
determine what is going on?
    If we really knew the answer, we might not have to take 
some temporary action, but at a time when there is sort of a 
sensitivity that the price may be too low now, at least as 
indicated by M-W, why not establish a temporary floor at 
$13.50?
    Secretary Glickman. I have been wrestling with that. First 
of all, the BFP is up $1.12 since its low, so it has come back 
some, and we expect that it is going to continue to go up.
    Now, whether it is going to reach the $13 level or not, I 
cannot tell you for sure.
    Senator Specter. Well, you have given an estimate that it 
will be an average this year of $13.50 in your testimony.
    Secretary Glickman. That is correct for the BFP.
    Senator Specter. So why not at least stabilize it at that 
price now while these other tests are going on?
    Secretary Glickman. Well, I would say there are two things. 
No. 1, and then I will ask my colleagues to respond, and I hope 
they give you enough time so you can do it all.
    First of all, I would have to tell you, this is a 
tremendously controversial issue, and it is one that would 
require us to hold a hearing to make a decision and hold a 
referendum.
    Now, I can accelerate that as much as possible, but I 
guarantee you that there are people in this room and around the 
country who will do their best to delay this decision long 
enough so it will not have an impact, because probably the BFP 
will be up at that level by the time this decision was final, 
which is probably 90 days, 120 days, or more.
    Senator Specter. Well, let us hope that is fast, and let us 
recognize there are a lot of people with delaying tactics, but 
what is the fastest you could do it to establish that base 
price?
    Secretary Glickman. If we were to go ahead and do this, I 
would ask Mr. Collins.
    Mr. Collins. Let me take a shot at this. First I will say a 
couple of things. First of all, the forecast for the basic 
formula price for this year is not $13.50. It is $12.80. Second 
of all, $13.50 by all historical----
    Senator Specter. You say the price is not $13.50?
    Mr. Collins. No.
    Senator Specter. The average is $12.80?
    Mr. Collins. Our projection is $12.80.
    Senator Specter. I thought the Secretary said it was 
$13.50.
    Mr. Collins. You said it was $13.50 and quoted his 
testimony.
    Senator Specter. No; I asked him if he did not say it was 
$13.50. I did not say it was $13.50. I do not testify. I ask 
questions.
    Secretary Glickman. Excuse me. The all-milk prices would 
average $13.75, so those are all three classes of milk. That is 
what my testimony said. I am sorry if I confused that.
    Mr. Collins. Just to get the facts straight, then, to set a 
floor price at $13.50 would be to set a price that is above 
what we are now forecasting and would also be above what has 
historically prevailed as the BFP for a long period of time.
    Senator Specter. What is the forecast? The $13.75, as the 
Secretary now says, involves more than what I have asked you 
about?
    Mr. Collins. Correct.
    Senator Specter. What is the expected price for what I have 
raised?
    Mr. Collins. The forecast for 1997 for the basic formula 
price is $12.80 per hundredweight, and for the all-milk price, 
which is the average price of milk received by producers for 
all classes of milk, is $13.75 per hundredweight.
    Senator Specter. What is that difference, Mr. Collins?
    Mr. Collins. The basic formula price is of course the 
minimum price that we announce for class III milk. The all-milk 
price would be what producers actually receive from all types 
of uses, including fluid use, which has, of course, the class I 
differential added to it.
    Senator Specter. Well, how long would it take, at the 
fastest, surmounting all the delays which the Secretary 
predicts will be attempted, how long would it take to establish 
a floor price of $13.50?
    Mr. Collins. That would require formal rulemaking, and our 
lawyers have advised us that that could take at least 6 months.
    Secretary Glickman. If I may add, as opposed----
    Senator Specter. How about subtracting? [Laughter.]
    Secretary Glickman. All right, subtracting, but if I may 
contribute, this would require a formal rulemaking as opposed 
to our action which I could take, depending upon the evidence 
received, on changing the BFP to reflect an alternative for the 
cheese exchange, which would not probably require a formal 
rulemaking. That one can be done faster. We have talked about 
that.
    Senator Specter. Well, that one definitely can be done 
faster, but that is going to require that you make an 
assessment of a different price of cheese, which you are now 
undertaking to do.
    Secretary Glickman. Well, and plus the testimony that we 
are getting right now may also reflect alternatives to that as 
well which we then could use to make a decision rather quickly.
    Senator Specter. My orange light is on, Mr. Secretary, so I 
am going to ask you to give me the benefit of your imaginative 
thinking along with your colleagues as to what might be done to 
meet this crisis. I do not have enough time, probably not 
enough knowledge to go through all of the range of 
possibilities which you experts know. What can be done, 
searching the full spectrum of your knowledge, to bring some 
immediate relief? That is the real question. There must be 
something that can be done by an imaginative lawyer from 
Wichita.
    Secretary Glickman. First of all, listening to my colleague 
from a similar background as I am, that we have taken some 
actions which have had some constructive help. That is, because 
of your interest and other people's interest, the price of milk 
is up almost 10 percent, and granted it has a long way to go, 
but it has moved, and we suspect it will continue to go up.
    Now, we are going to continue to take those steps, 
including using the dairy export incentive program [DEIP], 
purchases on the demand side of the picture, to do what we can 
to try to increase sales. And I just mentioned that I took one 
step a couple of weeks ago on the commodity supplemental food 
program to add cheese to that program, where we had not done 
that in recent times. That is one thing that we are going to 
do.
    Second of all, I recognize, as I have told you, that this 
NCE price is one that I would like to find an alternative for 
as quickly as possible. We have been out for comment for 4 
weeks, I guess, 3 to 4 weeks, and it is my hope notwithstanding 
the actions we are taking to get comments and do some surveys, 
that we can try to come up with an alternative as quickly as we 
possibly can.
    Senator Specter. Well, can you do an alternative before you 
finish this 6 weeks of surveys that Mr. Collins talks about?
    Secretary Glickman. Let me put it to you like this. We will 
look at the suggestions that are being made as part of that 
effort.
    One of the alternatives is for us to conduct a survey 
ourselves, and if we are going to use that alternative, we have 
got to make sure it is statistically accurate and it reflects 
enough people participating in it. That may be the best way to 
go. We may need your help in making it so that reporting is 
mandatory in that process if we do not get all the voluntary 
response needed.
    But you know, I want to move on this as fast as I can, but 
I want to make sure that we do it sensibly. Fortunately, we are 
in a period where the price looks more bullish over the next 
several months, and that will give us perhaps not the breathing 
room that all the producers need, because I know that that 
price is still very low for these people, but it will at least 
give us a little bit of time period where we are going to be 
approaching that $13 price level while we try to find some 
options for the BFP, some alternatives for it.
    In the meantime, if you want to consider making this 
reporting mandatory, that would not be something we would 
oppose and it might help get the cooperation over the next 
several weeks.
    Senator Specter. Well, my time is up. Thank you very much, 
Mr. Secretary, and thank you, Mr. Chairman.
    Senator Cochran. Thank you very much.
    Senator Kohl.
    Senator Kohl. Thank you, Mr. Chairman.
    What are the dangers of connecting up to a new market that 
may not yet be credible? I anticipate you do not want to do 
that until you are satisfied that the new market is credible. 
What are your options in that interim period?
    Secretary Glickman. Why don't we talk a little bit about 
what happens. For example, what would happen if the National 
Cheese Exchange would go out of business tomorrow afternoon, 
what would we do to try to deal with this issue, and compute 
the basic formula price? How do we handle it? I mean, that is a 
very important question, and I hand that to my experts, then.
    Mr. Collins. Well, we would have two options if the 
National Cheese Exchange were not to exist. One option would be 
to try and find an equivalent cheese price to the one that had 
been on the National Cheese Exchange. And that is what we have 
just been talking about. One possible candidate would be a 
survey that we would take, such as the one we have underway 
now, conducted by the National Agricultural Statistics Service. 
We could try and beef up or improve the Wisconsin Assembly 
Point Price Survey that we now report weekly, which most people 
do not like and do not think is very accurate.
    Those would probably be the major candidates that currently 
exist out there for a cheese price. We certainly probably could 
not use a futures price. There is a futures price for cheese, 
but I think thinness concerns with that market would probably 
prevent us from using that.
    So we would go through a decision process of trying to 
identify some equivalent alternative cheese price. Failing 
that, then we would look at the basic formula price itself, and 
possibly go to some alternative that did not include a cheese 
price, perhaps the M-W price, adjusted only based on changes in 
butter and powder prices, which might not make many people very 
happy. But that would be one candidate that we would consider.
    Going back to the old M-W price we used to use would also 
be a candidate we would consider. And I do not think that would 
make very many people happy, and it certainly does not make me 
very happy, because there are some serious thinness concerns 
with that approach as well.
    Right now there is no good alternative on the table in my 
judgment. And that is the dilemma. That is why something has 
not been done yesterday. So if the National Cheese Exchange 
were to disappear, short of having a new exchange or a 
validated survey to replace it, I think we would be worse off.
    Senator Kohl. All right. Well, are you saying that today 
the National Cheese Exchange, with its flaws, is as good or 
better than the alternatives that you are aware of?
    Mr. Collins. I can answer that, in my opinion, yes.
    Senator Kohl. So then are you suggesting that the National 
Cheese Exchange not go out of business until we have 
established something that is credible as an alternative?
    Mr. Collins. Well, I would say that at this point I would 
recommend to the Secretary--and I hate to recommend to the 
Secretary in front of a Senate hearing without doing it first 
in his office--but I would recommend to him that he would use 
the National Cheese Exchange until we had a superior 
alternative. Yes; that is what I would recommend.
    Senator Kohl. Do we have a superior alternative on the 
table?
    Mr. Collins. Not to my knowledge.
    Secretary Glickman. Well, right now, one of the superior 
alternatives is in the process of determination, and that is 
the direct survey that we are doing on a weekly basis, which, 
if we get the adequate amount of reporting, is probably 
superior. I would think there would be no question, if you can 
get enough people reporting to us, it is going to be a more 
accurate figure than the National Cheese Exchange.
    Mr. Dunn, do you have a comment?
    Mr. Dunn. Senator Kohl, there are about three things that 
are happening. One, the Secretary has asked for comments. We 
have received to date 169 comments from various people of what 
to do about the National Cheese Exchange. Now, the majority of 
those have been complaints. There have not been a lot of 
comments stating here are some positive alternatives.
    The second thing that is underway is, under our milk 
marketing order reform mandate, by mid-April, we plan to put 
out a preliminary proposal on some way to replace--to 
establish--a new basic price formula. So that will be coming 
out very, very shortly.
    It begs the question, though, that you raise--and later on 
Mr. Tipton is going to testify the Cheese Exchange may go out 
of operation by May 1. And if Senate bill 2 from Wisconsin 
passes, it may go out even sooner, if that quickly goes into 
play.
    So we have to look at the comments we have received, look 
at what NASS is doing, and certainly any other suggestions that 
this panel or any other dairy producers or people in the dairy 
business might have. Those things may catch us off guard. But 
by May 1, if the NCE closes, we are going to have to use 
whatever the Secretary has at his convenience. And we may even 
have to go back to an M-W series on an interim basis.
    Secretary Glickman. I was going to say that the survey we 
are doing, it does strike me that if the Cheese Exchange ceases 
to exist right now--the M-W system has been on the books in the 
past--so we could probably go back to that and substitute it 
for what we are doing now. It certainly would be technically 
feasible to go back. I am not saying it is the best option. But 
assuming that we would make the determination that the Cheese 
Exchange--the price component on the Cheese Exchange becomes 
unavailable or an equivalent price is not there and we could 
not substitute something else, we could theoretically move back 
in the direction of the old M-W.
    But we replaced it in 1995 because we did not consider it 
to be a very fair and feasible price.
    That is why, again, I repeat, the surveys that we are doing 
on a weekly basis perhaps offer us the best option as to what 
we might be doing.
    Mr. Collins.
    Mr. Collins. I would like to comment on this M-W price, 
which is an attraction to people who want to go back and get 
away from cheese prices as a way to discover the price of milk. 
The M-W price today, the one that we report, the base-month 
price, is based on a survey of about 200 million pounds of milk 
per month from Minnesota and Wisconsin. Now, what is the total 
production per month in Minnesota and Wisconsin? It is 
something like 3 billion pounds.
    Everyone is concerned about thinness in the base from which 
we draw our data. That is a thin base. But now, if we went back 
to the old M-W, that 200 million pounds comes from 170 plants. 
To go to the old M-W, we have to adjust the base month price 
using a survey of those plants that pay biweekly. When we 
abandoned this survey, there were only 61 plants doing that. 
That was 2 years ago.
    If we were to go back to the old M-W, we would now have to 
go back and start surveying those plants that pay biweekly. 
What their volume of milk is, I do not know. But I bet it is 
substantially below 200 million pounds.
    So we will be talking about an updater, an adjuster, to 
replace the NCE that is based on a very small sample, a very 
thin market, which is exactly the criticism of the National 
Cheese Exchange. So I do not jump into this idea of going back 
to the M-W as necessarily a superior alternative at this point.
    Senator Kohl. All right. I think that is very important 
testimony. What we are hearing you say is that we need to be 
careful about encouraging the NCE to go out of business without 
an acceptable alternative that is going to be better. 
Otherwise, we solve a problem by creating a bigger problem. Is 
that what you are saying, Mr. Collins?
    Mr. Collins. That is my opinion, Senator Kohl, yes.
    Senator Kohl. On the other hand, we all recognize that 
there is this tremendous dissatisfaction out there with the 
NCE, and we need to have a sense or urgency--which I am sure 
you do--about developing an acceptable alternative. Is that 
correct?
    Mr. Collins. That is my opinion, certainly.
    Senator Kohl. Are we finally looking at an acceptable 
alternative in the foreseeable future--meaning a month, 2, 3, 
4, or is that not going to happen, Mr. Collins?
    Mr. Collins. No; I think there is a prospect of that 
happening. I think one candidate on the table is the survey we 
just began. And with all due respect, you do not turn a survey 
like that into a reliable, accurate, valid indicator without 
some testing, without some observation. It is one thing to pick 
a price off an organized market of a homogeneous product, like 
the one that takes place in Green Bay. It is another thing to 
go out to 100 plants in the United States and ask them at what 
price they sold cheese. They say, what cheese, what kind of 
cheese, sold over what time period?
    There is a number of things that have to be straightened 
out, and it will take weeks to do that, to ensure that we have 
a valid series, where people are reporting a price that does 
not have huge standard errors in all of the weekly data that is 
being reported. So I think our survey is one candidate. But 
that is going to come somewhat slowly. That may be the best 
survey candidate available.
    However, I would also say that that survey is a concern to 
the cheese industry, that we would use a price like that for 
regulation, primarily because it is a voluntary-based survey. 
Suppose cheese prices start to go up, then we are going to use 
that reported cheese price to raise the minimum price of milk 
under Federal milk marketing orders. Is it in cheesemakers' 
self-interest to report that the price of cheese is going to go 
up if it is going to cause us to raise the minimum price of 
milk? Will some of them drop out of the survey if the cheese 
price starts to go up? Will the survey get thin if the cheese 
price starts to go up?
    That is a concern we have with a voluntary-based survey for 
using it in regulation. Nevertheless, that is one of the best 
candidates on the table at the moment.
    The other primary candidate on the table at the moment is 
this prospect that the Coffee, Sugar, and Cocoa Exchange or the 
Chicago Mercantile Exchange will develop an alternative market. 
Those are institutions with some credibility and reputation. 
And there is some prospect to think that they could organize a 
market that could remedy some of the concerns of the National 
Cheese Exchange.
    Senator Kohl. Do you have any intention of encouraging that 
to happen?
    Mr. Collins. Yes; we have been encouraging that to happen.
    Senator Kohl. Do you expect that it will happen or do you 
hope that it will happen?
    Mr. Collins. I hope that it will happen. It is clearly not 
our decision. It is the decision of those who buy and sell 
cheese. But we have certainly offered our support. We, in fact, 
attended organizational meetings of the CSCE cheese task force. 
And we are very interested in support of this occurring.
    Senator Kohl. All right. I thank you for your testimony.
    Thank you, Mr. Chairman.
    Senator Cochran. Thank you, Senator.
    Although not a member of the committee, our distinguished 
colleague from Pennsylvania, Senator Santorum, has asked 
permission to address some questions to our witnesses. For that 
purpose, we recognize Senator Santorum.
    Senator Santorum. First off, let me thank you, Mr. 
Chairman, for your graciousness in inviting me and allowing me 
to participate as a guest member of the panel. Thank you very 
much.
    I have a couple of questions for the Secretary. I want to 
get back to the subject at hand here. You state that the 
Wisconsin-Minnesota market is thin. The futures market is thin. 
The NCE market is thin. Somewhere out there something is thick. 
What is thick, and why cannot we measure it?
    Secretary Glickman. There is cheese being bought and sold 
by several hundred plants in the United States. So that is 
thick. And the way to do that is to get full participation. And 
we are going to try to do it the best we can. But we might need 
authority to compel it. That would provide thick participation.
    Senator Santorum. Let me ask you, what do you anticipate 
the cost of such a survey would be, and who would bear the 
cost?
    Mr. Collins. We are already conducting the weekly cheese 
price survey under our current appropriations. I do not think 
the cost is really an issue here. Of course, the agency who is 
doing this might have a different opinion. But I do not think, 
really, that is the issue.
    We are able to do it now. We are surveying 112 plants out 
of the universe of a little over 200. If it were mandatory, 
that would double the number of questionnaires. I think it is 
something we could handle.
    Senator Santorum. So, in a sense, what you are surveying is 
the bulk of the market--I mean what percent of the market would 
you say----
    Mr. Collins. The 112 plants represent 90 firms, and they 
account for 99.2 percent of cheese produced in the United 
States.
    Senator Santorum. So that will give you a pretty good idea 
of what is out there?
    Mr. Collins. Yes; now, it is a voluntary survey. We will 
not get 99.2 percent. We might get 60 to 70 percent. We do not 
know yet. That will be a thick sample.
    Senator Santorum. Thank you. Another concern I have is the 
issue of volatility. When the CCC held stocks, we did not have 
this kind of volatility. As a result of deregulation, however, 
we now have an industry that really does not have any mechanism 
to control volatility.
    What changes would you suggest--either through the private 
sector or through government--to help control that volatility? 
I know low price hurts, but when you lose 40 percent of your 
price in 3 months, that hurts even worse, because you cannot 
plan for it at all.
    Secretary Glickman. I think that Mr. Collins ought to 
comment on the reasons for this rapid price decline. Which if 
you look at the charts in the back of the testimony, you have 
never seen anything like this before. Certainly, in the old 
days, when the Government was much more involved in the price 
support mechanism, you would have had a support price that 
would have been a floor, that would provide a safety net.
    Quite frankly, the last several farm bills, which I voted 
for when I was in the House, eliminated that. It changed the 
rules of the game. We went to a free market system. And the 
call for a higher basic formula price now is a direct 
contradiction to what Congress has said in earlier farm bills.
    Now, that does not mean that we should be inflexible on it, 
but I think it is the recognition that this is in fact the 
case. Recently, the Washington Post, which is not known as one 
of the great supporters of farm bills, did an editorial, where 
they wrote that this volatility in dairy prices should require 
us to rethink the issue of farm safety net. Because, certainly, 
in the free market world and open borders, there is going to be 
a lot more variability, particularly for a perishable commodity 
like milk, where you cannot really put it under loan. What used 
to be the Government support program was the Government buying 
up the cheese under the loan program. But now, we really do not 
have any of the safety net programs operating.
    Now, I do think it is worthwhile examining why this 
extremely rapid change took place.
    Senator Santorum. But if you could answer--I am interested 
to hear why the rapid change occurred, and that is important, 
but I guess what I really want to get at is what risk 
management tools can the industry use or can we help the 
industry with to deal with this issue?
    Mr. Collins. I think that is a good point. This is an 
industry that has had stable prices through much of its 
history, as the price has sat right on its support price and 
the Government always had stocks to sell back into the market 
as price started to rise. What dairy farmers are facing is the 
same thing that grain farmers are facing as governments have 
moved out of holding stocks and have moved out of direct 
intervention in the marketplace.
    What we see in other markets, though, are more and more 
sophisticated risk management approaches taken by farmers. Look 
at the volume of contracting that takes place in grains or 
cotton, for example. Whether it is contracting with a local 
warehouse or contracting on futures and options markets, it far 
exceeds anything that is happening in the dairy industry.
    So the dairy industry, really, is a little bit behind in 
terms of, I think, the risk management instruments that are 
being utilized by those in the agricultural industry. So, 
certainly, one thing that the Department can do and one thing 
Congress can do is to help shape public opinion within the 
dairy industry about an awareness of how the market environment 
has changed, about the tools that are available, and about how 
to use those tools.
    And those tools run the gamut. They run from managing your 
inputs, such as your feed costs--should you grow it on the 
farm, should you buy it in the commercial marketplace--to 
pricing your product. Now, many dairy producers price their 
product through their co-op. And that is a little bit unlike 
grain markets. However, there is nothing to prevent co-ops from 
running different kinds of pools that would allow producers to 
lock in prices. And, in fact, some do. But it is certainly not 
commonplace or very widespread.
    One of the things that works against hedging is the low 
volume of futures activity in milk or cheese or butter 
contracts. As those markets develop--hopefully, they will be 
used. The farm price volatility will hopefully cause greater 
volume in those markets. The more volume in those markets will 
encourage more people to want to use those markets. And 
hopefully that will start to emerge in future years.
    At USDA, we do have a risk management education obligation 
under the 1996 farm bill. We have to be sure that that program 
is directed to dairy producers, not just to those who produce 
insurable crops, for example. We also have other authorities to 
run various kinds of pilot programs. And so maybe there are 
some things there that we can do.
    Senator Santorum. Can you describe the activity that the 
USDA has undertaken with respect to programs on risk 
management?
    Secretary Glickman. It is just starting up. Because it was 
in the bill that passed in April, we have begun some 
activities.
    Senator Santorum. We are looking for some short-term help. 
Is this something that could be helpful in the short term, to 
try to get more education for dairy producers?
    Secretary Glickman. Go ahead.
    Mr. Collins. Well, I do not really see it as a short-term 
solution, no. This is an educational effort, and it will take 
some time. And all of the instruments, the tools, the 
mechanisms for risk management really are not there for dairy 
producers the way they are for, say, grain producers at this 
moment.
    Secretary Glickman. I would say, in the grains area, we are 
moving to a system of revenue insurance, as opposed to disaster 
insurance. We are moving to a system where farmers can buy 
insurance based upon their income. And if they have volatility 
in the amount of dollars received, they can ensure a minimum 
level of revenue. We have a pilot program in the Midwest called 
the Crop Revenue Coverage. It has been for soybeans and corn, 
and we are expanding it to more areas and more crops.
    Senator Santorum. Does it have applicability to dairy or 
not?
    Secretary Glickman. It could. I do not know whether it does 
now. Producers are insuring their feed and that kind of thing--
protecting their input side. But in terms of their dairy 
production, I am not sure.
    Mr. Dunn. Senator Santorum, one of the witnesses who will 
testify later on is saying the price ought to be tied to what 
the input costs are--the feed costs, et cetera. On the other 
side of that coin, though, there is the opportunity, through 
the educational program, to assist producers to lock in protein 
costs, et cetera, which is very, very important to a dairy 
producer, so that they keep the prices need to break even 
lower, on an even pace throughout the year. By doing that, they 
can get a better return on their investment.
    But we are really in the infancy on putting together those 
types of programs on a mass scale to assist producers. It is an 
area that we certainly have to do a lot of work in.
    Senator Santorum. My understanding is there was an options 
pilot program in the farm bill. Can you discuss how that works?
    Mr. Collins. We had an options pilot program under the 1990 
farm bill, which we operated for the last 3 years of the 1990 
farm bill. We did not operate it for 1996 because of the 
lateness with which the 1996 farm bill was passed. We continue 
to have the authority to run that program. However, the 
authority has been changed slightly.
    We were spending about $3 million a year to run that 
program for corn, soybeans, and wheat in the last 3 years of 
the 1990 farm bill. The 1996 farm bill requires that if we run 
that program, we do it in a, quote, budget-neutral way. As a 
result of that, we have not gotten much interest from the 
industry to pursue the options pilot program, with one 
exception--the one I am sure you are leading up to.
    We did get a proposal from the Coffee, Sugar, and Cocoa 
Exchange for a dairy options pilot program. It was a very 
costly proposal. And we have that now. Our risk management 
agency has that proposal. They are evaluating that proposal. I 
assume they are under discussion with CSCE. I do not know that 
for sure. But that proposal is now being evaluated at the 
Department.
    Senator Santorum. I would appreciate it if you could at 
least get us some answers on how that is going and whether or 
not the opportunity for a pilot program exists.
    My time is up. I thank you very much.
    Thank you, Mr. Chairman.
    Senator Cochran. Thank you, Senator.
    Senator Specter, do you have any further questions of the 
witnesses?
    Senator Specter. I do, Mr. Chairman, but I will be 
relatively brief because we have many more witnesses this 
afternoon.
    Mr. Collins, a question which comes to my mind is, you have 
112 plants out there with 99.2 percent of cheese production. 
Why not simply call them all up and ask them what the sales 
price was today, yesterday.
    Mr. Collins. That is what we are doing, except we are 
sending them a piece of paper, so that they can write it down.
    Senator Specter. That is a lot different. A lot different. 
A piece of paper comes in. It has to be read. It has to be 
written on. It has to be mailed. Call them up. Just call them 
up. People answer the telephone. Tell them you are calling from 
the Department of Agriculture; you would like to know what the 
price is.
    Mr. Collins. Right. Well, you have to get to the right 
person, who has the books. And we also get other information 
from them. We get quite a bit.
    Senator Specter. I understand that. I frequently make calls 
and have to ask for somebody else.
    Mr. Collins. Right.
    Secretary Glickman. I think that the idea is something we 
should explore. That is, there may be a way to do this using 
modern technology. For example, electronic communication, e-
mail, Internet, getting a more instantaneous access to 
information rather than sending out formal questionnaires. I 
think the idea is worth exploring. I think it is a good idea.
    Senator Specter. Well, Mr. Secretary, I would like to 
explore that idea on February 11. I have a sense of urgency 
about this which is that after we went out there on February 
10, and told those 500 farmers that the Secretary had the 
authority, unilaterally, to change the price of milk if the 
cheese price was changed, to find a way to find out what the 
price is. I want information. You want information. We pick up 
the phone.
    Somehow it comes into the bureaucracy--Mr. Collins, with 
all due respect--it takes a month to do it, and then we send 
out letters. And people get letters, they do not like to 
respond to letters. I hate letters. Every piece of paper that 
crosses my desk is an anathema. But if I get a message on the 
telephone sheet that comes in from my secretary and they want 
an answer, can I see a group next week, I say yes or no. And I 
would just pick up the phone.
    Will you give me a list of those 112 plants? I will call 
them. I will have my staff call them. I have not seen the forms 
you sent out, but how simple are they? If they are simple, it 
is the first one that is ever come out of the Federal 
Government.
    Mr. Collins. It is a simple form. And if we were to do it 
on the telephone, it might allow us to announce the price a day 
or two earlier. I mean that is what you are talking about. We 
are talking about last week's cheese price being announced the 
following week with the method we have now. I do not see where 
your method is going to actually accelerate that very much.
    Senator Specter. Well, let me explain it to you. If you 
call up the 112 people, you put five people on it, they can 
make 20 calls or 25 calls, they can get the answers in a day
    Mr. Collins. Right.
    Senator Specter. And then you write them down and you see 
what it is.
    Mr. Collins. Right.
    Senator Specter. And maybe it is vastly different from the 
Green Bay price.
    Mr. Collins. Right.
    Senator Specter. So you would say to yourself, I may want 
to do this survey over 2 or 3 days. I do not know why you have 
to do the survey over 6 weeks to have an evidentiary base to 
establish a different price of cheese.
    Mr. Collins. I guess I did not understand your point. The 
6-week period is not an administrative lag in data collection, 
which is accelerated by a phone call. The 6-week period is 6 
consecutive weeks of getting people to report data, and then 
working with those people to report the right data, to report 
the cheese that has the right moisture content, cheese that has 
the right container, the cheese that is aged the right number 
of days, the cheese that is contracted during the right period.
    Maybe it can be done sooner than 6 weeks; 6 to 8 weeks 
actually is more of a traditional time period that our 
statisticians have required before they have reached a comfort 
level to be able to report publicly. And I think it is 
important that the statisticians be the ones that tell us when 
they are comfortable.
    Senator Specter. With all due respect, I do not think so. I 
think that is the Secretary's job or maybe the job of the 
Congress. I would have to explore what the issue is on the 
statisticians' comfort level. You have raised two questions. 
And if I may pursue this, Mr. Chairman, for just a moment or 
two.
    You went through a sequence of what you had to find out--
the right containers, the right consistency of cheese. Tell me 
about the complexities in pricing cheese. What are the 
complexities in pricing cheese? Is it different from going to 
the supermarket and buying cheese?
    Mr. Collins. Yes; I think it probably is.
    Senator Specter. Well, tell me about it. I do not know 
about that.
    Mr. Collins. Well, I do not know that much about it myself 
either. I am not the statistician collecting the prices. I only 
know what they have been telling me. They have been----
    Senator Specter. Well, then, I will ask the Secretary. What 
is the issue on pricing cheese?
    Secretary Glickman. Arlen, I do not know the answer, but I 
will commit to you this. However we can get the information, it 
needs to be collected the fastest way possible.
    Senator Specter. Well, Mr. Collins is telling me about the 
consistency of cheese and the container of cheese, and he went 
through a whole list of things. Then I ask him what is up, and 
he says he does not know.
    Secretary Glickman. Well, I certainly do not know the 
answer to that question. But all I can tell you is, based upon 
this hearing, we will go back and we will try to determine the 
methodology of collecting the information, and make sure it is 
as rapid and complete as possible. But as we said to Senator 
Kohl beforehand, we have got to make sure that we are dealing 
with apples and apples before we can come out with a decent 
number that makes some sense.
    Senator Specter. Secretary Glickman, all I know is that I 
have got a bunch of irate farmers. And they are madder than 
hell because their costs of production have gone up and the 
price of cheese has gone down. And I know, because you and Mr. 
Collins and I were there, and we all concluded and we said in 
that public meeting that you had the authority to change the 
price of milk if you establish the price of cheese.
    Secretary Glickman. That is correct.
    Senator Specter. And that was more than 4 weeks ago.
    Secretary Glickman. And we are pursuing that. And I have 
been on top of this issue. And before I came to Pennsylvania, 
we had already done a statement to indicate that the public 
comment would occur through March 31. And we have to honor that 
time period. In the meantime, we are examining the comments. We 
have started our own weekly collection process. We will try to 
make sure that that is as accelerated as possible.
    But if I may make one point, Senator, truthfully, the issue 
here is, and I agree with you, that this cheese price is a 
problem. But it is not the main problem that your dairy farmers 
are having trouble with. The problems go to a much bigger 
picture. And they, frankly, go to the fact that for years and 
years and years, the Government supported dairy products at 
high support levels. And that was ended. And now we are going 
through this free market gyration, with high volatility and 
highly variable prices. And the folks are hurting. A lot of 
folks are hurting because of this situation.
    I want to move this cheese issue as fast as I possibly can. 
I think it can make some difference. However, I do not think it 
is going to make a material difference. I think the big 
difference that is going to be made is in terms of how we 
reform the milk marketing order system, quite honestly. So I do 
not want to mislead farmers to believe that the change in the 
cheese price is going to make a demonstrable difference in 
their income levels. It will not. I wish it would.
    I wish I could snap my fingers and make this all well. But 
we have an old, antiquated, archaic system of how we price milk 
in this country. You have ordered us to change that. And it is 
going to be very controversial. We have to do our best to make 
sure it is done fairly.
    In the meantime, we have presented the evidence to you that 
there is a problem in this NCE, the way it is priced. We are 
going to do our best to resolve it as quickly as possible.
    Senator Specter. Well, if you are saying that the milk 
marketing orders have to be--that procedure has to be changed, 
you are talking there about a 6-month process?
    Secretary Glickman. Well, that is a long-time process. In 
fact, under the farm bill, we are required to have it complete 
in April 1999. I am not saying that is the short-term answer to 
the problem. I am just saying that in order to get some 
sensibility in the pricing and milk system, to deal 
fundamentally with the problems the dairy farmers are having, 
you have to deal with that side of the picture.
    Senator Specter. Well, when will you come to a conclusion 
as to the milk marketing orders, which is the long-range 
solution? That is what you just said.
    Secretary Glickman. Yes.
    Senator Specter. What is the timeframe on that?
    Secretary Glickman. Well, we are under the gun to get it 
done by April 1999. That is what the farm bill requires us to 
do. We plan a proposed rule in December 1997. We have to have 
that out about 11 months from now. But we have to have reform 
all finally done, finished, by April 1999.
    Senator Specter. Well, then what is a short-term answer, 
besides the cheese price?
    Secretary Glickman. Well the short-term answer is, in my 
judgment, working to modify the NCE price, which we are working 
on right now; and continue to expand and augment our demand-
increasing authorities, which means buying more cheese and 
selling more dairy products overseas, where we can; and working 
our best to make sure that there are alternative markets out 
there, including the futures markets. And I think with a 
combination of that, we can get some relief. And through your 
efforts and prodding, we will try to accelerate this process.
    Senator Specter. Well, what is a reasonable date when that 
would happen?
    Secretary Glickman. You mean the NCE option?
    Senator Specter. Anything.
    Secretary Glickman. We have a deadline of March 31, to get 
the NCE input. I wish it was sooner, but, meanwhile we have had 
about a $1.15 increase in the basic formula price in the last 2 
months.
    Senator Specter. Those are normal market forces?
    Secretary Glickman. Yes; they may be normal market forces, 
but we would like to think we are helping to contribute to 
those.
    Senator Specter. OK.
    Secretary Glickman. We expect that to continue. Now, I hope 
it continues through the entire rest of the year. And we are 
going to do our best, without too unfairly interfering in the 
marketplace, to try to keep supply and demand in relative 
equilibrium, if we can. At the same time, I would like to find 
an alternative to this NCE. I think that using it is not an 
acceptable way to price milk. And I am going to work as hard as 
I can to get this done. Or else you are going to call me up 
here and keep my feet to the fire, which are feeling kind of 
warm right now. [Laughter.]
    Senator Specter. Mr. Secretary, you have got asbestos 
shoes. [Laughter.]
    Will you give me the 112 people, because I would like to 
call them up tomorrow and find out what the price of cheese is?
    Secretary Glickman. We will give you all--we will not only 
give you the 112, we will give you everybody we have.
    Senator Specter. Fine. I would like to get that from you. 
Can I get it this afternoon?
    Secretary Glickman. We will get it to you by tomorrow. I do 
not know if I can get it to you by this afternoon, because I am 
leaving. My colleagues are staying up here, because they need 
to hear the testimony. But I will get the names moving.
    Senator Specter. OK, by tomorrow is fine.
    Secretary Glickman. Yes.
    [The information follows:]

    Each week NASS collects price information on sales of natural, 
unaged, Cheddar cheese at the first (wholesale) point of sale. Data are 
recorded for sales transactions completed during the survey week. A 
transaction is considered complete when cheese is shipped out or title 
transfers. The 65 plants reporting account for an estimated 85 percent 
of natural Cheddar cheese sales. Sample copies of two reports are 
provided for the Record. Pursuant to the provisions of 7 U.S.C. 2276, 
the Department is prohibited from releasing the names of plants 
surveyed.
                         Cheddar Cheese Prices

    [Released Aug. 1, 1997, by the National Agricultural Statistics 
                                Service]

                   40 lb. block prices rise 3.6 cents
    Prices received for 40 lb. block Cheddar cheese rose 3.6 cents per 
lb. for the week ending July 25, 1997. Prices in the MN/WI region rose 
over 5.5 cents per lb. Prices for 500 lb. barrels increased 0.4 cents 
per lb. and 640 lb. blocks increased 5.3 cents per lb.

[GRAPHIC] [TIFF OMITTED] T01MA13.036

    Revision Policy: This week's ``Cheddar Cheese Prices'' contains ten 
weeks of data. The extra information is published to ensure data users 
have the most accurate, up-to-date information. June data are no longer 
open to revision. Next month at this time, only July and August data 
will be published.
    Data Reliability: The survey collects price information on sales of 
natural, unaged, Cheddar cheese at the first (wholesale) point of sale. 
Data are recorded for sales transactions completed during the survey 
week. A transaction is considered complete when cheese is shipped out 
or title transfers. The 65 plants reporting account for an estimated 85 
percent of natural Cheddar cheese sales. Estimates for only the current 
month are subject to revision.
    Notice: This report will include ten weeks of data on the following 
release dates: September 5, October 3, October 31, and December 5.

                                    CHEDDAR CHEESE PRICES BY STYLE AND REGION                                   
----------------------------------------------------------------------------------------------------------------
                                                                        Week ending--                           
                                           ---------------------------------------------------------------------
             Style and region                             Jul 18, 1997                                          
                                            Jul 25, 1997       \1\      Jul 11, 1997   Jul 4, 1997  Jun 27, 1997
----------------------------------------------------------------------------------------------------------------
40 lb. blocks:                                                            Dol./lb.                              
    Avg. price: \2\                                                                                             
        MN/WI.............................        1.2636        1.2078        1.1906        1.1868        1.1889
        West \3\..........................        1.1950        1.1617        1.1479        1.1445        1.1466
        U.S.\4\...........................        1.2150        1.1787        1.1603        1.1549        1.1603
                                                                                                                
    Sales volume: \5\                                                      Pounds                               
                                                                                                                
        MN/WI.............................     1,095,379     1,697,923     1,090,694     1,066,271     1,368,780
        West \3\..........................     3,269,397     3,923,510     3,400,241     3,606,842     3,570,405
        U.S.\4\...........................     4,498,249     5,857,381     4,697,274     4,869,764     5,259,571
                                           ---------------------------------------------------------------------
640 lb. blocks:                                                           Dol./lb.                              
                                                                                                                
    Avg. price \2\ U.S....................        1.2390        1.1863        1.1701        1.1644        1.1654
                                                                                                                
                                                                           Pounds                               
                                                                                                                
    Sales volume \5\ U.S..................     1,055,345       863,666     1,098,164     1,121,786     1,186,785
                                           ---------------------------------------------------------------------
500 lb. barrels:                                                          Dol./lb.                              
    Avg. price: \2\                                                                                             
        MN/WI.............................        1.2177        1.2158        1.2131        1.2017        1.2147
        Other.............................        1.1952        1.1920        1.1900        1.1886        1.1913
        U.S...............................        1.2046        1.2006        1.1996        1.1941        1.2010
    Adj. price to 39 percent moisture:                                                                          
        MN/WI.............................        1.1384        1.1370        1.1295        1.1263        1.1290
        Other.............................        1.1088        1.1058        1.1036        1.0980        1.1036
        U.S...............................        1.1211        1.1170        1.1144        1.1098        1.1141
                                                                                                                
    Sales volume: \5\                                                      Pounds                               
                                                                                                                
        MN/WI.............................     3,707,010     3,465,431     3,318,522     3,417,633     4,662,975
        Other.............................     5,161,707     6,121,424     4,637,298     4,717,162     6,658,133
        U.S...............................     8,868,717     9,586,855     7,955,820     8,134,795    11,321,108
                                                                                                                
    Moisture content:                                                      Percent                              
                                                                                                                
        MN/WI.............................         34.75         34.77         34.48         34.92         34.37
        Other.............................         34.25         34.25         34.22         33.96         34.15
        U.S...............................         34.46         34.44         34.33         34.36         34.24
----------------------------------------------------------------------------------------------------------------
\1\ Revised.                                                                                                    
\2\ Prices weighted by volumes reported.                                                                        
\3\ CA, ID, OR, and WA.                                                                                         
\4\ ``Other Regions'' included in U.S. total.                                                                   
\5\ Sales as reported by cooperating manufacturers.                                                             


                                    CHEDDAR CHEESE PRICES BY STYLE AND REGION                                   
----------------------------------------------------------------------------------------------------------------
                                                                        Week ending--                           
                                           ---------------------------------------------------------------------
             Style and region                             Jun 13, 1997                                          
                                            Jun 20, 1997       \1\       Jun 6, 1997  May 30, 1997  May 23, 1997
----------------------------------------------------------------------------------------------------------------
40 lb. blocks:                                                            Dol./lb.                              
    Avg. price: \2\                                                                                             
        MN/WI.............................        1.1906        1.1984        1.1928        1.1882        1.1912
        West \3\..........................        1.1438        1.1453        1.1410        1.1407        1.1423
        U.S.\4\...........................        1.1575        1.1608        1.1595        1.1561        1.1613
                                                                                                                
    Sales volume: \5\                                                      Pounds                               
                                                                                                                
        MN/WI.............................     1,733,258     1,327,932     1,839,944     1,563,877     2,045,475
        West \3\..........................     4,005,425     3,359,164     3,820,455     3,908,574     3,842,841
        U.S.\4\...........................     6,049,131     4,854,962     5,838,913     5,654,293     6,139,062
                                           ---------------------------------------------------------------------
640 lb. blocks:                                                           Dol./lb.                              
                                                                                                                
    Avg. price \2\ U.S....................        1.1684        1.1723        1.1857        1.1751        1.1717
                                                                                                                
                                                                           Pounds                               
                                                                                                                
    Sales volume \5\ U.S..................       997,738     1,013,328       525,685     1,045,625     1,758,467
                                           ---------------------------------------------------------------------
500 lb. barrels:                                                          Dol./lb.                              
    Avg. price: \2\                                                                                             
        MN/WI.............................        1.1989        1.2100        1.2184        1.2146        1.2240
        Other.............................        1.1877        1.1987        1.2013        1.1971        1.2068
        U.S...............................        1.1920        1.2033        1.2089        1.2051        1.2165
    Adj. price to 39 percent moisture:                                                                          
        MN/WI.............................        1.1219        1.1273        1.1331        1.1370        1.1421
        Other.............................        1.1038        1.1177        1.1191        1.1161        1.1259
        U.S...............................        1.1107        1.1216        1.1253        1.1256        1.1350
                                                                                                                
    Sales volume: \5\                                                      Pounds                               
                                                                                                                
        MN/WI.............................     3,908,680     3,912,327     3,665,436     3,359,592     4,230,711
        Other.............................     6,313,356     5,759,175     4,587,078     4,040,825     3,281,805
        U.S...............................    10,222,036     9,671,502     8,252,514     7,400,417     7,512,516
                                                                                                                
    Moisture content:                                                      Percent                              
                                                                                                                
        MN/WI.............................         34.81         34.53         34.40         34.83         34.63
        Other.............................         34.36         34.58         34.52         34.57         33.62
        U.S...............................         34.53         34.56         34.47         34.69         34.62
----------------------------------------------------------------------------------------------------------------
\1\ Revised.                                                                                                    
\2\ Prices weighted by volumes reported.                                                                        
\3\ CA, ID, OR, and WA.                                                                                         
\4\ ``Other Regions'' included in U.S. total.                                                                   
\5\ Sales as reported by cooperating manufacturers.                                                             

                         Cheddar Cheese Prices

    [Released Aug. 8, 1997, by the National Agricultural Statistics 
                                Service]

                   40 lb. block prices rise 1.7 cents
    Prices received for 40 lb. block Cheddar cheese rose 1.7 cents per 
lb. for the week ending August 1, 1997. Prices in the MN/WI region rose 
over 1.2 cents per lb. Prices for 500 lb. barrels also increased 4.4 
cents per lb. and 640 lb. blocks increased 2.7 cents per lb.

[GRAPHIC] [TIFF OMITTED] T01MA13.037

    Data Reliability: The survey collects price information on sales of 
natural, unaged, Cheddar cheese at the first (wholesale) point of sale. 
Data are recorded for sales transactions completed during the survey 
week. A transaction is considered complete when cheese is shipped out 
or title transfers. The 65 plants reporting account for an estimated 85 
percent of natural Cheddar cheese sales. Estimates for only the current 
month are subject to revision.
    The next Cheddar Cheese Prices report will be released at 8:30 a.m. 
ET on August 15, 1997.

                                    CHEDDAR CHEESE PRICES BY STYLE AND REGION                                   
----------------------------------------------------------------------------------------------------------------
                                                                        Week ending--                           
                                           ---------------------------------------------------------------------
             Style and region                             Jul 25, 1997                                          
                                             Aug 1, 1997       \1\      Jul 18, 1997  Jul 11, 1997   Jul 4, 1997
----------------------------------------------------------------------------------------------------------------
40 lb. blocks:                                                            Dol./lb.                              
    Avg. price: \2\                                                                                             
        MN/WI.............................        1.2753        1.2636        1.2078        1.1906        1.1868
        West \3\..........................        1.2160        1.1950        1.1617        1.1479        1.1445
        U.S.\4\...........................        1.2320        1.2150        1.1787        1.1603        1.1549
                                                                                                                
    Sales volume: \5\                                                      Pounds                               
                                                                                                                
        MN/WI.............................     1,072,017     1,095,379     1,697,923     1,090,694     1,066,271
        West \3\..........................     3,164,620     3,269,397     3,923,510     3,400,241     3,606,842
        U.S.\4\...........................     4,483,640     4,498,972     5,857,381     4,697,274     4,869,764
                                           ---------------------------------------------------------------------
640 lb. blocks:                                                           Dol./lb.                              
                                                                                                                
    Avg. price \2\ U.S....................        1.2664        1.2390        1.1863        1.1701        1.1644
                                                                                                                
                                                                           Pounds                               
                                                                                                                
    Sales volume \5\ U.S..................       478,905     1,055,345       863,666     1,098,164     1,121,786
                                           ---------------------------------------------------------------------
500 lb. barrels:                                                          Dol./lb.                              
    Avg. price: \2\                                                                                             
        MN/WI.............................        1.2443        1.2177        1.2158        1.2131        1.2017
        Other.............................        1.2437        1.1948        1.1920        1.1900        1.1886
        U.S...............................        1.2440        1.2044        1.2006        1.1996        1.1941
    Adj. price to 39 percent moisture:                                                                          
        MN/WI.............................        1.1768        1.1384        1.1370        1.1295        1.1263
        Other.............................        1.1555        1.1089        1.1058        1.1036        1.0980
        U.S...............................        1.1649        1.1212        1.1170        1.1144        1.1098
                                                                                                                
    Sales volume: \5\                                                      Pounds                               
                                                                                                                
        MN/WI.............................     4,006,256     3,707,010     3,465,431     3,318,522     3,417,633
        Other.............................     5,017,545     5,186,678     6,121,424     4,637,298     4,717,162
        U.S...............................     9,023,801     8,893,688     9,586,855     7,955,820     8,134,795
                                                                                                                
    Moisture content:                                                      Percent                              
                                                                                                                
        MN/WI.............................         35.50         34.75         34.77         34.48         34.92
        Other.............................         34.34         34.27         34.25         34.22         33.96
        U.S...............................         34.86         34.47         34.44         34.33         34.36
----------------------------------------------------------------------------------------------------------------
\1\ Revised.                                                                                                    
\2\ Prices weighted by volumes reported.                                                                        
\3\ CA, ID, OR, and WA.                                                                                         
\4\ ``Other Regions'' included in U.S. total.                                                                   
\5\ Sales as reported by cooperating manufacturers.                                                             

                         Milk Marketing Orders

    Senator Specter. And beyond the cheese issue, which I 
understand is limited, I do not see any short-term fix in all 
that has been testified to. I understand you are buying more 
cheese and you are putting more demand in the market, which 
would raise the price. But the milk marketing orders, we are 
talking about a long time, until April 1999. Talking about 
establishing a different milk price, you are talking about 6 
months. I do not see anything that is very fast.
    Perhaps some of the other witnesses will have some more 
light to shed on that subject.
    Thank you, Mr. Chairman.
    Senator Cochran. Thank you.
    Senator Kohl.
    Senator Kohl. I just want to round out the discussion. You 
are saying that reforming the NCE and that whole process, just 
as a matter of fact, is not going to have a big impact on the 
price of milk. You are saying it is the formula price, the milk 
marketing order, that has to----
    Secretary Glickman. A major impact.
    Senator Kohl. The big impact will come from that?
    Secretary Glickman. The Cheese Exchange can have some 
impact.
    Senator Kohl. Some impact, right.
    Secretary Glickman. Yes; that is right.
    Senator Kohl. But you do not want to mislead----
    Secretary Glickman. That is correct.
    Senator Kohl [continuing]. Farmers, whether they be from 
Pennsylvania or Wisconsin or wherever into thinking that there 
is a huge impact that the reform of the NCE is going to have. 
You are stating it as a matter of fact, not as a matter of 
opinion.
    Secretary Glickman. I think you have characterized it 
correctly.
    Senator Kohl. Now, on the other hand, in answer to those of 
us who want some short-term improvements, you are bullish about 
the price of milk over the short term?
    Secretary Glickman. Based upon the experts that work for 
the Department of Agriculture, the answer is yes. And you know 
as well as I do, the markets are variable. But, basically, we 
think things look pretty good over the next few months.
    Mr. Collins. I would agree with that, but I would have to 
be the economist. On the other hand, you know, anything can 
happen. Right now, our projections are based on a very small 
increase in milk production in 1997. If we were to get a sudden 
increase in milk production, with productivity coming back--
which we have not seen in 2 years--and cheese inventories are 
fairly high right now--we could see some weaker milk prices. 
But, overall, the trend, we think, is for stronger prices for 
the year.
    Senator Kohl. I thank you.
    Thank you, Mr. Chairman.
    Senator Cochran. Thank you, Mr. Secretary, for your 
attendance and your contribution to this hearing. We appreciate 
it very much.
    Secretary Glickman. We will get Senator Specter his names, 
and hopefully phone numbers.
    Senator Cochran. Your Rolodex, that is what he wants.
    Senator Specter. Thank you very much.
                       NONDEPARTMENTAL WITNESSES

STATEMENT OF ALAN T. TRACY, SECRETARY, WISCONSIN 
            DEPARTMENT OF AGRICULTURE, TRADE AND 
            CONSUMER PROTECTION

                        Introduction of Witness

    Senator Cochran. Alan Tracy, the Secretary of the 
Department of Agriculture, Trade and Consumer Protection, from 
the State of Wisconsin, will be our next witness.
    Mr. Tracy, thank you for being here. And, Senator Kohl, I 
yield to you for any introductory comments you would like to 
make.
    Senator Kohl. Well, I want to welcome, Mr. Tracy and Mr. 
Brey, from Wisconsin, who are here to testify. I will not be 
able to stay through the entire hearing. But we have two 
outstanding gentlemen from Wisconsin, who are going to shed a 
great deal of light and information on this whole topic. And I 
think we are fortunate to have you here today.
    Senator Cochran. Mr. Tracy, you may proceed.

                        Statement of Alan Tracy

    Mr. Tracy. Thank you very much, Mr. Chairman and Senator 
Kohl. I very much appreciate your arranging for me to be here 
today.
    I do want to apologize on behalf of Governor Thompson, who 
had hoped to be here today. And I would hope to pass that word 
directly to Senator Specter in particular, because Governor 
Thompson had planned to come out earlier, when another hearing 
had been tentatively scheduled, responding to Senator Specter. 
And unfortunately he was not able to accommodate that schedule 
for today, but did send me in his stead.
    I appreciate the opportunity to address you regarding 
alternatives to the National Cheese Exchange in determining 
milk prices. Farm milk prices and the mechanisms for 
determining them are of utmost importance to Wisconsin farmers 
and the Wisconsin economy. Wisconsin leads the Nation in the 
number of dairy farmers, in the number of dairy cows and in the 
production of cheese. The dairy industry contributes over $17 
billion to Wisconsin's economy--nearly 10 percent of our 
State's overall economic output.
    Just about 1 year ago, our Department released a report, 
detailing the findings of a comprehensive study on cheese 
pricing and trading activities on the National Cheese Exchange. 
That study was conducted by researchers at the University of 
Wisconsin, at our request and under the authority of our 
department to investigate business practices in Wisconsin. The 
report stimulated widespread interest and debate about the 
National Cheese Exchange.
    Its findings were of particular concern because of the link 
between the National Cheese Exchange prices and the milk prices 
paid to farmers. While less than 2 percent of all bulk cheddar 
cheese is traded on the National Cheese Exchange--and in some 
years, less than one-tenth of 1 percent of all cheese--the 
National Cheese Exchange price largely determines the basic 
formula price, which is the price of manufacturing milk under 
the entire Federal milk pricing system. It is vitally important 
that the underlying market or markets be competitive and that 
farmers can have confidence that prices accurately reflect the 
supply/demand situation for milk.
    Following that report, Governor Thompson convened a task 
force on cheese pricing to make recommendations to improve the 
current system of pricing for the benefit of the dairy industry 
and consumers. I am submitting a copy of the Governor's task 
force January 1 report for the record.
    [The information follows:]
                Governor's Task Force on Cheese Pricing
                              introduction
    The Governor's Task Force on Cheese Pricing was named in May, 1996, 
amid ongoing concern about the cheese pricing system, and the influence 
of cheese prices on the price for manufacturing milk. The Task Force's 
charge was to ``make recommendations to improve the current cheese 
pricing system for the benefit of the dairy industry and consumers.''
    The Task Force held five meetings between July and December 1996. 
Membership included dairy producers, cheese makers, dairy marketers, 
and industry and state leaders. A complete list of members is included 
in Appendix 1. The meetings were well attended by dairy producers, farm 
and local media, and representatives from state and federal dairy 
related groups and agencies.
    The Task Force recommendations address the link between National 
Cheese Exchange prices and milk prices, alternative pricing mechanisms 
for cheese and milk, cheese market information, and oversight and 
operating rules of the National Cheese Exchange.
                               background
    Changes in U.S. dairy policy have resulted in market forces playing 
a larger role in pricing milk and dairy products. For most of the 
period from the early 1960's to the late 1980's, federal dairy price 
supports were instrumental in dairy pricing. Except for brief periods, 
cheese, butter, and nonfat dry milk prices were at or close to 
government purchase prices. Consequently, milk prices were driven by 
support prices, and price changes were small and predictable.
    Large milk surpluses and resulting large price support purchases 
and high treasury costs led to pressures to reduce the role of 
government in pricing milk. The support price for milk was reduced from 
$13.10 per hundredweight in the early 1980's to $10.10 in the early 
1990's. The support program became more of a safety net than a driver 
of milk prices. Manufacturing milk prices since the late 1980's have 
been consistently above the federal support level. More important, 
prices have been considerably more volatile.
    With market forces replacing the government as the driver of milk 
and dairy product prices, attention in the dairy industry focused on 
how market prices were determined. The Basic Formula Price (BFP) is 
used in the Federal Milk Marketing Order system to establish minimum 
prices for milk throughout the U.S. Cheese dominates the use of milk in 
Minnesota and Wisconsin, where the BFP is derived. Cheese prices are 
determined in large part by weekly price ``opinions'' for block and 
barrel cheddar cheese. These opinions are arrived at by observers of 
transactions on the National Cheese Exchange (NCE), a wholesale cash 
market located in Green Bay, Wisconsin.
    Members of the National Cheese Exchange trade cheese by open outcry 
in weekly trading sessions that last about one-half hour. On an average 
annual basis, consummated sales on the NCE represent from less than 0.5 
percent to 2 percent of annual cheddar cheese production. But the price 
opinions based on NCE transactions are extensively used as reference 
prices in purchase contracts and in spot market transactions for all 
types of cheese.
    In other words, trading activity on the NCE has an enormous 
influence on cheese prices, and, because of the prominence of cheese in 
establishing the BFP, on milk prices throughout the U.S.
    The impact of the NCE on regulated milk prices underlies public 
policy concerns regarding NCE trading activities. A recent 
investigation of the NCE involved a comprehensive economic study 
conducted by researchers affiliated with the University of Wisconsin-
Madison Food Systems Research Group at the request of and in 
cooperation with the Wisconsin Department of Agriculture, Trade and 
Consumer Protection, under its authority to investigate business 
practices in the state.
    A report released March 19, 1996, detailed the findings of the 
study.\1\ The report concluded that, ``As currently organized, the 
Exchange appears to facilitate market manipulation.'' The report also 
concluded that ``* * * the National Cheese Exchange was not an 
effectively competitive price discovery mechanism during 1988-93.'' 
Several specific problems with the NCE were identified along with 
related suggestions for alleviating competitive concerns.
---------------------------------------------------------------------------
    \1\ A copy of the summary report, ``Cheese Pricing: A Study of the 
National Cheese Exchange; Summary, Conclusions, and Policy 
Initiatives,'' is included as Appendix 3.
---------------------------------------------------------------------------
    The report stimulated widespread interest and debate about the NCE 
and cheese pricing, including a Congressional hearing in May, 1996. NCE 
traders vehemently denied allegations of misconduct. Along with some 
other industry participants, traders claimed that the Exchange 
accurately reflected supply and demand conditions for cheese.
    In response to waning public confidence in the NCE, especially in 
its role as a driver of regulated milk prices, Wisconsin Governor Tommy 
G. Thompson convened a Task Force on Cheese Pricing. Members were 
chosen to reflect the various perspectives of the dairy industry. The 
Task Force was charged with making recommendations to improve the 
current pricing system for the benefit of the dairy industry and 
consumers, and to remove the link between the National Cheese Exchange 
price for cheese and the basic formula price for milk.
    The Task Force sought a general overview of various aspects of the 
cheese and dairy pricing system before making recommendations for 
improvement. At their first meeting in July, Task Force members 
reviewed the background and conclusions of the UW/DATCP report. At the 
September meeting, members heard information about the operations and 
structure of the National Cheese Exchange, the cash market for cheese; 
and the Coffee, Sugar, and Cocoa Exchange, which trades futures 
contracts for cheese, butter, nonfat dry milk and milk. A 
representative of the U.S. Department of Agriculture's Dairy Market 
News Service explained the USDA cheese price reporting series. Task 
Force members also heard information detailing California's mandatory 
price reporting system for nonfat dry milk and other dairy products.
    During the October, November and December meetings, the Task Force 
accomplished its charge. It agreed on criteria useful for evaluating 
proposed recommendations, then discussed the various proposals that had 
been submitted for consideration by Task Force members. The proposals 
addressed the structure and organization of the National Cheese 
Exchange, participation in and access to trading on the National Cheese 
Exchange, improvements to cheese market information services, and 
alternative reference prices for milk and cheese. A subcommittee of 
five Task Force members was formed to finalize the report, which was 
then sent to all Task Force members for final approval.\2\
---------------------------------------------------------------------------
    \2\ A listing of ail materials provided to Task Force members 
during their deliberations is provided in Appendix 2. Copies of 
individual documents listed are available by contacting the Bureau of 
Trade Practices, Wisconsin Department of Agriculture, Trade and 
Consumer Protection, P.O. Box 8911, Madison, Wisconsin, 53704-8911, 
telephone 608-224-4918.
---------------------------------------------------------------------------
                         report recommendations
Evaluation Criteria
    The Task Force agreed on several criteria for evaluating proposals 
to improve the cheese pricing system. These criteria are based on the 
characteristics of a perfect market, which, while never observed in 
real life, provide guidance as to aspects of market structure that lead 
to desirable market performance. A perfectly competitive market 
consists of many buyers and sellers who buy and sell a homogeneous 
product. All participants have full information about the product and 
prices. Price is driven by supply and demand, thus no individual or 
firm can influence the price. Market participants are freely able to 
enter and exit the market.
    Posed as questions, the criteria used to evaluate the proposed 
recommendations were:
  --Does the proposal encourage more buyers and sellers to participate 
        in trading on the National Cheese Exchange?
  --Does the proposal make it easier for current and potential traders 
        to use the National Cheese Exchange?
  --Does the proposal mitigate the potential influence of large traders 
        vis-a-vis small traders?
  --Does the proposal expand the amount of market information and 
        equalize its accessibility to traders?
  --Does the proposal improve public confidence in the National Cheese 
        Exchange?
  --Does the proposal help the market to better reflect supply and 
        demand?
Recommendations
    After careful consideration, the Task Force advances these 
recommendations to improve the current cheese pricing system and to 
remove the link between NCE prices and milk prices paid to farmers.
    In addition to these specific recommendations, the Task Force 
recommends that the Governor lend encouragement and support to dairy 
farmers and marketers for efforts to expand demand for dairy products 
and to increase the value added by producers and manufacturers.
   addressing the link between the national cheese exchange and milk 
                                 prices
    1. Recommend that the U.S. Department of Agriculture should no 
longer use the National Cheese Exchange price in the price adjustor 
used to determine the basic formula price (BFP) for manufacturing milk. 
The price of manufacturing milk under Federal Milk Marketing Orders 
should be based on supply of and demand for milk used in the 
manufacture of dairy products.
    The USDA could accomplish this by:
  --First, substituting the National Agricultural Statistics Service's 
        (NASS) reported national average cheese price for the NCE price 
        in the BFP as soon as the NASS price is available and reliable 
        (mandatory reporting, if necessary for statistical 
        reliability);
  --and revising the weighting in the basic formula price adjustment 
        factor to reflect national production of cheddar cheese, nonfat 
        dry milk and butter.
    And then:
  --Begin substituting prices from the Coffee, Sugar and Cocoa 
        Exchange's ``BFP Milk Futures Contract,'' or similar contract 
        prices, for the BFP. A schedule could be developed that 
        increases the weight assigned to the milk futures price as the 
        volume of milk futures contracts traded increases;
    Or:
  --Replacing the BFP with a national survey of manufacturing milk 
        prices, less performance premiums and over-order values.
    And simultaneously:
  --Moving toward the deregulation of pricing within the Federal Milk 
        Marketing Order System, including elimination of the basic 
        formula price.
    Discussion Points:
  --The NCE price was never intended to be an indicator of national 
        supply of and demand for milk. Any of these alternative 
        measures have the potential to be more reliable indicators of 
        market supply of and demand for milk.
  --The current BFP is highly influenced by the NCE price in two ways: 
        (1) The base month Minnesota-Wisconsin price series (M-W price) 
        used in the BFP is highly correlated with the NCE price because 
        most of the survey plants make cheese that is priced in 
        reference to the NCE opinion; and (2), Over ninety percent of 
        the weight in the price adjustment favor used in the BFP is 
        based on the NCE price.
  --The NCE price results from trading that represents less than two 
        percent of all bulk cheddar cheese transacted nationally. In 
        the short term, the U.S. Department of Agriculture should 
        include a cheese price in the BFP that more broadly represents 
        cheese market transactions, and should weight manufactured milk 
        product prices by the proportion of national production of 
        these products, rather than on Upper Midwest production. In the 
        long term, any federal order price for milk used in 
        manufacturing should reflect markets for all manufacturing 
        uses, not solely cheese.
  --The NCE Board fully agrees with removing the NCE price from the 
        calculation of the BFP.
  --The USDA recently announced that the National Agricultural 
        Statistics Service (NASS) will begin reporting a probability-
        based national average cheddar cheese price.
  --The newly-reported NASS price would be more broadly based than the 
        NCE price and is expected to include spot and contracted sales 
        prices for bulk cheese. However, the NASS price will continue 
        to move in close concert with the NCE price as long as prices 
        for contracted and spot sales are pegged to NCE opinions.
  --The CSCE and the CME recently initiated futures contracts for Grade 
        A milk. These contracts represent possible alternative 
        indicators for manufactured milk value, but Grade A futures 
        prices are characterized by an unpredictable basis relative to 
        the BFP.
  --The CSCE is seeking authorization to trade a cash settlement BFP 
        contract. That contract, or a BFP contract on another futures 
        contract market, could potentially encourage broad 
        participation of milk producers, producer cooperatives, users 
        and manufacturers of milk-based products, as well as market 
        speculators, in determining the value of manufacturing milk.
  --The futures price could be phased in as a replacement for the BFP 
        as the market achieves sufficient volume to be viewed as a 
        reliable indicator of the market value for manufacturing milk.
  --The alternative of replacing the BFP with a national milk price 
        based on a survey of manufacturing plants, less over-order 
        values and performance premiums, is consistent with the Upper 
        Midwest Dairy Coalition's proposal for federal order reform.
  --A national price survey would base milk prices on the prices that 
        dairy plants actually pay nationally, not just in the midwest, 
        for manufacturing milk (both grade A and grade B.)
  --Deregulation of milk pricing, which would eliminate the need for 
        setting a basic formula price, could allow milk prices to be 
        competitively determined between buyer and seller, according to 
        supply of and demand for milk.
           alternative price discovery mechanisms for cheese
    2. Recommend that the Coffee, Sugar and Cocoa Exchange and/or the 
Chicago Mercantile Exchange establish a cash market for cheese.
    Discussion Points:
  --Both these exchanges would provide more frequent (daily) trading 
        sessions than the NCE provides currently.
  --These exchanges are currently regulated by the Commodity Futures 
        Trading Commission.
  --These exchanges can provide anonymous trading and offer 
        clearinghouse capabilities and other support to members.
  --Provides an opportunity for more direct linkage between the cash 
        and futures markets; may improve liquidity in the futures 
        markets and may improve participation in the futures markets.
                      improving market information
    3. Recommend that USDA expand the weekly Wisconsin Assembly Point 
Price series to a statistically reliable and regional series that would 
include major manufacturing areas. (Mandatory reporting, if needed for 
statistical reliability.)
    Discussion Points:
  --Improved market information would help buyers and sellers identify 
        trading opportunities and track regional market conditions.
  --This series would represent an alternative reference price for 
        contracted cheese sales.
  --Weekly and regional cheese market information would be more useful 
        than monthly, national information for cheese buyers and 
        sellers.
          regulatory oversight of the national cheese exchange
    4. Recommend that the Commodity Futures Trading Commission and the 
Federal Trade Commission re-evaluate their regulatory authorities 
regarding the National Cheese Exchange.
    Discussion Points:
  --The NCE is a national market and regulation of this market is more 
        appropriate at the federal level.
  --State regulation would be ineffective if it merely resulted in the 
        Exchange moving out of Wisconsin.
  --The NCE Board has previously requested oversight by the Commodity 
        Futures Trading Commission.
            operating rules for the national cheese exchange
    5. Recommend to the NCE Board that they consider imposing a limit 
on the daily price movement of NCE prices.
    Discussion Points:
  --There is a strong public interest in the NCE and limits may improve 
        public confidence.
  --Daily limits would allow the industry time to re-evaluate supply 
        and demand factors when market conditions are changing rapidly.
  --However, limits on price movements may limit participation and 
        volume of trading on the NCE.
  --Limits on price movements may cause prices in the short term to be 
        temporarily above or below prices reflecting supply and demand 
        conditions.
    6. Recommend to the NCE Board that they include one or more public 
(non-NCE member) members on their board.
    Discussion Points:
  --Addition of public members recognizes the public interest in the 
        Exchange as a driver of milk prices throughout the U.S.
  --Public members would offer a broader perspective to the exchange 
        board and could offer expertise that would be useful in 
        establishing policy and trading rules.
  --May improve public confidence in the National Cheese Exchange.
    7. Recommend to the NCE Board that the identities of buyers and 
sellers be anonymous during trading.
    Discussion Points:
  --Not knowing the identity of the buyers and sellers would mitigate 
        the potential influence of large traders vis-a-vis small 
        traders. Large traders may be perceived as having better 
        information, which could inhibit other traders from taking an 
        opposite position in the market.
  --Anonymous trading is common in futures contract markets, which, 
        like the NCE, are national in scope and have broad public 
        scrutiny.
  --Anonymous trading may encourage participation in trading on the 
        Exchange.
    8. Recommend to the NCE Board that they consider implementing more 
frequent trading sessions for bulk cheese transactions once remote 
electronic access is in place.
    Discussion Points:
  --The Exchange will be implementing remote electronic access to their 
        current weekly trading sessions in 1997. This is a positive 
        first step towards improving participation and access to 
        trading on the Exchange.
  --Increasing the frequency of trading on the Exchange to more than 
        once weekly may encourage broader participation in trading on 
        the Exchange (assuming cost effectiveness.)
    More frequent trading may result in less volatile price movements.
    Remote electronic trading facilitates maintaining the anonymity of 
traders.
                               appendix 1
          Governor's Task Force on Cheese Pricing Member List
    Chair, Mr. Robert H. Burns, President, ConAgra Refrigerated Foods, 
2000 S. Batavia Avenue, Geneva, IL 60134
    Deborah Van Dyk, Schreiber Foods, Inc., 425 Pine Street, PO Box 
19010, Green Bay, WI 54307-9010
    Mr. Bernard Golbach, President, Master's Gallery Foods, Inc., 328 
County Hwy. PP, PO Box 170 Plymouth, WI 53073-0170
    Mr. Larry Lemmenes, President and General Manager, Alto Dairy 
Cooperative, N3545 County EE, PO Box 550, Waupun, WI 53963
    Ms. Marsha Glenn, Vice President, Kraft Foods, Inc., 1 Kraft Court, 
Glenview, IL 60025
    Mr. Bill McCoshen, Secretary, Wisconsin Department of Development, 
123 W. Washington Ave., PO Box 7970, Madison, WI 53707-7970
    Mr. Wilfrid Turba, Retired Dairy Farmer, N 9617 Turba Court, 
Elkhart Lake, WI 53020
    Mr. Will Hughes, Wisconsin Federation of Cooperatives, 30 W. 
Mifflin, Madison, WI 53703
    Dr. Ed Jesse, Associate Dean, Agriculture Hall, Room 146, 
University of Wisconsin-Madison, Madison, WI 53706
    Mr. Jack Sturm, President, A. Sturm and Sons, 215 Center Street, PO 
Box 287, Manawa, WI 54949
    Mr. Bob Wagner, President, Weyauwega Milk Products, 105 E. Third 
Ave., PO Box 410, Weyauwega, WI 54983
    Mr. Alan Tracy, Secretary, Wisconsin Department of Agriculture, 
Trade and Consumer Protection, 2811 Agriculture Dr., PO Box 8911, 
Madison, WI 53708
    Mr. Bob Thelen, Dairy Farmer, Route 2, Box 39, La Farge, WI 54639
    Mr. Gary Anderson, Dairy Farmer, Route 1, Box 184, Cecil, WI 54111
    Mr. Richard Gould, President, National Cheese Exchange, 130 E. 
Walnut St., PO Box 1844, Green Bay, WI 54301-1844
    Mr. W. O'Neill McDonald, President, SuperValu-Great Lakes Division, 
7400 95th Street, PO Box 330, Pleasant Prairie, WI 53158-0330
    Mr. Gerald Jaeger, Dairy Farmer, N1387 Rolling Drive, 
Campbellsport, WI 53010-2250
    Mr. Jon Peterson, Dairy Farmer, Route 2, Box 170, Cashton, WI 54619
    Darin Von Ruden, Dairy Farmer, Rt I Box 23A, Westby, WI 54667
    Jim Holte, Dairy Farmer, N2478 CTY H, Elk Mound, WI 54739
                               appendix 2
Information and materials associated with and leading to the July 25, 
        1996 Task Force meeting
    Letter sent to members of the Governor's Task Force on Cheese 
Pricing, dated May 14, 1996, from Governor Tommy G. Thompson.
    Draft of Press release ``Governor Appoints Cheese Pricing Task 
Force,'' dated May 14, 1996.
    Letter sent to Alan T. Tracy, Secretary of the Department of 
Agriculture, Trade and Consumer Protection, from Governor Tommy G. 
Thompson regarding Mr. Tracy's agreement to serve as a member of the 
Task Force on Cheese Pricing.
    Introductory letter containing information about the goals of the 
Task Force, dated July 10, 1996 and sent to the members of the Cheese 
Task Force from Alan T. Tracy, Secretary of the Department of 
Agriculture, Trade and Consumer Protection.
    ``Cheese Pricing, A Study of the National Cheese Exchange.'' 
Mueller, Willard F., Bruce W. Marion, Maqbool H. Sial, and F.E. 
Geithman. The Department of Agriculture, Trade and Consumer Protection 
and the Department of Agricultural Economics, University of Wisconsin-
Madison. March 1996.
    ``Cheese Pricing: A Study of the National Cheese Exchange. Summary, 
Conclusions, and Policy Initiatives.'' Mueller Willard F., Bruce W. 
Marion, Maqbool H. Sial, and F.E. Geithman. The Department of 
Agriculture, Trade and Consumer Protection and the Department of 
Agricultural Economics, University of Wisconsin-Madison. March 1996. 
(Included in this report.)
    National Cheese Exchange Investigation, Summary Remarks. March 19, 
1996.
    National Cheese Exchange Member list.
    Agenda for Thursday, July 25, 1996 Governor's Task Force on Cheese 
Pricing meeting.
    Map to Prairie Oak Office Building.
    Preliminary Draft of ``Proposed Order of the State of Wisconsin 
Department of Agriculture, Trade and Consumer Protection Adopting 
Rules,'' dated March 15, 1996.
    National Cheese Exchange Investigation, Questions and Answers, 
March 19, 1996.
    National Cheese Exchange Investigation, Federal and State 
Regulatory Authority.
    Statement of Alan T. Tracy, Secretary of the Department of 
Agriculture, Trade and Consumer Protection, on bulk cheese market 
pricing issues, before the U.S. House Subcommittees on Livestock, Dairy 
and Poultry; and Risk Management and Specialty Crops, May 15, 1996.
    Submission by National Cheese Exchange, Inc., to the House 
Subcommittees on Livestock, Dairy and Poultry, and the House 
Subcommittee on Risk Management and Specialty Crops, May 15, 1996.
    Statement of Willard F. Mueller, William Vilas Research Professor, 
Emeritus Department of Agriculture and Applied Economics, University of 
Wisconsin-Madison, before Joint Hearings of the House Subcommittee on 
Livestock, Dairy and Poultry, and the House Subcommittee on Risk 
Management and Specialty Crops, May 15, 1996.
    Statement of Bruce W. Marion, Professor of Agricultural Economics 
and Director, Food Systems Research Group, University of Wisconsin-
Madison, before Joint Hearings of the House Subcommittee on Livestock, 
Dairy and Poultry, and the House Subcommittee on Risk Management and 
Specialty Crops, May 15, 1996.
    Written testimony of Betsy Holden, Executive Vice President of 
Kraft Foods, Inc. and General Manager of the Kraft Cheese Division, 
before Joint Hearings of the House Subcommittee on Livestock, Dairy and 
Poultry, and the House Subcommittee on Risk Management and Specialty 
Crops May 15, 1996.
    Tape recording, consisting of two cassettes, of the complete July 
25, 1996 Task Force meeting.
Information and materials associated with and leading to the September 
        19, 1996 Task Force meeting.
    Summary of Action from the July 25, 1996 Task Force meeting.
    Minutes from the July 25, 1996 Task Force meeting.
    Letter, dated September 6, 1996, sent to Task Force members from 
Bob Burns, Vice Chair, Governor's Task Force on Cheese Pricing.
    Agenda for the September 19, 1996 Task Force Meeting.
    Amended Agenda for September 19, 1996 Governor's Task Force on 
Cheese Pricing meeting.
    Letter, dated September 19, 1996, from the National Cheese 
Exchange, Inc., to the Governor's Task Force on Cheese Pricing, 
concerning the operations and structure of the National Cheese 
Exchange, Inc.
    Letter, dated June 6, 1996 to Alan T. Tracy, Secretary of the 
Department of Agriculture, Trade and Consumer Protection, from Blake 
Imel, Acting Director of U.S. Commodity Futures Trading Commission, 
Division of Economic Analysis, regarding the report ``Cheese Pricing: A 
Study of the National Cheese Exchange.''
    Letter, dated July 26, 1996, to Alan T. Tracy, Secretary of the 
Department of Agriculture, Trade and Consumer Protection, from Donald 
S. Clark, Secretary of the Federal Trade Commission, regarding the 
report ``Cheese Pricing: A Study of the National Cheese Exchange.''
    Letter from Richard E. Rominger, Deputy Secretary of the Department 
of Agriculture, to Alan T. Tracy, Secretary of the Department of 
Agriculture, Trade and Consumer Protection, regarding the report 
``Cheese Pricing: A Study of the National Cheese Exchange.''
    ``Responses to Hearing Testimony and Subcommittee Members' 
Questions.'' Mueller Willard F., Bruce W. Marion. The University of 
Wisconsin-Madison. June 18, 1996.
    ``Dairy Market News,'' Week of September 2-6, 1996, Volume 63, 
Report 36.
    ``Dairy Market News,'' Week of September 9-13, 1996, Volume 63, 
Report 37.
    ``Review of Econometric Findings in the University of Wisconsin 
Study of Prices on the National Cheese Exchange.'' Gardner Bruce L. 
University of Maryland. July 1996.
    ``Comments on Bruce Gardner's Review of the University of Wisconsin 
Study of Cheese Pricing on the National Cheese Exchange.'' Marion, 
Bruce W., Willard F. Mueller. University of Wisconsin-Madison. 
September 19, 1996.
    News Release, ``Economist Calls Report on National Cheese Exchange 
`Seriously Flawed','' July 25, 1996.
    Testimony of James J. Bowe, President of Coffee, Sugar and Cocoa 
Exchange, Inc., before the Joint Hearings of the House Subcommittee on 
Livestock, Dairy and Poultry, and the House Subcommittee on Risk 
Management and Specialty Crops, May 19, 1996.
    The National Cheese Exchange, Inc. Rules Regulating Trading, July 
1996.
    Tape recording, consisting of two cassettes, of the complete 
September 19, 1996 Task Force meeting.
    Video from David Ikari, California Department of Food and 
Agriculture, shown at September 19, 1996 Task Force meeting.
Information and materials associated with and leading to the October 
        17, 1996 Task Force meeting.
    Letter Dated October 9, 1996 sent to Task Force members concerning 
the October 17, 1996 meeting from Robert Burns, Vice Chair, Governor's 
Task Force on Cheese Pricing.
    Map to Ramada Inn, site of Task Force meeting.
    Agenda for the October 17, 1996 meeting of the Governor's Task 
Force on Cheese Pricing.
    Summary of Action from the September 19, 1996 Task Force Meeting.
    Letters from the State of California Department of Food and 
Agriculture concerning changes to the current Stabilization and 
Marketing Plans for Market Milk, received from David Ikari, along with 
video tape (shown at September 19, 1996 meeting).
    Graphs showing various price relationships between National Cheese 
Exchange Prices, Federal Milk Order prices, Wisconsin Assembly Point 
Spot prices and CSCE futures prices.
    Recommendation worksheets for members of the Governor's Task Force 
on Cheese Pricing from October 17, 1996 meeting.
    October 17, 1996 meeting topic outline.
    Examples of Alternative BFP for the month of April '96, for the 
month of June '96, and Proposed Phasing-in of Alternative BFP.
    October 17, 1996 DATCP Rule Proposal.
    A March 28, 1996 memo from Alan T. Tracy, Secretary of the 
Department of Agriculture, Trade and Consumer Protection, to the Board 
of Agriculture, Trade and Consumer Protection concerning the National 
Cheese Exchange; Hearing Draft Rule.
    An October 9, 1996 memo from Alan T. Tracy, Secretary of the 
Department of Agriculture, Trade and Consumer Protection, to the Task 
Force members regarding proposals for the Task Force discussion.
    Letter from Jon R. Peterson, Task Force Member, sent to John 
Norton, Director of the Bureau of Trade Practices, regarding Mr. 
Peterson's proposals for cheese pricing.
    Letter, dated October 7, 1996, from Phillip F. Gudgeon, Dairy 
Producer and Commodity Futures Broker, sent to Jon R. Peterson, Task 
Force Member, concerning dairy's price discovery system.
    Letter, dated October 7, 1996, from Bernard V. Golbach, Chairman of 
Masters Gallery Foods, sent to John C. Norton, Director of the Bureau 
of Trade Practices, regarding the October 17, 1996 Task Force meeting.
    FAX, dated October 3, 1996, from Ed Jesse, Task Force Member, to 
John C. Norton, Director of the Bureau of Trade Practices, containing 
recommendations and criteria for evaluating proposals for change in 
cheese pricing.
    Letter, dated October 1, 1996, sent to John C. Norton, Director of 
the Bureau of Trade Practices, from John A. Sturm, President of A. 
Sturm & Sons Inc., concerning proposals on how to improve the cheese 
pricing system.
    Submitted recommendations to the Governor's Task Force on the 
Cheese Exchange by Gary L. Anderson, Task Force Member.
    CSCE Nearby Cheddar Contract and NCE.
    Memo, dated March 28, 1996, from Alan T. Tracy, Secretary 
Department of Agriculture, Trade and Consumer Protection, to the Board 
of Agriculture, Trade and Consumer Protection, regarding the National 
Cheese Exchange; Hearing Draft Rule.
    Tape recording, contained on two cassettes, of the complete October 
17, 1996 Task Force Meeting.
Information and materials associated with and leading to the November 
        14, 1996 Task Force meeting.
    Letter, dated November 7, 1996 and sent to Task Force members 
concerning the November 14, 1996 Task Force Meeting, from Robert Burns, 
Vice Chair, Governors Task Force on Cheese Pricing.
    Letter, dated November 1, 1996, distributed to the members of the 
Task Force on Cheese Pricing from John C. Norton, Director of the 
Bureau of Trade Practices, regarding an additional meeting in December.
    Letter, dated November 1, 1996 from Governor Thompson to the 
members of the Task Force on Cheese Pricing concerning recommendations 
to improve the current cheese pricing system.
    Letter, dated November 13, 1996, from Governor Thompson and 
addressed to Alan T. Tracy, Secretary of Agriculture, Trade and 
Consumer Protection, and Robert Burns, Vice Chair of the Task Force on 
Cheese Pricing, concerning the Governor's recommendations.
    FAX, dated November 13, 1996, from Ed Jesse, sent to John C. 
Norton, Director of the Bureau of Trade Practices, concerning 
supplemental Cheese Task Force recommendations.
    FAX article from the Coffee, Sugar & Cocoa Exchange titled ``CSCE 
Files with CFTC to Trade BFP Milk Contact.''
    Memo, dated November 18, 1996, from Ann Roth, Task Force Staff 
Support, to the members of the Governor's Task Force on Cheese Pricing, 
regarding establishing a cash contact for the cheese on the CSCE.
    Letter from Dan Glickman to Senator Feingold, dated October 29, 
1996.
    A letter, dated October 29, 1996, from R.J. Gould of the National 
Cheese Exchange, Inc. to John C. Norton, Director, Bureau of Trade 
Practices, Wisconsin Department of Agriculture, Trade and Consumer 
Protection, concerning the Governor's Task Force on Cheese Pricing.
    Press release ``Governor Expands Cheese Exchange Task Force'', 
dated November 7, 1996.
    Agenda of the November 14, 1996 Governor's Task Force on Cheese 
Pricing meeting.
    Summary of Action for Task Force meeting held on October 17, 1996.
    Minutes of the October 17, 1996 Governor's Task Force on Cheese 
Pricing meeting.
    Statement from Upper Midwest Milk Producers Association, included 
with the minutes of the October 17, 1996 meeting and distributed to the 
Task Force members at the November 14, 1996 Task Force meeting.
    Summary of Preliminary Proposals Still on the Table as of November 
14, 1996.
    ``Why do Corporations Have More Rights than You?'' Democracy 
Unlimited of Wisconsin Cooperative. Madison, WI. Handed out by this 
group at Nov. 14 meeting.
    ``The National Cheese Exchange: Impacts on Dairy Industry 
Pricing.'' Hamm, Larry G., Robert March. Dairy Markets and Policy-
Issues and Options. Cornell University. February 1995.
    Tape recording, contained on two cassettes, of the complete 
November 14, 1996 Task Force Meeting.
Information and materials associated with and leading to the December 
        5, 1996 Task Force meeting.
    A letter dated November 26, 1996 sent to the members of the 
Governor's Task Force on Cheese Pricing from Bob Burns, Vice Chair 
Governor's Task Force on Cheese Pricing, concerning the December 5, 
1996 Task Force meeting.
    Agenda for the December 5, 1996 Governor's Task Force on Cheese 
Pricing meeting.
    Map to the Dane County EXPO Center, where Dec. 5, 1996 meeting was 
held.
    Summary of Action from the November 14, 1996 Task Force meeting.
    Proposal to Replace the BFP submitted by Darin Von Ruden.
    List of Proposals Adopted at the November 14, 1996 meeting.
    FAX letter, dated November 25, 1996, from Commissioner, Gene 
Hugoson of the Minnesota Department of Agriculture, to Secretary 
Glickman concerning the NCE and pricing of cheese.
    Information sheet dated November 18, 1996 and titled: ``What is New 
With the Governor's Task Force on Cheese Pricing?''
    News release, December 5, 1996, from Farm Bureau News entitled 
``Farmers need to take milk pricing to USDA, according to farmers on 
Task Force on Cheese Pricing.''
    Letter from Dory Kidder to the Task Force on Cheese Pricing 
concerning the pricing of cheese.
    Letter, dated November 11, 1996, from Rod and Pam Olson, Dairy 
Producers, sent to Robert Burns, Vice Chair of the Governor's Task 
Force on Cheese Pricing, concerning their proposal for changes in the 
cheese pricing system.
    Letter, dated November 26, 1996, from Marvin Zorn concerning the 
Green Bay Cheese Exchange.
    The Base Month Minnesota-Wisconsin Price and Basic Formula Price 
released noon, C.S.T., December 5, 1996, from the Wisconsin 
Agricultural Statistics Service.
    News release, dated December 3, 1996, from the United States 
Department of Agriculture titled ``USDA Announces Suggested Milk Order 
Consolidations.''
    Family Farmers vs. Kraft FoodsTM. UW Greens. Madison, 
WI. Handed out by UW Greens at this meeting.
    Letter from Kevin Kirker to Governor Thompson, dated November 27, 
1996, and FAX to John C. Norton, Director of the Bureau of Trade 
Practices, for distribution to the Task Force members.
    Letter from John Peterson, received via FAX on December 4, 1996, to 
the Task Force members regarding his recommendations for improving the 
system of cheese pricing.
    Tape recording, contained on two cassettes, of the complete 
December 5, 1996 Task Force Meeting.
Information received after final Task Force meeting
    Letter from Richard J. Gould, President of the National Cheese 
Exchange, dated December 26, 1996, objecting to the proposed Task Force 
on Cheese Pricing report. This letter is addressed to Carol Svenson, of 
the Department of Agriculture, Trade and Consumer Protection and Task 
Force Member.
    Minutes of the December 5, 1996 Task Force meeting.

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                       Task Force Recommendations

    Mr. Tracy. I would like to just quickly summarize the 
recommendations in it. The first and lead recommendation is 
very much to the point of these hearings. The recommendation is 
that the U.S. Department of Agriculture should no longer use 
the National Cheese Exchange price in the price adjuster used 
to determine the basic formula price for manufacturing milk. 
The price of manufacturing milk under a Federal milk marketing 
order should be based on supply of and demand for milk used in 
the manufacture of dairy products. I will return to that one.
    The next recommendation was that the Coffee, Sugar, and 
Cocoa Exchange and/or the Chicago Mercantile Exchange establish 
a cash market for cheese. That has not happened yet, but we 
have seen some hope that that could occur.
    The next recommendation was to recommend that USDA expand 
the weekly Wisconsin Assembly Point Price series to a 
statistically reliable and regional series that would include 
major manufacturing areas. And also mentioning the possibility 
of mandatory reporting, if necessary, for statistical 
reliability. And I am pleased that USDA is proceeding on that 
recommendation.
    The fourth recommendation was that the Commodity Futures 
Trading Commission and the Federal Trade Commission reevaluate 
their regulatory authorities regarding the National Cheese 
Exchange. And that is the very subject of a bill that Senator 
Kohl has introduced.
    Then there were four more recommendations that were 
directed to the National Cheese Exchange board, dealing with 
such things as daily price limits, anonymous trading, 
electronic trading, and so on.
    I would like to caution the subcommittee that these 
suggestions are not magic solutions that will miraculously 
provide high, stable milk prices for our Nation's dairy 
farmers. With the end of the Federal dairy price support 
program in sight, we have left the era of Government-supported, 
stable milk prices and entered the era of market-driven 
national and even international pricing.
    However, the task force suggestions would, if implemented, 
move milk pricing to markets that are more competitive and that 
will more accurately represent the supply and demand in milk 
for all of its manufacturing purposes.
    Returning to that first recommendation. The recommendation 
includes both an interim replacement for the National Cheese 
Exchange price in the current basic formula price, as well as 
longer-term replacements for the basic formula price itself. In 
the short term, the NCE price can be replaced by a national 
average cheese price, collected and reported by USDA's National 
Ag Statistic Service. And you have heard a report on how that 
series is being developed.
    In the longer term, we suggested a couple of alternatives. 
One would be substituting an average monthly milk futures price 
for the basic formula price or, two, replacing the basic 
formula price with a competitively determined milk-pay price 
collected through a national survey of prices that dairy plants 
actually pay for milk.
    The task force has also recommended that USDA and the 
Federal dairy policy should be moving toward the deregulation 
of milk pricing, including the eventual elimination of setting 
a basic formula price for milk.
    It is easy to get lost in the complex details of the milk 
marketing system, but for the purposes of illustration, let us 
compare the current pricing mechanism with milk to the pricing 
mechanism for corn. Imagine for a moment that Cargill, 
Continental Grain and Mitsubishi sat down once a week with 
Ralston Purina, Nabisco, and Tyson's Foods, just for examples, 
to buy and sell a few trainloads of corn. And that regardless 
of whether any corn actually changed hands, the prices at which 
corn was traded or was at least offered or bid became the price 
of corn for virtually every corn transaction in the coming 
month. Corn farmers would be up in arms.
    Yet this is just about what happens for milk, based on 
trading on the Cheese Exchange, where a handful of large 
companies set the price for more than 100,000 dairy farmers in 
the United States.
    Dairy farmers, however, unlike corn farmers, do not have 
the option of storing their product to wait for a better price. 
And currently, they do not even know what they will be paid 
until the month after they ship their milk.
    Now, compare that scenario that I gave for what actually 
does occur in the corn market. Every day, thousands of farmers 
and hundreds of grain elevators sell and buy corn or agree to 
buy and sell corn at a future time using prices from the 
futures contract markets. In addition, Wall Street investors 
and market speculators bring their knowledge and their 
expertise to the futures market, and actively participate.
    The expectations of thousands of individuals on the future 
supply and demand for corn are measured by the minute. Compared 
to the level of information about, participation in, and 
sophistication of the market mechanism for corn, our dairy 
market mechanisms are still in their infancy.
    If we have a clear vision of where we would like to go, we 
can better determine what direction to take the next step. For 
the best future dairy pricing mechanisms, why not use as a 
model the systems used in corn, wheat, soybeans, and other 
agricultural commodities, and adapt it to the peculiarities of 
milk? Why could not dairy farmers, at least on a monthly or 
quarterly basis, evaluate offers from various dairy plants for 
their upcoming production? Such offers could cover a range of 
time periods from which the milk producer could choose.
    Dairy farmers could also price their product in advance on 
the futures market. The plants, at the time they contract for 
future production, could sell milk futures that they would buy 
back as the milk is delivered.
    Further, processors could also hedge their purchases. 
Investors and speculators, seeing the makings of a real market, 
would bring their money, their expertise, and their analysis to 
that market. The dairy futures market would work to provide a 
clear measure of future price expectations, updated by the 
minute.
    I am optimistic that dairy futures markets will grow, that 
they will eventually provide a competitive, dynamic market, 
reflecting an accurate value of the demand for and supply of 
milk and dairy products. I would like to specifically suggest 
that dairy futures prices could be phased in to the basic 
formula price calculation as participation in those contract 
markets grows.
    USDA and Federal dairy policy need to evolve, reducing 
Government involvement and relying more on the marketplace. We 
need action now to improve the milk pricing mechanism, but we 
also need to take a longer term view of the milk pricing reform 
effort currently underway.
    One of the farmers who came to Washington with Governor 
Thompson in February, and met with Senator Kohl and others of 
our delegation and Secretary Glickman, made a statement to 
Secretary Glickman that I would like to repeat for you today. 
This was Pete Knigge of Omro, WI, and he said: ``I am not here 
to complain about the price of milk. I am here to fix the way 
milk is priced.''
    No; he was not happy about pay prices this past winter. But 
he does not want you or the USDA or any other Government entity 
to set dairy prices. Now, that is not the only view of Federal 
pricing in Wisconsin, but I do believe it is the majority view.
    Mr. Knigge wants those prices set in the marketplace. But I 
think he and all of the farmers in Wisconsin, virtually, agree 
that they want a mechanism that they can trust to accurately 
tell them what the market price is for their product. I think 
Pete's statement concisely describes the mission before us 
today.

                           Prepared Statement

    I thank the committee and the chairman for your interest in 
this topic, and especially Senator Kohl for arranging for me to 
be here, and for your continued constructive work on national 
dairy policy reform. I look forward to questions.
    Senator Cochran. Thank you, Mr. Tracy.
    [The statement follows:]
                  Prepared Statement of Alan T. Tracy
    Good morning, Chairman Cochran and Subcommittee members. Thank you 
for inviting me to share with you my perspective on current dairy 
pricing issues, and in particular, alternatives to the National Cheese 
Exchange in determining milk prices.
    Farm milk prices, and the mechanism for determining them, are of 
utmost importance to Wisconsin farmers and Wisconsin's economy. 
Wisconsin leads the nation in the number of dairy farmers and dairy 
cows and in the production of cheese. The dairy industry contributes 
over $17 billion to Wisconsin's economy, nearly 10 percent of our 
state's overall economic output.
    Just about a year ago today, our department released a report 
detailing the findings of a comprehensive study on cheese pricing and 
trading activities on the National Cheese Exchange (NCE). The study was 
conducted by researchers at the University of Wisconsin at our request 
and under our authority to investigate business practices in Wisconsin. 
The report concluded that ``As currently organized, the Exchange 
appears to facilitate market manipulation.'' The report stimulated 
widespread interest and debate about the NCE, including a Congressional 
hearing before the House Committee on Agriculture's Subcommittees on 
Livestock, Dairy and Poultry, and Risk Management and Specialty Crops.
    The report's findings were of particular concern because of the 
link between NCE prices and milk prices paid to farmers. While less 
that two percent of all bulk cheddar cheese is traded on the National 
Cheese Exchange, the NCE price largely determines the ``Basic Formula 
Price,'' the price of manufacturing milk under the entire Federal milk 
pricing system. It is vitally important that the underlying market or 
markets be competitive and that farmers have confidence that prices 
accurately reflect the supply of and demand for milk.
    Wisconsin Governor Thompson convened a Task Force on Cheese Pricing 
to ``make recommendations to improve the current system of pricing for 
the benefit of the dairy industry and consumers.'' A copy of the Task 
Force's report to the Governor is attached for the record. Governor 
Thompson, along with Task Force members, representatives of our farm 
organizations and members of our Congressional delegation met with USDA 
Secretary Glickman in early February to present the Task Force's 
recommendations.
    At the outset, I would like to caution this Subcommittee that these 
suggestions are not magic solutions that will miraculously provide 
high, stable milk prices for our nation's dairy farmers. With the end 
of the federal dairy price support program in sight, we have left the 
era of government supported, stable milk prices and entered the era of 
market-driven, national, and increasingly, international pricing. 
However, the Task Force suggestions, if implemented, will move milk 
pricing to markets that are more competitive and that will more 
accurately represent the supply of and demand for milk for all its 
manufacturing uses.
    The Task Force recommendations include both an interim replacement 
for the NCE price in the current Basic Formula Price (BFP), as well as 
longer term replacements for the BFP. We have suggested that in the 
short term, the NCE price be replaced by a national average cheese 
price, collected and reported by USDA's National Agricultural 
Statistics Service (NASS). NASS has recently begun collecting this 
price series. For the longer term, we have suggested two alternatives: 
(1) Substituting an average monthly milk futures price for the BFP; or 
(2) Replacing the BFP with a competitively determined ``milk pay 
price,'' collected through a national survey of prices that dairy 
plants actually pay for milk, less performance premiums, Class I pool 
disbursements and over-order values. The Task Force has also 
recommended that USDA and federal dairy policy should be moving toward 
the deregulation of milk pricing, including the eventual elimination of 
setting a Basic Formula Price for milk.
    Compare the current pricing mechanism for milk with the pricing 
mechanism for corn. Imagine for a moment, that Cargill, Continental 
Grain and Mitsubishi sat down once a week with Ralston-Purina, Nabisco 
and Tyson Foods, for example, to buy and sell corn, and that regardless 
of whether any corn actually changed hands, the prices at which corn 
was traded (or was offered or bid) became the price of corn for 
virtually every corn transaction in the coming month. This is what 
happens for milk, based on trading on the NCE. Compare this scenario 
with what actually occurs in the corn market: Every day, thousands of 
farmers and hundreds of grain elevators sell and buy corn or agree to 
sell and buy corn at a future time, using prices from the futures 
contract markets. In addition, Wall Street investors and market 
speculators bring their knowledge and their expertise to the futures 
market and actively participate. The expectations of thousands of 
individuals on the future supply of and demand for corn are measured by 
the minute. Compared to the level of information about, participation 
in and sophistication of the market mechanism for corn, our dairy 
market mechanisms are still in their infancy.
    If we have a clear vision of where we would like to go, we can 
better determine in what direction to take the next step. For the best 
future dairy pricing mechanisms, let's use the systems used for corn, 
wheat, soybeans and other agricultural commodities, adapted to the 
peculiarities of milk. Why couldn't dairy farmers, on a monthly or 
quarterly basis, evaluate offers from various dairy plants for their 
upcoming production? Such offers could cover a range of time periods 
from which the milk producer could choose. Dairy farmers could also 
price their product in advance on the futures market. The plants, at 
the time they contract for future production, could sell milk futures 
that they would buy back as the milk is delivered. Further processors 
could also hedge their purchases. Investors and speculators, seeing the 
making of a real market, would bring their money, expertise and 
analysis to the market. The dairy futures market would work to provide 
a clear measure of future price expectations, up to the minute.
    I am optimistic that the contract markets for dairy futures will 
continue to grow, and that they will eventually provide a competitive, 
dynamic market reflecting an accurate value of the demand for and 
supply of milk and dairy products.
    USDA and federal dairy policy need to continue to evolve, reducing 
government involvement and relying more on the marketplace. We need 
action now to improve the milk pricing mechanism, but we also need to 
take a longer term view of the milk pricing reform effort currently 
underway.
    One of the dairy farmers who came to Washington with Governor 
Thompson in February, Pete Knigge of Omro, Wisconsin, made a statement 
to Secretary Glickman that I'd like to repeat for you today. He said, 
``I'm not here to complain about the price of milk, I'm here to 
complain about the way milk is priced.'' No, he wasn't happy about his 
pay prices this past winter. But he doesn't want you, or USDA, or any 
other government entity to set dairy prices. He wants them set in the 
marketplace, but he wants a mechanism he can trust to accurately tell 
him the market price for his product. I think Pete's statement 
concisely describes the mission before us today.
    I want to thank the committee for your interest in this subject and 
I especially want to thank you, Senator Kohl, for arranging for me to 
be here today and for your constructive work to reform national dairy 
policy. I would be pleased to answer any questions committee members 
may have.

    [Clerk's note.--The task force report appears with Mr. 
Tracy's testimony previous to this prepared statement.]

                 Status of the National Cheese Exchange

    Senator Cochran. Senator Kohl.
    Senator Kohl. Thank you very much, Mr. Chairman.
    Mr. Tracy, can you bring any information to us with respect 
to the National Cheese Exchange? Are they closing? Are they 
closing soon? How quickly do we have to develop an alternative? 
What can you tell us, Mr. Tracy?
    Mr. Tracy. Well, I think you will have some other people 
who will be testifying later, who are closer to that than I am, 
who are, for instance, members of the board of the exchange. I 
believe that there are some here who are members or at least 
have those members as memberships of their associations. And I 
think that is better directed to them.
    I am pleased that the USDA is proceeding to put together 
the price series that they are working on. I agree with 
Assistant Secretary Collins that they do need to do some 
proofing or some truthing of that mechanism before they 
substitute it for the NCE right now. I do think that the M-W 
does provide an alternative--not precisely the old M-W, because 
there are some things that are wrong with it. But you could 
modify the M-W and go back to that mechanism. It did not use 
the Cheese Exchange price directly in the calculation, as the 
basic formula price does.
    One of the problems with the M-W is that it was based 
purely on grade B pricing, grade B milk shippers, and the 
number of those is continuing to decline in the upper Midwest, 
and yet much of the grade A milk that is shipped in Wisconsin 
is also used for manufacturing purposes--over 80 percent of it. 
So you could substitute grade A milk in for a percentage of the 
grade B, modify that M-W, and come up with something, if you 
had to, and I think USDA could do that if they had to.
    But I am hopeful that they will rather quickly be able to 
acquire some assurance that their milk survey work is a 
suitable substitute.
    Again, keep in mind that that is still going to reflect an 
awful lot of what the Cheese Exchange dictates. Right now, most 
of the trades that occur between plants who buy and sell cheese 
are done with the basis of the Cheese Exchange. So, even if we 
are surveying cheese prices, we are going to be getting--and we 
are surveying maybe 30 percent of all the sales, for instance--
we are still going to be reflecting what goes on in that very 
narrow market in the Cheese Exchange price.
    That is why I would like to see us develop a price 
discovery mechanism for milk. You know, there is not a price 
discovery mechanism for milk now. This is the No. 1 
agricultural commodity in the United States and there is no 
price discovery mechanism for it. It is purely a calculated 
price, calculated by USDA for the base price, and then 
additional calculations made by the plants who pay the farmers, 
in turn, calculated off the cheese price. There is a price 
discovery mechanism for cheese, but it does not involve the 
participation and the broad number of players with broad 
amounts of information that would make it as good a market as 
it can be.
    Senator Kohl. All right. I am done. I just want to ask a 
question, if I might, quickly. Could you give us an opinion on 
what could happen in the dairy industry, and in dairy States as 
important as Wisconsin, if we continue to have a segmentation 
regionally?
    Mr. Tracy. Well, that is a good question.
    Senator Kohl. Can you give us an opinion? I would like your 
opinion of it for the record. How concerned are you that we 
might have a segmentation of the dairy industry in this country 
that would really wreak havoc?
    Mr. Tracy. Well, there are two kinds of segmentation that 
take place. One is political segmentation. The dairy industry, 
being a powerful force in every State in the Nation virtually, 
is very powerful in its regional groups. As you know, it is 
easier to stop something from happening here in Washington than 
it is to make something go.
    Unfortunately, when the dairy industry has not been in 
agreement with each other, it has been easy to keep things from 
happening. That is why, I think, that the progress that was 
made in the 1996 farm bill of requiring some changes in the 
milk marketing order system, in requiring some changes in the 
way that prices are developed, are really important, because 
now something has to happen. Of course, you kind of dumped it 
in poor Secretary Glickman's lap. But something definitely has 
to happen in terms of changing these pricing mechanisms.
    If the dairy industry is together, they are unstoppable, 
because they are so powerful. But any one broad regional group 
has heretofore been able to stop pricing. The other that you 
have talked about, in segmentation, I think what we mean is a 
balkanization of prices or the continued lack of a national 
pricing system.
    Oddly enough, we do have a national pricing system for 
cheese. The pricing for it tends to come out of our part of the 
country, where we have roughly one-fourth of the dairy farmers. 
But there is a national pricing system for cheese. There is not 
a national pricing system for fluid milk.
    Fluid milk is priced order by order. I know the chairman 
has done a lot of work in trying to overcome European export 
subsidies and European import barriers. Yet what you have, 
between individual marketing orders for fluid milk is very 
similar to what Europe has, with its variable levy for imports 
of agricultural commodities that bring that price back up.
    If, for instance, you ship a load of fluid milk from 
Wisconsin down to, let us say, the south Florida order--I 
cannot remember exactly what that differential is in the south 
Florida order, but it is darn near 100 percent fluid 
utilization and it is something over $4 a hundredweight--so 
those farmers in that area are guaranteed a minimum price of 
something like $4 over the BFP. That is a pretty powerful 
price.
    Well, you would think, with free trade, that would work 
itself out. We have interstate highways now. We can ship a 
truckload of milk from Wisconsin to south Florida without even 
turning on the refrigerator and not lose more than 1  deg.C of 
temperature in it, with modern equipment. But what happens is 
that the bottler who receives that milk in south Florida has to 
pay that differential into that local pool in south Florida 
where it gets distributed to Florida milk producers, even 
though that milk might have come from Wisconsin. And the 
Wisconsin milk producers get none of the benefit of the higher 
fluid milk price for that load. They essentially get the 
manufacturing price.
    That is the regionalization of pricing that we have through 
the order system. So getting at the 10 orders is going to help. 
You are still going to have big differences in utilization. You 
still have barriers to trade. I think that those compensatory 
payments are a terrible thing that are a restraint of trade 
within the United States.
    Senator Kohl. Thank you, Mr. Tracy.
    And thank you, Mr. Chairman.
    Senator Cochran. Senator Leahy, have you any questions for 
the witness?
    Senator Leahy. Thank you.
    Are you suggesting that a better way is to do something 
like the Cheese Exchange, or did I misunderstand you?
    Mr. Tracy. No; not at all. We proposed a number of specific 
alternatives to the Cheese Exchange for pricing.
    Senator Leahy. Because I was going to say, having somebody 
meet for a couple of hours a week and manipulate it, I would 
hope you would not want that.
    Mr. Tracy. Right.
    Senator Leahy. I am sure the dairy farmers would be 
delighted to hear how powerful they are. I think in my region 
in New England, I think they make up about one-tenth of 1 
percent of the population. I think they are going to be 
impressed to hear from you just this enormous power they have. 
I can think of some of the States that have joined for what 
they think is best for both consumers and producers, and that 
includes States that have about a dozen dairy farmers in their 
whole State.
    Maybe if you spent time in some of these States, it looks a 
little different. It may be the case in Wisconsin. Maybe this 
is a major part. I think in my part of the world, they have 
neither the electoral or financial muscle that they might have 
in Wisconsin. And if they get gains with our State legislators 
or with members of Congress, it is because they have made a 
darn good case for what they want, not because they have any 
muscle at the ballot box. And, frankly, I think they have made 
some darn good cases.
    I just thought I would throw that in, for whatever it is 
worth.
    Mr. Tracy. Thank you very much.
    Senator Leahy. If we are going to be speaking in these kind 
of euphemisms, Mr. Chairman, I just thought I would throw in a 
few facts.
    Senator Cochran. We are trying to find out what everything 
is worth today.
    Mr. Tracy. If I could respond very briefly, Senator. I 
agree with you. I did not intend to imply that they had the 
power to overcome the wishes of consumers. Only that, in terms 
of things like details of dairy policy, that if the entire 
dairy industry is together, because they are constituents of 
all 100 Senators of the U.S. Senate, for instance----
    Senator Leahy. If they are all together, it is a lot 
better.
    Mr. Tracy [continuing]. They can accomplish a lot. But it 
is also possible, when they have regional differences, that 
they stymie each other.
    Senator Leahy. I have been here for 22 years, and I have 
always wished fervently for the dairy industry, nationwide, to 
be together on some of these issues. And being an optimistic 
sort, and this close to St. Patrick's Day, I will keep on 
wishing. [Laughter.]
    Mr. Tracy. Thank you, Senator.
    Senator Cochran. Thank you, Mr. Tracy, for being here and 
for your testimony at this hearing.
    Next, I am going to call on a panel of dairy farmers and 
producers we have with us today: Mr. Harold Howrigan, president 
of St. Albans Cooperative Creamery, Inc., in Vermont; Buckey 
Jones, board of directors of Mid-America Dairymen, from 
Mississippi; Arden Tewksbury, manager of the Progressive 
Agricultural Organization; Bill Brey, president of the 
Wisconsin Farmers Union; and Ken Zurin, a dairy farmer from 
Pennsylvania.
    We appreciate very much the attendance of this panel of 
witnesses. And you can be assured that it is your interest that 
has provoked the questions that we have raised to the Secretary 
and the policymakers here in Washington about dairy pricing and 
whether reforms are indicated and, if so, what reforms ought to 
be considered.
    Let us start with Mr. Howrigan. We have copies of 
statements. They will all be placed in the record in their 
entirety. We encourage you to summarize your comments so we 
will have a chance for questions.
    Senator Leahy. Mr. Chairman.
    Senator Cochran. Senator Leahy.
    Senator Leahy. Mr. Chairman, I appreciate your courtesy. 
Because, as you know, Mr. Howrigan has an airplane back to 
Vermont and we do have a big storm coming in the morning. So he 
needs to get this one. So I appreciate that.
    Senator Cochran. We appreciate that, and we hope this does 
not cause anybody any inconvenience.
    Mr. Howrigan, you may proceed.
STATEMENT OF HAROLD J. HOWRIGAN, PRESIDENT, ST. ALBANS 
            COOPERATIVE CREAMERY, INC., VERMONT
    Mr. Howrigan. Thank you, Mr. Chairman, members of this 
committee. I am very honored, of course, to be here. And I 
intend to do just that, summarize briefly and touch on a few 
points. I am a dairy farmer from Fairfield, VT, the president 
of St. Albans Cooperative Creamery, and I speak on behalf of 
our 600 members and the other farmers of the Northeast who 
share our concerns that we are addressing here today.
    Vermont has just under 2,000 dairy farmers in production. 
The average size is 85 to 90 cows. And they produce 1 to 1.5 
million pounds of milk annually. In Vermont, we produce over 
400 million dollars' worth of milk, 94 to 95 percent of which 
is sold outside of Vermont. Which means that nearly $400 
million of outside money comes into the State each year. This 
is generator income. It has a multiple factor of 4 to 5 times 
its initial value.
    Vermont dairy farmers employ about 40,000 people directly 
and with the related businesses. In our county, Franklin 
County, in the northwest section of Vermont, we exported over 
700 million dollars' worth of agricultural products in 1995. 
The dairy industry is of utmost importance to the State of 
Vermont. In Vermont, dairy farming accounts for 80 percent of 
our agricultural income--a higher percentage than any other 
State in this country.
    We are well located to supply one-third of our consuming 
public, which live within a 500-mile radius of our source of 
supply. Which guarantees them a direct and immediate source of 
fresh product. I think this is very important.
    We need our farms in Vermont and New England. And our 
farmers are dependent on this basic formula price, which is, of 
course, very directly correlated to the National Cheese 
Exchange and the cost of production in the United States. Dairy 
farmers throughout the Nation need a base price that is 
understandable and creates a fair price.
    The information used to formulate this basic price needs to 
come from broad, reliable sources. This information must have a 
track record which could be used to calculate past prices for 
comparison as well as to provide a prediction for the future 
market changes.
    The futures market for cheese has been suggested as an 
alternative. The most intriguing portion of this futures market 
is the minimum price fluctuation requirement used in the 
commodity markets. This will provide a cap or a damper on 
excessive movement, as we have witnessed in this last fall of 
our milk prices.
    The basic formula price is important to all our dairy 
farmers nationwide. And this basic price should be connected to 
a pricing mechanism that is more reflective of market 
condition. The trading of less than one-half of 1 percent of a 
product should not establish a basic price for the other 99.5 
percent. I think this creates a problem.
    A more stable activity here could restore the dairy farmer 
confidence in the formulation of the prices that they are paid 
for their milk. Now, it may take time to implement a variable 
alternative to the price data from the National Cheese 
Exchange. And within this timeframe, again, we need to look at 
some of the existing pricing mechanism and not rely solely on a 
new source, but be aware of the excessive fluctuation that 
might occur.
    I would like to quote my brother Francis. He was in our 
local State legislature. He is quoted as saying that farmers 
must live like they are going to die tomorrow, but you farm 
like you are going to live forever, because of our long-term 
investments.

                           Prepared Statement

    I thank you again for the opportunity to address you on 
these issues, and I appreciate your interest in taking some 
proper, corrective action. And it was touched on a little bit 
previously on the basic price of fall, over spring, milk. And 
it is interesting to note in our co-op at St. Albans, we have 
kept a fall incentive. And we pay our members $1 a 
hundredweight over their basic price in the fall. Just an 
extra, additional premium for fall production over the spring 4 
months. The months of March, April, and May as a base, then the 
months of September, October, and November is the payback. This 
has worked very well to level our production in our small co-
op.
    We thank you very much.
    Senator Specter [presiding]. Thank you very much, Mr. 
Howrigan.
    [The statement follows:]
                Prepared Statement of Harold J. Howrigan
    I would like to thank this committee for the opportunity to speak 
to you today regarding the National Cheese Exchange.
    My name is Harold Howrigan and I am a dairy farmer from Fairfield, 
Vermont. At the current time, I farm three farms with my family. The 
three farms comprise a total of 1,800 acres and 500 head of Holstein 
cattle. In 1996, my family shipped over 7 million pounds of milk to the 
St. Albans Cooperative Creamery, Inc. I am the President of the St. 
Albans Cooperative Creamery, Inc., and I speak today on behalf of 600 
dairy farmer members in Vermont and upstate New York.
    In 1996, Vermont dairy farmers produced over $400 million worth of 
milk. Most (94-95 percent) of this was sold outside of Vermont, which 
means that nearly $400 million of out side money comes into Vermont 
because of the investment and hard work of our dairy farmers. This is 
generator income and has a real impact of 4 to 5 times greater than its 
initial value to our local economy.
    Vermont agriculture and its related businesses employ 40,000 people 
in Vermont. Franklin County, Vermont alone exported over $700 million 
in agricultural products in 1995. The dairy industry is of the utmost 
importance to the state of Vermont.
    The livelihood of our dairy farmers and of our State's economy is 
dependent of the Basic Formula Price. The BFP is used to formulate the 
prices for Class I, II and III milk. These Class prices, along with 
Class III-A, are used to calculate the blend prices paid to dairy 
farmers based on percent utilization of each Class of milk in Federal 
Order 1. The average blend price paid to dairy farmers in Federal Order 
1, Zone 21 for 1994 was $13.10, for 1995, $12.66 and for 1996, $14.63. 
The cost of production of milk in the Northeast as reported by the USDA 
was $17.68 in 1994 and $17.77 in 1995. Grain prices were elevated in 
1996 so the cost of production of milk was higher still in 1996. As you 
can see, farmers in the Northeast are not being paid at a level that 
meets the USDA's calculation of the cost of production. I have attached 
a graph summarizing this information for 1995 and 1996.
    There has also been volatility in the average blend price between 
1994 and 1996. From 1994 to 1995 the price decreased by 3.48 percent. 
Between 1995 to 1996 the price increased by 7.90 percent. Dairy farmers 
have been riding a roller coaster of milk prices within the year as 
well. The lowest blend price for 1996 occurred in April at $13.53. The 
highest blend price occurred in October at $16.04. This is a 18.6 
percent increase in price in 6 months. The January 1997 blend price for 
Zone 21 was $12.96. This represents a 23.8 percent drop in the blend 
price in 3 months. This volatility is linked to the Basic Formula Price 
and to the National Cheese Exchange prices for 40 pound blocks of 
cheddar cheese. Attached is a chart for 1996 showing the direct 
correlation between the Basic Formula Price and the National Cheese 
Exchange 40 lb. Block price.
    The National Cheese Exchange is a part of the Basic Formula Price 
calculation, although it was not established for this purpose. The 
weekly market was established over 50 years ago to allow cheese makers 
and buyers to sell excess cheese or buy cheese when short. Its purpose 
was not intended for use in the calculation of the national base milk 
price. There are many concerns about the National Cheese Exchange 
including price volatility, representativeness of trades, ``thin 
market'', and market dominance.
    We have witnessed the price volatility this year, with record highs 
and rapid declines in prices. The National Cheese Exchange is 
considered a ``thin market'' because of little trading volume and the 
possibility that individual firms can exert undue influence on prices 
and other terms of trade. The volume of cheese traded is small compared 
to the entire United States market for cheese. The less than 1 percent 
of cheese traded at the Exchange sets prices for all the cheese 
produced. This ``thin market'' concern and that of market dominance has 
been made evident by a recent report published by Mueller, Marion, Sial 
and Geithman which accuses Kraft of manipulating the market to depress 
cheese prices.
    The Cheese Exchange does not represent a large amount of cheese or 
a diversity of cheese products. The 40 members of the Exchange trade 
cheese for 30 minutes each Friday morning. Trading on the Cheese 
Exchange represents only .2 to .5 percent of annual cheese production. 
Prices have been volatile on the cheese exchange and in the last part 
of 1996 were dramatic. The high for 40 pound blocks occurred in August 
of 1996 at $1.6942 per pound and the low occurred in December at 
$1.2373 per pound. Alternatives to the National Cheese Exchange must or 
should be more reliable indicators of market supply and demand for 
products and provide more stability in milk prices. Cash markets such 
as the National Cheese Exchange are indicators of supply and demand 
conditions for particular companies that trade on the Exchange, but may 
not indicate what is being paid in the marketplace.
    Cheese is an important part of the national dairy industry. 
Approximately 36 percent of the United States milk supply is made into 
cheese. In years past, University of Wisconsin Economists determined 
that 92 percent of the change in the Minnesota Wisconsin prices series 
could be explained by changes in the cheese price. Prices paid for 
cheese will need to play a role in the formulation of a base price for 
manufacturing milk.
    A replacement is needed for the National Cheese Exchange price data 
in the formulation of the Basic Formula Price. Accurate price discovery 
is very important to any milk pricing system. The market value of 
manufactured products can be obtained by price surveys, trading on cash 
markets, trading on futures markets or specific data on sales 
transactions. I am pleased that the USDA has begun a survey of cheese 
prices nationwide. This survey could be a useful alternative to the 
National Cheese Exchange data but, I also have concerns about the 
information contained in this survey. The comparisons must be real. 
Cheese prices must be reported for identical product composition (more/
less moisture or fat) and insure pricing reflects same terms of sale.
    It is important to obtain weighted average prices received that is 
reported by manufacturers for actual commodity sales. This should be 
done for all commodities and not just cheese. It should provide the 
most accurate value of manufactured products and the value of milk 
going into these products.
    The replacement for the National Cheese Exchange price data must 
also have historical information available. Historical information 
could be used to calculate past prices for comparison as well as 
provide a prediction for future market changes. The futures market for 
cheese has been suggested as an alternative. The most intriguing 
portion of the futures markets is the Minimum Price Fluctuation 
requirement used in the commodities markets. This provides a cap to 
price movement on the market. This cap would provide more stability to 
dairy farmer prices through a more incremental and known change in 
cheese prices. Futures markets can be very beneficial to processors and 
producers in time. However, based on the current minimal activity, I am 
not sure that the futures price should be used to base current milk 
prices. If a new cash market is used in the calculation of the basic 
formula price and there is no historical information, it would be 
important to have some kind of price snubber for a period of time to 
ensure that this new cash market reflects true market conditions.
    Obtaining the price data required for the calculation of the Basic 
Formula Price should be one step in the overall reform of this pricing 
system as part of the federal order consolidation. Several options have 
been proposed for an alternative to the Basic Formula Price. I would 
ask you to appraise each proposal using the following criteria: Long 
life, will the proposed alternative to the BFP be useful for at least 
10 years; Understandable, this pricing mechanism must be clear and 
evident to the dairy farmers that must survive its outcome. They must 
have confidence in the process; Geographic uniformity, manufactured 
dairy products compete in a national market which suggests a uniform 
national price for milk used in manufacturing; and this pricing system 
must reflect the manufacture milk market, be it prices for butter, 
nonfat dry milk and cheese.
    The Basic Formula Price is important to all dairy farmers 
nationwide. The basis for the calculation for the BFP should be 
connected to a pricing mechanism that is more reflective of market 
conditions. A pricing mechanism that has broader trading activity and 
oversight of this trading could restore dairy farmer confidence in the 
formulation of their milk price to calculate their milk checks.
    Farmers must live like they are going to die tomorrow, but must 
farm as if they are going to live forever.
    I thank you again for the opportunity to address you on this issue.

    [GRAPHIC] [TIFF OMITTED] T01MA13.030
    
    [GRAPHIC] [TIFF OMITTED] T01MA13.031
    
                    National Survey of Cheese Prices

    Senator Specter. Senator Leahy has questions.
    Senator Leahy. I wonder if I might, Mr. Chairman. I 
appreciate this, because I think that Mr. Howrigan is going to 
have to leave right after for an airplane. I would note--and 
his whole statement is in the record--he makes a point that we 
should all think about. In here, he says farmers must live like 
they are going to die tomorrow, but must farm as if they are 
going to live forever. And in your State, my State and all 
others, that is the case.
    And to the extent that governmental policies can give some 
sort of predictability, I think we should. This chart next to 
me, Harold, shows that not once between 1974 through 1993 did 
any trading on the Exchange account for more than 1 percent of 
total cheese production. But the Department of Agriculture 
accords prices found on the Cheese Exchange a significant 
amount of weight. These tiny amounts of trading carry a huge, 
disproportionate amount in triggering the prices.
    Now, Secretary Glickman has said that he will work with us 
to devise a better option for replacing it. Senator Jeffords 
and I made a proposal to him. We suggested that they do some 
kind of an online random thing, like the New York Times Best-
Seller List does. They do not go to the same bookstore every 
time to check which books are selling, because it would be very 
easy just to manipulate that by the publishers just going in 
and buying those books. They go random.
    Do you think something like that, a national survey of 
cheese prices, random, electronic, weekly, mandatory, could 
give a price that represents the market, rather than something 
that could be really open to manipulation because of the tiny 
amounts?
    Mr. Howrigan. I think, Senator, it is very obvious we need 
a broader and more responsible mechanism and pricing reporting 
that would truly reflect its actual value of the milk that goes 
into it.
    Senator Leahy. Would you say that, in your membership, that 
is a pretty universal feeling?
    Mr. Howrigan. It appears to be. It certainly is in our 
area. The farmers are very concerned and frustrated when they 
lose 25 percent of their income in a couple of months' time.
    Senator Leahy. Well, you had milk prices shot up in 
September, fell through the floor in December, got to rise a 
little bit again now. Obviously, that kind of a yo-yo situation 
does not help anybody. It does not help the consumers and it 
does not help the producers. Do you think that there is a 
connection between that and the Cheese Exchange?
    Mr. Howrigan. There is certainly a strong suspicion of 
that. And our bankers get very concerned when our prices go to 
heck. I will tell you.
    Senator Leahy. I bet they do.
    Thank you, Mr. Chairman. I appreciate the courtesy of 
letting Mr. Howrigan go first.
    Senator Specter. Well, thank you, Senator Leahy. We are 
glad to accommodate him on his plane schedule.
    Mr. Howrigan, do you have any suggestion as to what might 
be done in the short run, immediately, to help farmers on this 
terrible problem they are facing?
    Mr. Howrigan. Well, there was a lot of discussion earlier 
with the Secretary and Mr. Collins and Mr. Dunn, and you had 
some very good questions, Senator. And I would hope that they 
would act forthwith, and provide some of that immediately. I 
think flooring that basic price would go quite a long ways.
    Senator Specter. Well, we are going to call up all those 
sales tomorrow and see what that shows. I do not think it is up 
to the statisticians. I think it is up to the policymakers. 
That is my idea in public policy.
    Mr. Howrigan, we thank you. And if you have to catch a 
plane, we will understand your departure.
    Mr. Howrigan. We thank you very much, Senator.
    Senator Specter. And, Senator Leahy, if you have to catch a 
plane, we will understand your departure.
    Senator Leahy. No; I am just going to make sure I get 
Harold to the place where he has to go.
    Senator Specter. If you do not have to catch a plane, 
Senator Leahy, we will still understand your departure. 
[Laughter.]
    Senator Leahy. Mr. Chairman, I know that I am in my 
mother's arms as long as you are here.
    Senator Specter. Thank you very much.
    Senator Cochran has asked me to chair the meeting. I am not 
only the next ranking in seniority on the subcommittee, I am 
the only person left.
    So let me turn now, in order of listing on the panel, to 
Mr. Arden Tewksbury, manager, Progressive Agriculture 
Organization, a man I have known for many, many years, and a 
very strong advocate of the dairy farmer.
    Mr. Tewksbury, the floor is yours.
STATEMENT OF ARDEN TEWKSBURY, MANAGER, PROGRESSIVE 
            AGRICULTURAL ORGANIZATION, PENNSYLVANIA
    Mr. Tewksbury. Thank you, Senator Specter.
    I do have a prepared statement that has been circulated, 
and I understand will become a part of the record.
    Senator Specter. Your full statement will be made a part of 
the record, without objection, as will all the full statements.
    Mr. Tewksbury. Thank you.
    I guess I will then center my remarks around observations I 
had both in my remarks and what I have heard today. I have to 
tell you that I am very disappointed on many things I have 
heard today so far. You and I both were at the meeting at the 
college, where our records show 750 people were there. We did 
hear remarks that attempts would be made in the very near 
future to raise prices to the dairy farmers.
    Evidently many have long-term and short-term memories. We 
know now the basic formula price fell by $4.03 in a short 
period of time, and people are talking as if this never 
happened before. Yet, as I check my records, in 1989 through 
1990, I find the same prices fell $4.25 per hundredweight in 1 
year's time to our dairy farmers all across the United States. 
We did not have the basic formula price at the time. We had 
what was called the M-W series price, which tied all of our 
milk prices together, and they fell that time also.
    So history now has repeated itself as to what happened just 
7 years ago.
    The M-W, as a replacement for the basic formula price, in 
my opinion, would be no real improvement, because this happened 
back then. And I surveyed the M-W pricing back about that time 
and found out, as we have heard today, it was a very small 
portion of the milk, grade B milk, produced in the upper 
Midwest. And of the milk that was produced, it was probably 
less than one-half of that milk that was surveyed to see what 
the prices were being paid to the dairy farmers by those 
processors.
    And I think we are completely on the wrong track of trying 
to produce milk in the United States. Now, I know we are 
probably trying to step a couple steps above and beyond the 
scope of this hearing. But if we are going to deal with the 
problems we have facing dairy farmers, we must elicit all 
viewpoints as to what is the problem and what needs to be done.
    We have a very, very serious short-term problem here in the 
United States for our dairy farmers. Of course, I have got to 
admit that I really have not heard any reputable solution to it 
today. And then we have a long-term problem.
    Now, I have been told over and over again lately that if 
enough Senators, including yourself and others--30-some--and 
some 30-some secretaries of agriculture--would petition the 
Department of Agriculture, we could expect to have the basic 
formula price raised to a level of $13.50. Evidently, all the 
people across this country that circulated that remark were not 
hearing what really was going to happen. But we certainly heard 
today there is no movement afoot, on a short-term basis, to 
raise the basic formula price 1 cent per hundredweight, let 
alone to the level of $13.50.
    I have not heard anybody say today, as they have been 
talking about milk prices, that the cheese prices on the Green 
Bay Cheese Exchange have stayed stagnant for 3 straight weeks. 
And the barrel prices went down 1 cent last week, which would 
indicate probably the block prices will not go up tomorrow. So 
that means we have 4 weeks of cheese prices not going up in 
this country, and will not affect the prices paid to dairy 
farmers any more than where we are today.
    It is strange that this has been omitted.
    Now, if we are going to give dairy farmers some income, we 
have to raise prices. We have got to raise prices to them. It 
has got to be done one of three ways. We thought the Secretary 
did have the authority to do it without going through the 
hearing procedure. And what he said today is exactly what he 
said on December 19, that it would take 6 months to do it. 
Well, that is 6 months from December 19. Now it is 6 months 
from today, which is now 9 months from December 19.
    At the same time, in Pennsylvania, the producers that we 
are representing, we know the average dairy farmer is going to 
lose--and our testimony proves that--is going to lose about 
$26,000 in gross income. The dairy farmers in Pennsylvania are 
going to lose $280 million of gross income in 1 year's time. 
The economy in Pennsylvania, in our estimation, will be 
adversely affected by $1.9 billion, just in Pennsylvania alone, 
with this decline in milk prices.
    If the Secretary--and I hear nothing today--is not going to 
be able to raise prices, raise the basic formula price, I would 
have to enlist the support of the U.S. Congress to step in and 
either raise the basic formula price to the level we have 
advocated the Secretary to do. Our suggestion, of course, as it 
has been and will continue to be, is $15 per hundredweight. We 
would buy into a $13.50 on an interim basis until we got this 
situation resolved.
    And I am sorry the Senator from Vermont had to leave, 
because our second alternative then would be to do what was 
done in the U.S. Senate in the spring of 1991. And that was to 
raise the class I differentials on all milk, fluid milk across 
the United States, by $3 per hundredweight.
    And I would urge the Congress to consider stepping in and 
doing that method. Because my concern is just as keen for the 
farmers in California and Wisconsin as they are in 
Pennsylvania. And we would have to pool that $3 nationally to 
all dairy farmers. And I have talked to the Dairy Division of 
the USDA, and they said, yes, it can be done--some problems, 
but it could be done.
    Now, in Pennsylvania, the gallon price of milk in our area 
has now gone from $2.29 to $2.35. We have recaptured 6 cents of 
the 46-cent drop that hit us in the last 3 or 4 months. 
Consumers--I have talked one-on-one with 4,000 consumers in the 
last 2 months--and outside of two of them, every one of them 
supports what we are trying to do.
    I am also concerned that if milk per gallon is selling for 
$2.35 in northeastern Pennsylvania, why is that same milk 
selling for $3.55, $3.56, and $3.59 per gallon in Orange 
County, CA? Maybe it is time, if we are going to keep this 
manufacturing price as the mechanism to price milk, that we 
should not only include the wholesale price of our dairy 
products, but include the retail price of products into a 
formula that would more adequately give a price to our dairy 
farmers.
    Because our survey also finds that in northeastern 
Pennsylvania, I can buy top-quality butter for $1.55 a pound. 
My son did a survey in California yesterday for me, and we 
found a national brand butter selling in Orange County, CA, for 
$2.99 a pound. Now, it would be awful nice if we capture some 
of those retail dollars back into the hands of our dairy 
farmers.
    I also went across the Delaware River in Port Jervis, NJ, 
and I found that same butter selling down there for $2.99. So 
it does not matter if it is on the east coast or the west 
coast, this national brand butter is commanding $3 a pound.
    Now, if this is a way that the predecessors to this panel 
are saying the free market works, it sure as the Devil does not 
work to the benefit of our dairy farmers. If it did, then why 
did we see, in 1996, the price of butter on the Chicago 
Mercantile Exchange go from 80 cents a pound on January 5, 
1996, up to $1.50 in June 1996, at the same time the raw milk 
product price went up only $1.05 per hundredweight, which was a 
tremendous windfall for somebody in the butter business? I do 
not know who made the money, but the consumers got raped and 
the dairy farmers got gouged on a pricing mechanism like this.
    So, in essence, what we are saying, Senator, is in the 
short-term situation, one option has been declined today 
because the Secretary has very clearly announced to us that he 
cannot raise the milk prices on the basic formula price without 
a hearing. And if we went through all that, it may take 6 
months. That is not what farmers are waiting to hear.
    The second alternative is, can the U.S. Congress step in 
and do that? And third, if they can do that, will they step in 
and do what you did in 1991, when 60 Senators voted to raise 
the class I differential, including you and the late Senator 
John Heinz, by $3 per hundredweight, and pool that milk across 
the United States to get some money into the hands of our dairy 
farmers?

                           Prepared Statement

    Senator Specter. We thank you very much, Mr. Tewksbury.
    When you say you are disappointed, so am I. I think that at 
least we could get an answer on the cheese issue, should have 
gotten an answer on the cheese issue a long time ago.
    I will have some more questions for you, but we are going 
to go through the rest of the panel at this time.
    [The statement follows:]
                 Prepared Statement of Arden Tewksbury
    My name is Arden Tewksbury, I own and operate a dairy farm in 
Meshoppen Township, Wyoming County, state of Pennsylvania.
    I have been operating my present farm since October 1957.
    In addition to operating my dairy farm, I am the consulting manager 
of the Progressive Agricultural Organization. (Pro-AG).
    Pro-AG was formed in February 1991, following the severe pricing 
crisis that faced dairy farmers in 1990-91. Pro-AG has membership in 
Pennsylvania, New York and New Jersey. We work very close with the 
National Family Farm Coalition located in Washington, DC. The Coalition 
has membership in approximately 35 states.
    My appearance today is being made on behalf of the Progressive 
Agricultural Organization, and the thousands of dairy farmers that we 
have met with during the last few months.
    I want to recognize the quick response that Senator Cochran, 
Senator Specter and other Senators on this Committee have illustrated 
by calling this special emergency hearing.
    Mr. Chairman, in late October 1996, it became obvious to Pro-AG 
that dairy farmers, once again were going to be seriously victimized by 
an inadequate milk pricing formula.
    I have been, and will continue to be very critical of the farm 
organizations across the United States for not working closer together 
in an attempt to ward off the serious decline in milk prices paid to 
all dairy farmers.
    On December 19, 1996 I attended a special meeting along with other 
organizational leaders, that was called by the U.S. Secretary of 
Agriculture, Mr. Dan Glickman. At that meeting, I urged the Secretary 
to establish a floor under the basic formula price of $15.00 per cwt. 
(on all milk). I was astonished at suggestions that were made by 
leaders of our milk cooperatives to floor the basic formula price at 
$13.00 per cwt., on Class I and Class II milk only. At the meeting with 
the secretary, I urged him to come into Northern Pennsylvania and 
observe the mood of our dairy farmers.
    Since December of 1996, Pro-AG has held nearly 20 meetings with 
farmers and business people to explain the decline in milk prices, and 
attempt to find out from dairy farmers how they feel regarding short 
term, and long term solutions to the milk pricing dilemma the dairy 
farmers are facing. Over 2,000 dairy farmers and business people 
attended these meetings. In addition, nearly 300 people attended a 
Dairy Farmers Rally with Senator Rick Santorum. At all of these 
rallies, the dairy farmers voted overwhelmingly to support a new milk 
pricing formula that would relate to the average cost of producing 
milk. In other words--establish the value of milk at the farm level.
    On February 10, 1997 a dairy farmer rally was held in Keystone 
College, La Plume, Pennsylvania, 10 miles north of Scranton, PA. This 
meeting was called by our distinguished Senator from Pennsylvania Arlen 
Specter. Everyone in North Eastern Pennsylvania was pleased that 
Senator Specter brought with him U.S. Secretary of Agriculture Dan 
Glickman. Never before had our area had the presence of a U.S. Senator 
and U.S. Secretary of Agriculture on the same podium.
    A crowd of at least 750 people turned out for the rally at 8:30 AM. 
Many at the rally were consumers. These consumers came to support the 
dairy farmers. Both Senator Specter and Senator Glickman announced they 
were there to hear from the farmers, and, they certainly did hear from 
the farmers.
    Some of the key points made at the rally were:
    1. Dairy farmers are in a serious milk pricing dilemma.
    2. Dairy farmers want the basic formula price floored at $15.00 per 
cwt.
    3. Dairy farmers need a blend price paid to them of $16.00 per cwt.
    4. Consumers were supporting the dairy farmers 100 percent.
    5. Consumers announced they would pay more for milk and milk 
products, providing the additional funds went to the dairy farmers.
    6. On a long term basis--once again, the dairy farmers wanted their 
milk priced on the average cost of production.
    Mr. Chairman, it is now nearly three months since the first meeting 
with Secretary of Agriculture, Dan Glickman. Something now has to be 
done to improve prices to dairy farmers.
    While this hearing is being held mainly regarding the continued 
inclusion of the National Cheese Exchange as a component of the Basic 
Farmer Price; we have sever reservations regarding any other cheese 
pricing points that will influence the basic formula price enough to 
have a positive effect on the prices paid to dairy farmers.
    For instance--The most recent National Exchange price announced was 
$1.32\1/2\ cwt. per lb. The Wisconsin Assembly price was between $1.32-
$1.35\1/2\. Obviously these types of prices will not raise prices to 
dairy farmers.
    In addition to the National Cheese Exchange, the M-W price series 
is still a main component of the basic formula price. The M-W Series 
only represents a very small portion of the milk produced in the United 
States. The M-W is the price paid by processors to Grade B producers in 
the upper Midwest. Five years ago, I did a survey of the M-W Series. I 
found out that there was less than 5 billion lbs of Grade B milk in the 
M-W area and approximately 2\1/2\ billion lbs of milk was surveyed for 
the determination of the prices paid to dairy farmers. Certainly, dairy 
farmers will never receive a fair price for their milk, unless there 
are enough changes in the components of the Basic formula price.
    We are estimating the average dairy farmer in Pennsylvania will 
loose $25,970 between October 1996 through September 1997. The 
comparison price we used was September 1996.
    Mr. Chairman, attached to our testimony are three charts: Chart No. 
1 illustrates the decline in milk prices; Chart No. 2 illustrates the 
predicted losses to dairy farmers shipping milk under the provisions of 
federal milk marketing Order No. 2 (NY-NJ); and Chart No. 3 illustrates 
Class prices in Order No. 2 for different periods of time in 1996.
    The chart also illustrates the blend price that would be achieved 
by Pro-AG's proposal, the Commissioner of Agriculture's proposal and 
the proposal made by National Milk Producers on December 19, 1996.
    All quoted prices are generated from various stated basic formula 
prices. Final prices reflect prices that would be paid to Order No. 2 
producers.
    The gross dollar loss to the dairy farmers in Pennsylvania will be 
approximately 280 million dollars for one year. However, the economic 
loss to the rural areas in Pennsylvania will be 1.9 billion dollars. 
Imagine what these figures come to on a National level.
                          short term solutions
    1. The Secretary of Agriculture should, if he has the authority, 
place a floor under the basic formula price of $15.00 per cwt. for an 
indefinite period of time.
    2. If the Secretary can not establish the floor price, then 
Congress should take the appropriate steps to establish the same floor.
    3. If suggestion numbers one and two are not followed, then 
Congress must take action and raise the Class I differentials in all 
federal milk marketing orders by $3.00 per cwt. for an indefinite 
period of time.
    4. If cheese prices are continued to be used then the formula must 
represent the retail value of cheese as well as the wholesale value of 
cheese. The same would be true of butter prices.
                               long term
    Mr. Chairman, the time has now arrived when we must review other 
ways of pricing milk to our dairy farmers across the United States.
    We strongly feel the value of the dairy farmers milk must be 
established on the actual cost of producing milk.
    The USDA currently surveys the cost of production by several 
regions across the United States.
    Three main components make up the cost of production: 1. Cash Cost; 
2. Return on investment; and 3. Unpaid labor.
    The manufactured value of milk could be established by using the 
cash cost-plus an adequate return on investment.
    The value of fluid milk could be established by using the cash cost 
plus the return on investment plus a fair figure for unpaid labor.
    In our estimation, this formula would return a pay price to our 
dairy farmers of nearly $16.00 per cwt. Different organizations will be 
submitting a detailed copy of this formula to the USDA during the next 
two weeks.
                          general observations
    1. I can buy top grade butter in Meshoppen for $1.55 per lb. Yet, I 
go to a Shop-Rite store in Port Jervis, New Jersey and find a National 
Brand butter selling for $2.99 per lb. What's going on?
    2. I can go into Meshoppen and purchase American cheese for $2.00 
per lb. Yet, I can go to other stores and find National brands of 
cheese selling for $4.00 per lb. This is very confusing.
    3. During February 1 gallon of milk was selling for $2.29 per 
gallon in Northeast Pennsylvania yet, in many stores in Elmira, 
Horseheads, Corning and Binghamton, New York stores, milk was still 
selling as high as $2.75 per gallon in some super markets.
    4. In Orange County California, milk is selling for nearly $4.00 
per gallon.
    5. On January 5, 1996 the Chicago wholesale price of butter was 
$0.80 per lb. By late June of 1996, the price went to $1.50 per lb. At 
the same time the raw milk price used for butter went up $1.05 per cwt. 
Something is wrong.
    These observations are only a few of the many inequities facing 
dairy farmers and consumers.
    Mr. Chairman, the time has come to take the speculation and 
manipulation out of milk prices.
    Dairy farmers and consumers are highly recommending the time has 
arrived to price milk on the cost of producing milk at the dairy farm.
    Thank you.
                                 ______
                                 

Chart 1.--Prices received by dairy farmers under Federal Order No. 2 at 
                          the 200-210-mile zone

Basic formula price:
    September 1996................................................$15.37
    October 1996.................................................. 14.13
    November 1996................................................. 11.61
    December 1996................................................. 11.34
                        -----------------------------------------------------------------
                        ________________________________________________
      Decline..................................................... -4.03
                        =================================================================
                        ________________________________________________
Class III price:
    September 1996................................................ 15.43
    October 1996.................................................. 14.19
    November 1996................................................. 11.67
    December 1996................................................. 11.40
                        -----------------------------------------------------------------
                        ________________________________________________
      Decline..................................................... -4.03
                        =================================================================
                        ________________________________________________
Class I price:
    November 1996................................................. 17.79
    December 1996................................................. 16.55
    January 1997.................................................. 14.03
    February 1997................................................. 13.76
                        -----------------------------------------------------------------
                        ________________________________________________
      Decline..................................................... -4.03
                        =================================================================
                        ________________________________________________
Blend price:
    September 1996................................................ 15.81
    October 1996.................................................. 15.62
    November 1996................................................. 14.87
    December 1996................................................. 13.79
    January 1997...............................................\1\ 12.56
    February 1997..............................................\1\ 12.65
                        -----------------------------------------------------------------
                        ________________________________________________
      Decline..................................................\1\ -3.16

\1\ Estimate.

                                      CHART 2.--GROSS DOLLARS LOSS PER FARM                                     
                             [Compared to September's 1996 price of $15.61 per cwt.]                            
----------------------------------------------------------------------------------------------------------------
                                                                                    100,000 lb.     50,000 lb.  
                      Month                         Blend price      Loss per      producer per    producer per 
                                                                  hundred weight       month           month    
----------------------------------------------------------------------------------------------------------------
October.........................................          $15.62           $0.19            $190             $95
November........................................           14.87             .94             940             470
December........................................           13.79            2.02           2,020           1,010
January.........................................       \1\ 12.60            3.21           3,210           1,605
February........................................       \1\ 12.61            3.00           3,000           1,500
March...........................................       \1\ 12.81            3.00           3,000           1,500
April...........................................       \1\ 13.20            2.60           2,600           1,300
May.............................................       \1\ 13.31            2.50           2,500           1,250
June............................................       \1\ 13.31            2.50           2,500           1,250
July............................................       \1\ 13.52            2.29           2,290           1,145
August..........................................       \1\ 13.60            2.21           2,210           1,105
September.......................................        \1\13.70            2.11           2,110           1,055
                                                 ---------------------------------------------------------------
      12-month loss.............................  ..............  ..............          25,970          12,985
----------------------------------------------------------------------------------------------------------------
\1\ Estimated blend price.                                                                                      

              Chart 3.--Federal Milk Marketing Order No. 2
    The highest blend price that Order No. 2 producers received was for 
September's 1996 milk, $15.81 per cwt.
    Below are the class prices of milk that achieved the $15.81 
September 1996:

Class 1...........................................................$16.91
Class 2........................................................... 14.79
Class 3........................................................... 15.43
Class 3-A......................................................... 15.91
Blend............................................................. 15.81

    The highest class prices in 1996 were:

November:
    Class 1.......................................................$17.79
    Class 2....................................................... 15.67
September: Class 3................................................ 15.43
July: Class 3-A................................................... 16.04

    Pro-Ag's proposal--floor the basic formula price at $15.00 per 
hundred weight:

Class 1 price.....................................................$17.42
Class 2 price..................................................... 15.30
Class 3 price..................................................... 15.06
Class 3-A price................................................... 12.00
Blend............................................................. 15.72

    State commissioners of agriculture's proposal--basic formula price 
$13.50:

Class 1...........................................................$15.92
Class 2........................................................... 13.80
Class 3........................................................... 13.56
Class 3-A......................................................... 12.00
Blend............................................................. 14.30

    Co-ops proposal--basic formula price $13.00 (on class 1 and 2 milk 
only):

Class 1...........................................................$15.42
Class 2........................................................... 13.30
Class 3........................................................... 12.10
Class 3-A......................................................... 12.00
Blend............................................................. 13.45
STATEMENT OF KENNETH E. ZURIN, DAIRY FARMER, MOUNT JOY, 
            PA
    Senator Specter. I would like to call now on our 
distinguished Pennsylvania farmer, Mr. Ken Zurin, from 
Lancaster. Mr. Zurin, the floor is yours. Thank you for coming.
    Mr. Zurin. Thank you, Senator, for inviting me. I agree 
with Mr. Tewksbury, and pretty much everything that he says 
here, but I am just a farmer. I only found out Monday night 
that I was invited down here, and I did not have a lot of time 
to get a lot of the numbers together. But my wife and I, she is 
in the audience back here, we own a herd of 300 dairy cows 
which gives a total of right around 6 million pounds a year. 
And also, by the way, we milked cows this morning at 3:30 
before we came down here.
    The dairy industry is in a difficult situation. The BFP 
does not work. The price of milk, like they said, dropped from 
the $16 range down to the $12 range in a little less than 4 
months' time with record high feed prices, and I do buy some 
feed. This drop in milk price alone costs me just a shade over 
$20,000 a month for 4 months. So that is not too hard to 
figure. That is $80,000 I was out. And that is not even 
figuring the higher cost of feed. This gives us a financial 
crisis in the dairy industry. We need a more stable market, 
like everybody was saying here, like most other businesses.
    Prices in 1996 compared to 1995 were 13 percent higher for 
milk. Now, that sounds well and good. But the feed prices were 
26 percent higher in 1996 compared to 1995, which my feed 
prices make up over one-half of my production costs, and I came 
up with this. If I were to pass this on to my two sons, this 
farm, I do not think I would be doing them a favor.
    Now, you want a quick fix? I do not know what to tell you 
about a quick fix other than like Mr. Tewksbury said, you know, 
have the Congress put a $2 or $3 increase on us. That would be 
very nice. But I talked to a couple of neighbors around my 
place there, my dairy farm, and we were talking here the other 
evening and I said how about it if we would have just a class I 
and a class II price? All Class I price is all human 
consumption product. I do not care if it is fluid milk, ice 
cream, cheese, or whatever. And then butter, also in that.
    Then class II would be dry powder milk or anything else, 
anything used for animal feed, dogfood, catfood, you know, 
anything like that. And then let supply and demand set the 
price. Now, that is going to take time to do that. It is not 
going to be a quick fix, but I think over time, I think that 
would work.
    Now, we are going to have to set the country off in about 8 
or 10 orders or regions, whatever you want to call them. I, 
myself, think that would work, because every region in the 
country has separate or different costs to produce milk. Where 
I am at I have land right around me selling for $7,000 and 
$8,000 and $9,000 an acre. But you go out to Wisconsin, why, 
that sells a good bit cheaper. So their production costs are 
not quite as high as what ours are in here, and we have the 
population here where we can sell our product.
    That is about all I have.

                           Prepared Statement

    Senator Specter. OK, Mr. Zurin. We appreciate your coming 
down. When you got up at 3 o'clock in the morning to milk the 
cows and came down here, we understand that is not easy. Thank 
you for being here.
    Mr. Zurin. And that is every morning.
    Senator Specter. What time do you go to sleep?
    Mr. Zurin. Well, it was 11:30 last night.
    Senator Specter. You are a good man, Mr. Zurin.
    [The statement follows:]
                    Prepared Statement of Ken Zurin
    I am Ken Zurin from Lancaster County, PA. We own a herd of 300 
dairy cows which give us a total of about 6,000,000 lbs. of sellable 
milk per year.
    The dairy industry is in a difficult situation. The B.F.P. does not 
work. The price of milk dropped from the $16.00 range down to the 
$12.00 range in four months time with record high feed prices. This 
drop in milk prices alone cost me $20,000 per month not even figuring 
in the higher cost of feed. This gives a financial crisis in the dairy 
industry. We need a more stable market like most other businesses.
    Prices in 1996 compared to 1995 were 13 percent higher for milk in 
1996 than 1995, but feed prices were 26 percent higher in 1996 and feed 
costs made up over half of the cost to produce milk.
    If I were to pass the farm over to my two sons, I do not think I 
would be doing them a favor at numbers like these.
Alternatives:
    The B.F.P. will not work with the N.C.E. (National Cheese Exchange) 
setting the price because very little cheese is sold on the exchange. I 
think we should have 8 Federal orders in the United States--Have Class 
I and Class II. Class I would be all dairy products for human 
consumption (except dry powder milk). Dry powder milk and anything else 
would be Class II. Then let supply and demand set the prices.
STATEMENT OF BUCKEY M. JONES, BOARD OF DIRECTORS, MID-
            AMERICA DAIRYMEN, INC., MISSISSIPPI
    Senator Specter. Now we will turn to Mr. Buckey Jones, 
board of directors of the American Dairymen. Thank you for 
joining us, Mr. Jones. The floor is yours.
    Mr. Jones. Thank you, sir. I am Buckey Jones, dairy farmer 
from Mississippi, on the Corporate Board of Mid-America 
Dairymen. I understand I have got 5 minutes. I sincerely 
believe you should handicap us guys from down South that talk 
so slow and give us 6 minutes. I would have brought two of my 
assistants----
    Senator Specter. Mr. Jones, you have 6 minutes.
    Mr. Jones. Thank you. [Laughter.]
    I would have brought two of my assistants to help me, but I 
was afraid you may get on them like you did the Secretary's 
assistants. And so I left them milking the cows and feeding the 
calves.
    Senator Specter. You thought I got on them, did you?
    Mr. Jones. Yes, sir.
    Senator Specter. You ain't seen nothin' yet. [Laughter.]
    You ought to see if we were in a courtroom. [Laughter.]
    Mr. Jones. I am glad to hear that milk is $4 a gallon in 
California. It gives us hope to get it up to about what it is 
worth, which is about $6 a gallon.
    The National Cheese Exchange, I guess, is the topic that we 
are here to discuss today, and I sincerely believe, as we look 
at the entire structure of the National Cheese Exchange, that 
it is one small portion of the problem, and maybe it is not the 
problem at all. As we look at the structure of the dairy 
industry since 1990, we have certainly seen dramatic changes. I 
think the authors of the 1990 farm bill told us to expect 
extreme gyrations in the market, and as far as that is 
concerned, we certainly have not been disappointed, because we 
have seen some extreme fluctuations in the market.
    But on the National Cheese Exchange, the charges are that 
very little cheese as a percentage of the whole is traded 
there. But I would like to suggest to you if you look at the 
players on the National Cheese Exchange, those players--Kraft, 
Simplox, Land of Lakes, AMPI, Mid-America Dairymen, Beatrice, 
whoever--they do in fact buy and sell and produce and market 
most of the cheese in the country.
    So it is a reflection of what the market is, the cheese 
market, and as we in the South look toward the cheese market, 
we do not see that there is a bugger under every rock, and that 
there are people in the cheese exchange that have some strong 
desire to destroy the industry or anything of that nature. As a 
whole, I think the National Cheese Exchange has the support of 
the industry.
    But I would like to raise a question today, if I may, that 
somewhere in the process decoupling class I milk from the 
cheese price and having cheese control the fluid milk price in 
this country, which amounts to about 42 percent of the 
production in the country, is somewhat out of sorts as we look 
to the future of a changing industry.
    People in Florida, for instance, have a very hard time 
trying to understand why their milk would drop in price by 25 
percent because the cheese supply in Idaho, which is almost 
3,000 miles away, is in abundant supply. Some people note that 
to be sort of like showing up at kindergarten when you are 6 
years old and having to stand in a corner for 3 days with your 
nose to the board because your sister broke a window pain 6 
years before. It is just two things that do not correlate.
    Can it be done? I sincerely believe with the wisdom of the 
dairy industry in this country and the wisdom of the Congress, 
we can have a system whereby fluid milk can be separated from 
the cheese price, and therefore to some extent cushioning the 
industry from the volatility and the frustration of 
fluctuations that we have had in the last 4 months. There is 
really no good reason to base fluid milk prices on the cheese 
price. There is just no good reason to do it.
    We have had, in the fall of 1996, the highest milk prices 
for the consumer in my area of the world that we have ever had, 
and yet sales continue to grow. Are the consumers bucking or 
rejecting the milk prices, or milk because the milk price is 
too high? The truth is that sales have continued to grow. So 
therefore, I say to you in all sincerity, if we dairy farmers 
want more money out of the market, and we want more money in 
our check, we need to go to that market and claim it for 
ourselves.
    I say sincerely that there is just really no good reason to 
price fluid milk because Idaho, California, Minnesota, and 
Wisconsin happen to produce most of the cheese and let Idaho, 
Wisconsin, California, and Minnesota set the price for the 
entire dairy industry. Can we convince the other 46 States that 
the cheese prices set the fluid milk prices? I doubt it. 
Because of this, I think that the 30-percent value that we lost 
last year because of cheese prices was something that farmers 
had in their hand and lost, and they should not have lost it.
    This was a time when we were scrounging all over the 
country in my part of the world just to get enough milk for the 
fluid market. In my area of the world, the production is 
approximately 12 billion pounds of milk. The market for milk 
and dairy products in that part of the world is over 15 billion 
pounds. We gave up years ago all the hard product market, but 
our consumers deserve a wholesome, fresh source from fluid 
milk, and they deserve it locally.
    If you look at the record, and I am a history major so I 
believe in what goes on in history, the highest priced milk 
anyone in Mississippi ever drank was not that high-priced class 
I differential milk that was produced in Mississippi, but that 
milk we brought from outside in the fall to fill the market 
that we did not have milk for. So if milk is such a rare 
commodity in the Southeast and if you think the price is too 
high, I invite you down to start a dairy. There are a lot of 
them for sale because of this cheese price.
    Somewhere in this arena I think that we all have to step up 
and say, as the Secretary said, this is an antiquated system 
that we have, and now is the time to change it. And we have a 
golden opportunity, I think, at this point in time to do that 
very thing as we look to the future as dairy farmers.
    Class I price separated from the cheese price is not an 
impossible task. It can be done, and I think we can do it. 
Somewhere, we all must realize, every one of us dairy farmers 
must realize, that parity was a wonderful thing, but parity 
today would be about 27 bucks a hundredweight, and someone 
should calculate for me really quickly how much milk we would 
have in this country at $27 a hundredweight without some kind 
of production control.
    So with the lack of production control and the lack of 
parity, we must all realize that the cost of production plus 
whatever dairy farmers are willing to settle for as profit, 
plus the hauling and the freight, will eventually set the 
market for the system. The Federal order system, in my opinion, 
has worked well. It is not perfect, but we do not need to scrap 
it.
    Senator Specter. Mr. Jones, could you summarize? I have 
just been advised that the majority leader wants to close the 
floor by 6 o'clock, and I have to be back on the floor for 
another matter.
    Mr. Jones. I have two more points.
    Senator Specter. OK.
    Mr. Jones. I think if we look at what Rich McKee put out 
this week for class I pricing options, I think that here again 
we see an example of continuing to base everything on a cheese 
price. Some of those options have some validity, but we still 
believe that separating class I from cheese is the way to go, 
and we will support that, and our co-op supports it wholly and 
it has a considerable amount of support throughout the other 
cooperative systems.
    Let me say that our cooperative supports exports and the 
export programs, and we believe sincerely that 10 years from 
now the American dairy market will dominate the world market 
because of our abilities and what we can do on an annual basis. 
Even though we cannot compete with the coffers of the European 
Common Market, we can compete once those subsidies are reduced.
    Senator Cochran mentioned the seasonal base plan that is so 
important to the Southern producers, and I sincerely hope that 
we can reinstate or at least get some messages back to the 
Congress that the seasonal base plan is, in fact, a good thing 
for the Southeast. It is good for the consumers because they 
are the ones that ultimately pay the price that we all receive.
    Let me say that I sincerely appreciate the opportunity to 
visit with the committee, and I sincerely hope that somewhere 
in this arena that we dairy farmers, only less than 100,000 
Grade A dairy farmers in the entire country, we could all get 
into the University of Tennessee football stadium and have room 
left over, and yet we go around shouting at one another going 
in 1,000 directions. Sometime we have to come to the conclusion 
that the dairy industry can work together and get at it.
    Thank you.

                           Prepared Statement

    Senator Specter. Thank you very much, Mr. Jones. We 
appreciate your testimony. Your statement will be made part of 
the record.
    [The statement follows:]
                 Prepared Statement of Buckey M. Jones
    I am Buckey Jones, a dairy farmer from Smithdale, Mississippi. I 
appreciate this opportunity to appear before this subcommittee today 
and discuss some of the issues that face our nation's dairy farm 
families. I am a member of Mid-America Dairymen, Inc., a milk marketing 
cooperative with approximately 18,000 members in 30-plus states. I am a 
member of the Mid-Am Corporate Board of Directors.
    Much has been said and written about the National Cheese Exchange 
in the last few weeks. The NCE alone is not the problem. It merely 
reflects the market conditions of the cheese market. Over time it is a 
barometer of the market conditions that exist. While a major percentage 
of the total cheese actually sold in the U.S. is not traded on the 
Exchange, the Exchange itself is made up of members who DO produce and 
market a very large percentage of the total cheese marketed. The 
Exchange is the major place in the country where buyers and sellers 
come together weekly to buy and sell cheese based on their estimates of 
the supply and demand in the market.
    As the dairy industry has begun to deregulate, we have seen 
increased volatility in prices for all dairy products. (See attached 
graph) It is for this reason that we need to take a new look at the 
basis on which the different Classes of milk are priced. The price of 
Class III (milk used to make cheese) should be based on a product 
formula based on the cheese values. This should continue to be the data 
generated from National Cheese Exchange activity. If there is increased 
regulatory oversight of the Exchange, it should be by the Commodity 
Futures Trading Commission (CFTC). The price of cheese will ultimately 
set the price of milk used to make cheese. However, it is at this point 
that prices set for other Classes of milk should be disassociated from 
the cheese market.
    Given the volatility and wild fluctuations in the dairy commodity 
markets the last two years, and given the inelasticity, consumption, 
and production of fluid milk, there is no good reason to continue 
basing fluid milk (Class I) and soft products (Class II) on the price 
of cheese. These need to be decoupled from the commodity markets. Four 
states--Idaho, Wisconsin, Minnesota, and California--produce most of 
the American style cheese in the United States. Yet, these four states, 
by setting the cheese price and thus, the Basic Formula Price, set the 
price of milk for the rest of the country--even in areas of deficit 
production. (See attached graph of cheese prices versus BFP) For 
example, during the last 4 months of 1996, we experienced a decline of 
nearly 30 percent ($4.03 per hundredweight) in fluid milk prices. It 
was during this same period the region of the country that I live in 
was spending millions of dollars to purchase and transport milk into a 
deficit market. All of these dollars were not recouped from the market 
place, therefore dairy farmers paid part of the costs.
    The concern about the general economic conditions our nation's 
dairy farms is so great that 31 Senators recently signed a letter to 
Secretary of Agriculture Dan Glickman and to President Clinton asking 
for a temporary $13.50 price floor as a basis of calculating Class I 
prices in the Federal and state orders. The letter had bipartisan 
support and I commend those Senators who signed the letter. This is a 
perfect opportunity, given the concern about the NCE, the general dairy 
situation, and the desire to reform the system, to actually decouple 
Class I from the cheese market.
    As a basis for establishing Class I prices, we suggest a Supply/
Demand adjuster using a 12 month rolling average compared to the 
previous 12 months rolling average and adjust prices $0.12 for each 2 
percent change in Class I utilization. The Federal Milk Market 
Administrators should also be given the authority, under the informal 
rulemaking process, to make short term adjustments in Class I prices 
based on industry comments.
    Butter and nonfat dry milk powder prices, such as the current Class 
IIIa should be used as the basis for a new class, Class IV.
    We need the ability to export dairy products in a competitive world 
dairy market environment, therefore, we would like to see an export 
class developed. I realize that many of these issues are to be taken up 
by the Secretary in the Federal order reform process, and are not the 
basis of any currently proposed legislation, but our position is one 
that we believe to be realistic and equitable.
    I have also been asked to comment on the Seasonal Base Plan issue. 
Seasonal base plans are an appropriate tool for market orders to use in 
trying to achieve a more seasonally balanced milk supply. Base plans 
are not price enhancements but are a means of redistribution of 
proceeds to those who perform for the market by reducing spring 
production and increasing fall production, when milk supplies are 
traditionally tighter. We support reauthorization of Seasonal Base 
Plans.
    Federal orders have performed a vital function for farmers, 
processors, and consumers. We support the Federal order system and will 
work to aid in the reform process currently underway.
    I thank the Chairman and Committee for this time and opportunity 
and will be happy to answer any questions that you might have.

[GRAPHIC] [TIFF OMITTED] T01MA13.032

[GRAPHIC] [TIFF OMITTED] T01MA13.033

STATEMENT OF BILL BREY, PRESIDENT, WISCONSIN FARMERS 
            UNION
    Senator Specter. I would like to turn now to Mr. Bill Brey, 
president of the Wisconsin Farmers Union. Mr. Brey.
    Mr. Brey. The comments that we have here today, and I thank 
you very much for this time constraint we are under, and I am 
from Wisconsin, I will have to talk twice as fast. So if you 
cannot understand it, I did apply it so it is in the record. I 
hope you accept it.
    Senator Specter. It will all be in the record, Mr. Brey. We 
understand you fine.
    Mr. Brey. What we are advocating is that the delinking of 
the National Cheese Exchange and the response of what Mr. Jones 
has talked about a little bit is that the regionalism that that 
causes, even though there was a shortage of fluid milk, the 
National Cheese Exchange priced all milk, so we recognize that, 
as he does, as farmers and dairy producers, that that is not a 
place because of the thinly traded to hang our hat on as far as 
receiving our production costs.
    What we are talking about in the interim that you are 
urgently trying to find is that as dairymen and the 20 States 
belong to National Farmers Union, and as we get together as 
farmers we have a much different conception of how we want our 
milk priced to farmers as the industry uses the National Cheese 
Exchange as their place to price the milk. So the industry is 
not really--there is a difference there, and we are farmers, so 
we are here from one end or part of that that makes that 
industry. Without our sustenance the industry will no longer 
survive.
    So from that side, one of the things that we would like to 
implement in this short-term price relationship is the 
production costs. And we can either use U.S. Department of 
Agriculture figures over the last 4 years, calculate them, 
average them, increase the inflation that is in there, or we 
can look at a price-to-feed ratio and put that as one component 
of a pricing system.
    For example, it was talked about today that the basic 
formula price is moving up. But price-to-feed ratio also is, if 
you look at the chart, in October 1996 when we had the highest 
milk price, we also had the highest milk-to-feed ratios that 
gives us the profit that we need as dairymen to stay in 
business. But now, even though the basic farmer price is 
creeping up, our costs our outpacing it. So the cost of milk-
to-feed ratio is 2.30, which is quite a bit different than the 
2.89 back in October when we could take that feed and make a 
little money on it.
    One of the other things that we think should be included in 
this mix is that wholesale price. It is based on a wholesale 
price from cheese manufacturers throughout the United States, 
and that is what the Secretary alluded to. But we need 
mandatory reporting so that it shores up, so that it becomes 
meaningful, and not based on what continues to happen on the 
National Cheese Exchange as basing that price from what the 
reporting is.
    The other place that we are looking for is a retail price, 
and that was also alluded to by the farmers, the share in what 
happens out there. This, again, is current information that 
could be put together with a lot of phone calls quickly. That 
could come from the Bureau of Labor.
    So here we have three different entities that would make 
this price of milk more reliable to the farmer. It brings the 
confidence back into the market by looking at 90 percent of the 
milk or better, and costs that are exchanged to get that milk 
or the profits derived from that milk, versus just looking at 
the National Cheese Exchange and trading 1 percent and saying 
that should be the same price for the milk fluid or whatever. 
It is not quite right.
    Senator Specter. Mr. Brey, I do not understand your point. 
Are you saying there are some other prices we could look at 
besides the cheese price which could raise the price of milk?
    Mr. Brey. Yes; to the farmer.
    Senator Specter. Such as what? I do not understand.
    Mr. Brey. One would be to look at the wholesale price and 
take that into a barometer, take the retail price, take that 
into--however it fits. I am not sure how it would fit. I do not 
have the answer.
    Senator Specter. OK, you could do that, but there would 
have to be a total change by the Department of Agriculture on 
how they price milk.
    Mr. Brey. Well, this is what can be implemented as we move 
into order reform as a new BFP, but it also gives us relevance 
to the urgency that you are asking and talking about.
    Senator Specter. I think it is. I think it is. Proceed.
    Mr. Brey. I mean, if one of the--if there is an idea that 
says that these--looking at where we get the information from 
the cheese is not accurate enough or it is not sure enough, I 
think if you put all these other ones and lay them together, 
whatever percentages that we want to put on them will give us a 
more timely benefit of them.
    The other thing that was mentioned today is exchange 
trading. Again, it is too early. The announcement and the 
implementation of that is not even there yet. How can that be a 
barometer so urgently needed at this time. I think it has to 
see the participation and whatever that is going to be on that. 
So that is too speculative at that point, and with the 
influence of the National Cheese Exchange still being there, 
that is why it is thinly traded also at this time, because they 
always use the crutch that will get them to where they want to 
be at the most rapid rate.
    The other thing is looking at economic formulas, I know 
USDA has called and put a committee together, or whatever, to 
put together a new basic formula price. But most of that early 
testimony was done before the crash of the cheese exchange. 
That was supposed to be in there. So some of that summation 
does not have any relevance of where we are today as producers 
in losing that $4 a hundredweight as producers losing it. So 
that should be reopened and maybe thrown out, or at least 
revisited so that it is more meaningful at the current time. I 
mean, times are changing that fast, and we have to be up to 
current and looking at what is happening now, not at something 
that happened prior to and assuming the National Cheese 
Exchange was going to be there as a pricer.
    The other thing that we----
    Senator Specter. Mr. Brey, could you summarize, please, at 
this point?
    Mr. Brey. The other one is that the basic formula price has 
to be changed, and we hope that that could also be something 
that you could work on quite readily.
    The last one is we are not necessarily removing the 
National Cheese Exchange, but as Wisconsin Senate passed the 
bill bipartisanly, 28 to 5, to bring about trading against 
interest law, that gives the indication that that is where the 
cheese exchange has to be done only on the national level also, 
so that it is not moved to another State and still creates the 
entity that it does in pricing all our milk.

                           Prepared Statement

    And this is what we are trying to do to provide stability, 
not only to what the farmers have, but every time there is a 
spike or volatility in the market the consumer ends up paying 
also. And this is why we want to have more stability in the 
market, and that is why we are needed and we are very fortunate 
to be here today as producers on this panel. So thank you very 
much, Senator.
    [The statement follows:]
                    Prepared Statement of Bill Brey
    Good afternoon. My name is Bill Brey. I am a dairy farmer in 
Sturgeon Bay, Wisconsin and I serve as president of the Wisconsin 
Farmers Union and on the board for the National Farmers Union. Thank 
you for the opportunity to discuss viable alternatives to the National 
Cheese Exchange. Replacing the NCE price as the main price setting 
component in the basic formula price is critical to restoring fairness 
and stability. My testimony today will address the position of the 
National Farmers Union on price reform and will also outline action 
that should be taken pending the reform.
          policy of the national farmers union on price reform
    Ten days ago delegates to the annual convention of the National 
Farmers Union passed policy calling for the replacement of the National 
Cheese Exchange in setting the basic formula price. Delegates agreed 
that the most important factor in pricing milk should be the cost of 
production, the same factor that other businesses use in pricing their 
products. Delegates agreed that additional factors for calculating the 
formula price should include both wholesale and retail prices.
    1. Production Cost.--There are several ways to measure production 
cost. One possibility is to use the cost of production figure 
calculated every four years and indexed annually by the United States 
Department of Agriculture.
    Another viable possibility calls for basing the cost of production 
on the milk-feed ratio, i.e., the amount of feed a producer can buy for 
one pound of milk. This number is calculated on a monthly basis also by 
USDA. Using the milk to feed ratio would let the formula reflect the 
producers' bottom line. For example, many non-farmers would see that 
milk prices were higher in February of 1997 than the previous month and 
therefore assume producers were better off. However, the milk-feed 
ratio actually declined in February, indicating that feed prices rose 
faster than milk prices and so the producer was actually in worse shape 
in February than January.
    The following table of the milk-feed ratio shows how producers have 
fared in the past six months. Keep in mind that producers do best when 
the milk-feed ratio increases.

        Pounds of feed that can be purchased for 1 pound of milk

February 1997.....................................................  2.30
January 1997......................................................  2.40
December 1996.....................................................  2.61
November 1996.....................................................  2.78
October 1996......................................................  2.89
September 1996....................................................  2.61
August 1996.......................................................  2.27
July 1996.........................................................  2.20

Note.--Calculations are based on a 16-percent dairy ration, and 3.67 
test milk.

Source: USDA, NASS

    The milk-feed ratio is especially critical to producers who are 
forced to purchase a large share of the feed they use. However, it 
should be emphasized that while cost of production is a critical factor 
in calculating the formula, it should not be the only factor used.
    2. Wholesale Price.--The wholesale price will become available from 
the National Agricultural Statistic Service (NASS) in May of 1997, and 
will be announced for the nation as well as individual regions, on a 
weekly basis. It is based on the wholesale price from cheese 
manufacturers throughout the United States, and is expected to include 
over 90 percent of the nation's cheese. We commend Secretary Glickman 
for his decision to collect and publish this data.
    3. Retail Price.--The retail price component could be based on the 
information collected by the Bureau of Labor, used for measuring the 
consumer price index (CPI). While some adjustments may be needed, we 
believe such data is properly part of the formula used to calculate 
dairy prices.
                            exchange trading
    We are watching with interest the current effort of the New York 
Coffee, Sugar, and Cocoa Exchange (CSCE) to develop a cash market for 
dairy. This may provide an alternative to the National Cheese Exchange 
and has the potential advantage of oversight by the Commodity Futures 
Trading Commission. However, since this contract does not even exist 
yet, it is impossible to estimate its potential as a price indicator. 
And, even if the CSCE successfully develops its cash market, the price 
set there should not replace the cost of production factor as the key 
component in setting the producers' price.
                       using an economic formula
    Of the alternatives we have reviewed, the economic formula proposed 
by University of Wisconsin Dairy Economist Ed Jesse is one of the few 
that uses the cost of production in calculating the producers' price. 
Jesse's model is based on 3 factors and reflects: (1) changes in the 
cost of producing milk, (2) disposable consumer income, and (3) prices 
for manufactured dairy products. We are optimistic that economic 
formulas, such as the Jesse proposal, are among the least affected by 
the NCE price and seem to produce a relatively stable producer milk 
price. We still have questions as to how the model might be adjusted to 
ensure it will yield a price that allows the dairy farmer to earn an 
adequate return while continuing to provide a stable supply of milk and 
dairy products to the consumer.
       actions to take pending reform of the basic formula price
    1. Setting a floor.--We commend Congress and the administration for 
enacting legislation calling for reform of the basic formula price. 
Such reform takes time, yet many producers need action now. For the 
short term, action should be taken to enact a temporary price floor 
under the basic formula price. Emergency action should assist producers 
in all regions, and should not be dependent on whether the milk 
produced on a particular farm or region is used for fluid, ice cream or 
cheese. In order to be fair, the price floor should be set under the 
BFP. If alternatively, a floor is set under only class I or II, 
national pooling should be used to ensure an equal distribution of the 
emergency assistance.
    2. National Cheese Exchange Oversight.--As long as the National 
Cheese Exchange continues to be the biggest factor in setting producer 
milk price, the Commodity Futures Trading Commission should be directed 
to provide oversight of the NCE. In addition, Congress should enact a 
federal rule prohibiting trading against interest, a form of market 
manipulation. The Wisconsin Senate has passed a bill at the state 
level, although action is still pending in the Wisconsin Assembly. In 
the absence of federal legislation, the NCE can avoid regulation by 
moving to another state.
    3. Restoring Price Stability.--In addition to replacing the current 
basic formula price, Congress and USDA should take action to rebuild 
market price stability. In the past years under the dairy support price 
program, producers and bankers could at least be certain of a price 
floor. With the enactment of the FAIR Act, the floor will continue to 
decrease, disappearing entirely by the year 2000.
    While price volatility may benefit exchange brokers, it is only a 
detriment to producers and consumers. Wild price fluctuations make it 
needlessly difficult for producers to meet their cash flow needs and 
make it difficult for financial institutions to make loans. Volatility 
also harms consumers because the store price rises when the farm price 
rises but fails to come back down a proportional amount when the farm 
price falls. Congress should repair the safety net by reinstating the 
support price at a level that would at least prevent free-fall of 
producer prices and eliminate consumer price spikes.
                               conclusion
    Thank you for the opportunity to testify today. We look forward to 
continuing to work with Congress and the administration to ensure that 
there will still be family farmers supplying consumers with a wholesome 
and readily available milk supply in the future.

                   Price of Cheese Long-Term Solution

    Senator Specter. Thank you, Mr. Brey. The suggestions that 
you made, Mr. Brey, are useful ones. They are looking to a 
long-term solution, and what I have been looking to is not only 
a long-term solution but a short-term solution.
    It is true that Congress could change the milk price. We 
can do lots of things here. If the President signs it, it is 
done. If he does not, we can override a veto.
    And I understand what you are saying, Mr. Tewksbury, and I 
reluctantly say that it is highly unlikely that that is going 
to happen. We are not going to get a bill through the Congress. 
I have pushed hard on this price of cheese because that is an 
immediate factor.
    Now, we did not hear when we were in Pennsylvania on 
February 10 that there was going to be a very small 
differential. We did not hear that, and I am not sure it is a 
small differential. I want to know what the facts are.
    I am going to get those 112 people who count for 99.2 
percent of the price of cheese, I am going to call them up, and 
I am going to ask Mr. Tipton, who is going to testify next, 
what questions I should ask them, because Mr. Collins did not--
he went through a lot of things about the size and the bulk and 
the containers, but when I asked him what they were he said he 
did not know. That was up to the economists, the statisticians.
    I think this is a matter of policy. It is up to the 
Secretary of Agriculture to establish what enough statistics 
are, and I had expected that if there was a sufficient 
evidentiary base--that is what I said in northeast 
Pennsylvania, a sufficient evidentiary base that we could get 
some relief here.
    As Mr. Tewksbury said, he is disappointed, and so am I.
    Mr. Tewksbury, pull the microphone over. We will give you 
the last word for this panel.
    Mr. Tewksbury. Senator Specter, we have tracked some of the 
other cheese pricing points, and unfortunately we also are 
finding that they are not responding to any large increase over 
the National Cheese Exchange.
    It is possible that the same players are playing in the 
other markets that are playing in the exchange, and maybe what 
we thought would raise the prices may not do it.
    My question is, then--because I am asking a question now, 
instead of making a statement. If the Secretary cannot raise 
the price to our dairy farmers, and if Congress cannot or will 
not step in and raise the prices to our dairy farmers, and the 
cheese prices have now been stagnant for 3 straight weeks and 
probably will be for a fourth week tomorrow--we probably have 
seen the largest increase in the basic formula price we are 
going to have for a while--and our dairy farmers are facing 
these figures that I have given to you and other members of the 
panel have given to you, what do we tell our dairy farmers back 
home tomorrow as to what they can expect for the next 2 or 3 
months, to have the prices go up?
    Because January's milk, regardless of what anybody has been 
saying, was 81 cents per hundredweight less than it was in 
1981. That is 16 years ago, and we paid billions of dollars in 
to keep the dairy program. That is one hell of a reward to our 
dairy farmers to have those prices less than they were in 1981.
    Senator Specter. Mr. Tewksbury, I do not have an answer for 
you. I am struggling with the one opening that I saw, as I 
said, on the cheese price, and you heard me ask the question to 
the experts here, Mr. Collins, who is the most technical expert 
above and beyond the Secretary or the Assistant Secretary, 
because they have had experience with it, and I went out into 
the hall--I had to step out for a few minutes, went out in the 
hall, thanked the Secretary for coming and said, Mr. Collins, I 
expect something imaginative.
    We still have two more witnesses, Mr. Tipton and Mr. 
Coughlin, to see if we can shed some additional light on this. 
I am prepared to do everything I can. I am coming back to the 
Northeast. I am going to be back in the Northeast, in Luzerne 
County, to talk to farmers again. We break on recess--we are in 
session next week, then we break on recess, and I will be up 
there on Tuesday the 25th to give you my best thinking. I am 
prepared to face the music.
    The music, Mr. Jones, is a lot tougher than the music Mr. 
Collins had. You should have been up there with 750 farmers. I 
thought there were 500, but Mr. Tewksbury said 750.
    Mr. Tewksbury. The bleachers held 500. Then there were all 
the chairs around, which makes it 750.
    Senator Specter. It was a big crowd, and it was a very 
unhappy crowd.
    I am prepared to go back and talk to them again to tell 
them what I am trying to do so they will know there is at least 
some interest here. This is a special hearing on this issue, 
and I have an instinct that if we push at the edges hard enough 
we can find something. I think we can, and I am prepared to do 
the work to try.
    Mr. Tewksbury. I am saying our farmers are going to be more 
disappointed and more upset to learn that nothing can be done 
in the immediate future to raise their prices. They are going 
to be more upset than they were when they realized where the 
milk prices went to in January and February. I think there are 
things that are going to happen across the United States.
    Senator Specter. Well, I am committed to keep working on 
it, but I do not have an answer by myself.
    Mr. Tewksbury. I appreciate that.
    Senator Specter. OK. Thank you very much, Mr. Jones, Mr. 
Brey, Mr. Zurin, and Mr. Tewksbury.
    I would call our final panel now. Mr. E. Linwood Tipton and 
Mr. Ed Coughlin. We thank you, gentlemen, for coming. We thank 
you for being patient. We have Mr. E. Linwood Tipton, president 
and CEO of International Dairy Foods Association, a long-time 
expert in the field. Mr. Tipton and Mr. Coughlin, as I said.
    We are on the balanced budget amendment and I have to make 
a floor statement before 6 o'clock, so to the extent you can 
summarize your statements, we would appreciate it. Your full 
statements will be made a part of the record, and if your 
statement does not answer the question as to how we raise the 
prices of milk, that is what I will ask you when you finish 
your statement.
    Mr. Tipton, the floor is yours.
STATEMENT OF E. LINWOOD TIPTON, PRESIDENT AND CEO, 
            INTERNATIONAL DAIRY FOODS ASSOCIATION
    Mr. Tipton. Thank you very much, Mr. Chairman. I appreciate 
it. I have four points that I want to talk about, I think the 
same four subjects that you have been talking about, volatility 
and prices, the economics of milk prices, the cash markets for 
cheese, and finally, the basic formula price and what our 
suggestions might be with respect to that.
    I think with respect to volatility there is one thing that 
I would like to make a point of, and that is, while prices have 
changed rather drastically recently in the milk industry, the 
fact is the volatility in the milk industry is still well below 
the volatility in virtually all of the other commodities. The 
prices of corn, wheat, soybeans, cotton, et cetera, are much 
more volatile than the price of milk has been, and even this 
past year----
    Senator Specter. Mr. Tipton, do those lines face the same 
kind of crisis that milk is facing now?
    Mr. Tipton. Well, I think--I am sure when the prices are 
fluctuating they have found ways to deal with it, and that is 
what I want to talk a little bit about, about how you deal with 
it, because I think that everybody thinks we ought to get rid 
of the volatility, and my point is that that is virtually 
impossible, and other commodities have more volatility, so 
there ought to be a way that we ought to be able to deal with 
the volatility that we have.
    In that connection there is, and we have already talked 
about it, authority under the FAIR Act of 1996 for some 
training programs as well as some pilot programs with respect 
to the futures markets, and we would urge you to work with the 
Secretary of Agriculture and make sure those programs get up 
and operative. I think that is a great opportunity for 
everybody and would serve the industry enormously well.
    The second point that I wanted to talk about is the 
dynamics in the milk pricing, and most of the discussion today 
has been the decrease that occurred in the price in September, 
from September and October through December. The fact of the 
matter is that when the Government got rid of its surpluses and 
got some lower price support programs and the Government did 
not have surpluses of powder or cheese or butter, that is what 
allowed the prices to go as high, last fall, as they did. There 
was a problem. Grain prices were going up, and farmers needed 
more money. Prices went up, and that is the way the market 
ought to operate.
    In the past, when the Government had surpluses, they sold 
whatever their surpluses were back on the market once the price 
had gone up 10 percent, so that effectively set a lid. They 
could not go above that.
    When we got rid of the surpluses, they can go up to 
whatever it takes in order to generate a reasonable supply of 
milk and take care of the economic situation on the farm. That 
is what occurred last fall. We think that is appropriate and 
right.
    Once the milk production started coming back, started 
increasing, the prices began to fall. They fell, and they have 
started correcting that.
    Now, people were talking about them not coming back real 
fast right now. They have come back significantly, I think, 
when you are going into a period that is traditionally the 
flush period of the milk production cycle, so it may be a 
couple of months, April or May, when traditionally that is the 
largest milk production, that they may be a bit laggard.
    However, our prediction is, and the Secretary of 
Agriculture is a tiny bit higher in his predictions than we 
were, that for 1997 milk prices will be the second highest 
prices on record. 1996 was the highest; 1997 will be the second 
highest; and feed costs are coming down, and I think that 1997 
will be a successful year for dairy farmers.
    Moving to the cheese market, the National Cheese Exchange 
has been in effect since 1918, for a long time. It has had the 
scrutiny of Federal and State agencies, including the State of 
Wisconsin extensively recently, including the Federal Trade 
Commission, and including the Commodities Futures Trading 
Commission, all of which have investigated it, and all of which 
have issued letters indicating that they had found no 
manipulation, no illegal activities, nothing that would be out 
of the ordinary.
    Senator Specter. Who has issued that, Mr. Tipton?
    Mr. Tipton. Excuse me?
    Senator Specter. Who has issued the statement you say that 
there is no irregularity or no manipulation, you say by the 
Green Bay Cheese Exchange?
    Mr. Tipton. That is correct. The letters have been from the 
attorney general of the State of Wisconsin, from the Federal 
Trade Commission, and from the Commodities Futures Trading 
Commission.
    Senator Specter. The statement by Mr. Tracy at the bottom 
of the first page references the study conducted by researchers 
at the University of Wisconsin and the report concluded, ``As 
currently organized the exchange appears to facilitate market 
manipulation,'' so that is at least one authoritative 
conclusion to the contrary.
    Mr. Tipton. Well, it is not an official body. That was two 
professors at the University of Wisconsin. Prior to that, the 
attorney general of the State of Wisconsin conducted his 
investigation and found that there was no basis for taking any 
action. That was two professors at the University of Wisconsin 
that had been commissioned by the Secretary of Agriculture to 
undertake that analysis.
    Senator Specter. Well, the Secretary of Agriculture has 
adopted their conclusion and thinks it is sufficiently reliable 
to adopt it. I do not want to get into a dueling war about 
experts, but the Secretary of Agriculture makes a big point of 
it.
    Mr. Tipton. It is kind of beside the point in any event, in 
my opinion.
    Senator Specter. I did not make the point, Mr. Tipton.
    Mr. Tipton. The reason I say it is beside the point is 
because the National Cheese Exchange, it is the intent of the 
associations I represent and the National Cheese Exchange to 
create a new exchange, either with the Chicago Mercantile 
Exchange or with the Coffee, Sugar, and Cocoa Exchange.
    Senator Specter. How soon will that happen, do you think, 
Mr. Tipton?
    Mr. Tipton. It is our target to have that done by May 1. 
There are a number of things to be done.
    Senator Specter. Will they have a price in effect by May 1?
    Mr. Tipton. It is our target to have the trading occur on 
May 1.
    Senator Specter. Well, if trading occurs, then you have a 
price.
    Mr. Tipton. Well, yes, it would have that week, yes.
    Senator Specter. You would not have to send out a lot of 
questionnaires.
    Mr. Tipton. No.
    Senator Specter. Make a lot of phone calls.
    Mr. Tipton. No.
    Senator Specter. What questions should I ask tomorrow, Mr. 
Tipton? What is this about containers and about size, all of 
those things that Mr. Collins mentioned, rattled off, and then 
when I asked him about specifics he said only statisticians 
knew that.
    Mr. Tipton. Well, I think people do have a tendency to 
think cheese is cheese, as they often think milk is milk.
    Senator Specter. Oh, no. I buy Swiss, I buy American, I buy 
cheddar, I buy all different brands of cheese.
    Well, what questions am I going to ask tomorrow when I call 
these people?
    Mr. Tipton. I think I need to provide just a tiny bit of 
background, and then I will try to answer that, if I may.
    Senator Specter. OK.
    Mr. Tipton. The tiny bit of background is that the National 
Cheese Exchange and the new commodities, or new cheese exchange 
will deal with cheddar cheese only. That is the basic product.
    So in asking people for prices, which they do in the 
survey, you have to make sure that you get--and this is the 
kind of information that I think you would want to know as well 
if you were going to base your prices on it. You are going to 
have to get that it is a homogeneous product. Its age makes a 
big difference. Under the exchange rules it cannot be more than 
30 days old, and it cannot be younger than 3 days old.
    It has to be at what location it is delivered, what are the 
delivery times. There is a lot of information that actually 
affects what the contract price might be for selling cheese. It 
depends on what services they add to it. Are they adding 
services of certain delivery services, certain time 
restrictions on when it is delivered, those kinds of things.
    Those are the things that complicate the issue, and those 
are not issues under a cash market, because we specify under 
the terms and the rules of that cash market what cheese it is 
that must be delivered.
    Senator Specter. Why is it only cheddar cheese? Cheddar is 
only one kind of cheese. Why is it that, as opposed to some 
other type of cheese?
    Mr. Tipton. Well, there is a tremendous range in the value 
and cost of cheeses, and that is trying to get at one of the 
largest shares of the market that is a homogeneous product.
    Senator Specter. So it is an indicator of price to be 
calculated into the milk price.
    Mr. Tipton. Yes; and it is a homogeneous product that you 
can get a price on.
    Senator Specter. So it is from 3 days to 30 days old, that 
is one. Location, delivery time--well, I see the time. It has 
to be for a time certain. Location depends--so that involves 
transportation.
    Mr. Tipton. But a lot of contracts might provide that I 
will deliver next month, not this month, and that is the price 
I am giving you for next month.
    Senator Specter. Well, that is not helpful. That is a 
futures market.
    Mr. Tipton. No; that would be individual business 
transactions, commercial transactions between companies.
    Senator Specter. OK. It would be what the price is next 
month. They are contracting today for delivery for next month, 
and we want to know what it is today.
    Mr. Tipton. Yes.
    Senator Specter. OK. I think I have the point.
    Mr. Tipton. Thank you.
    The last point I would make is that we do expect to have 
that new market up and running May 1. It may slip a little bit, 
but that is our target, and we are doing the best we can to 
accomplish that, but that does create a dilemma as the 
Secretary talked about, because at that point we would then 
anticipate that trading under the National Cheese Exchange 
would be discontinued, and that is the basis for the pricing 
under the formula, and so the Secretary would be compelled at 
that point to find an equivalent--under the law to find an 
equivalent series.
    Senator Specter. I think he would be kind of happy to do 
that at this point.
    Mr. Tipton. I hope so, and I hope that he would make the 
choice then of this new exchange as the basis, at least in the 
interim until they can get some other kinds of reform or look 
at other data to see what might be a suitable way of doing it.
    So it is our recommendation that the new exchange should be 
the basis used in the basic formula price.

                           Prepared Statement

    Senator Specter. Mr. Tipton, thank you very much for your 
testimony. We appreciate your expertise in the field. I had 
called when I got back from northeastern Pennsylvania, and you 
were an encyclopedia of information, and I appreciate your 
cooperation and your assistance.
    Mr. Tipton. Thank you. You are very kind.
    [The statement follows:]
                Prepared Statement of E. Linwood Tipton
    My name is E. Linwood Tipton, and I am President and Chief 
Executive Officer of the International Dairy Foods Association (IDFA) 
and its constituent member, the National Cheese Institute (NCI), a 
national trade association of processors, manufacturers and marketers 
of cheese and cheese products. NCI members market about 85 percent of 
the cheese consumed in the United States. Many of our members buy and/
or sell cheese on the National Cheese Exchange, which currently 
provides the only cash market for cheese in the United States. I 
appreciate the opportunity to appear before you today to present our 
views on the National Cheese Exchange (NCE), the role of a cash market 
for cheese, and alternatives to the use of NCE prices in determining 
the Basic Formula Price (BFP) used in Federal milk marketing orders to 
set class prices.
    Questions about trading activities on the National Cheese Exchange 
and their effect on milk prices are not new. These subjects have been 
examined intently over the past decade, by both state and federal 
authorities, with no findings of improper or illegal acts. The real 
basis for concern today, however, is not the National Cheese Exchange 
itself, but rather, recent changes in farm milk prices.
       i. a comparison of milk and other commodity price changes
    Price volatility is experienced by virtually every commodity. For 
several decades, however, dairy commodity prices were stabilized by 
federal programs. Because of this long period of price stability, the 
dairy industry did not develop futures contracts or other risk 
management tools that are common in other agricultural sectors. As you 
can see from the attached graph, which compares the price volatility of 
seven different commodities as recently as during the period 1991-95, 
milk prices experienced less volatility than other major agricultural 
commodities (see Graphs 1 and 2 attached).
    When the Federal Government held inventories of dairy products, and 
dairy support prices were above what market prices would have been 
absent the high support prices, the release of Government inventories 
effectively placed a lid on how high dairy prices could go and the 
support price placed a floor on how low they could go. This range was 
normally about 10 percent, because CCC inventories of dairy products 
were released at prices 10 percent above the support price.
    Now that market prices of dairy products regularly and 
substantially exceed the support price and the CCC does not have a 
stockpile of dairy products, prices for milk and dairy products are 
considerably more volatile. During 1996, this worked to the great 
benefit of dairy farmers who were confronted with much higher feed 
costs. Because the Federal Government did not have stocks to resell to 
the commercial market when market prices rose well above the former 10 
percent lid, milk and dairy product prices were able to increase to 
reflect the higher feed costs. This relieved much of the burden on 
America's dairy farmers.
    Under the current dairy program, therefore, increased volatility of 
milk and dairy product prices should be expected. Dairy farmers and 
processors are beginning the process of learning how to better cope 
with and manage this increased volatility. In this regard, we urge USDA 
to implement an educational program within the dairy industry to help 
dairy farmers, manufacturers and processors better understand how to 
use available risk management tools. Authority for such a program was 
provided in sections 191 and 192 of the Federal Agriculture Improvement 
and Reform Act of 1996 (the FAIR Act).
     ii. recent developments in the market dynamics of milk prices
    Last year, a shortage of feedgrains drove up feed prices, which 
increased dairy farmers' costs of producing milk and led to a reduction 
of milk production. Tight milk supplies coincided, however, with strong 
demand for milk and other dairy products. Milk prices paid to farmers 
therefore rose substantially, increasing more than 21 percent over the 
six months of March to September. By September of last year, milk 
prices had soared to an all-time historic peak of $15.37 per 
hundredweight as reflected in the BFP, and $16.30 per hundredweight as 
reflected in the all-milk price.
    At the same time, cheese production was higher than previous year's 
levels. Although cheese sales were also above year-earlier levels 
through summer, they were not keeping pace with production, and 
commercial inventories grew. In September, when increased cheese and 
milk prices finally reached the consumer, sales declined. Good harvest 
weather led to near-record crops, reducing costs and adding to both the 
expectation and actuality of stronger dairy supplies.
    As a result of all these factors, commercial inventories of cheese 
were building and there was an overall surplus of cheese. This excess 
of supply over demand was predictably reflected in a sharp decline of 
cheese prices on the NCE from the highest levels in history.
    The confluence of these particular conditions in the market was, 
however, a temporary phenomenon. With lower cheese prices last fall, 
wholesale demand recovered. As we moved into 1997, cheese prices began 
to rise. Similarly, after declining from September through December, 
the BFP turned around and increased in January and February 1997. I 
would note for your attention, however, that even with the year-end 
declines, the average annual BFP for all of 1996 ($13.39) was the 
highest in history (see Graph 3 attached).
    As 1997 began, both producers and processors of dairy products were 
publicly optimistic about the outlook for milk prices. On January 3, 
our organizations and the National Milk Producers Federation jointly 
issued a press release, projecting the BFP in 1997 to be the second 
highest on record--second only to last year's record high. Our 
projections are for the BFP to average $12.66 this year. The first 
quarter estimates are probably too low, since the February BFP is 
already at $12.46, suggesting that we may have been too conservative 
for the rest of the year as well.
    In short, any discussion of recent volatility in milk prices must 
take account of the fact that recent short-term price declines followed 
an historic surge in milk prices, with even the annual average reaching 
an all-time high. Moreover, milk prices paid to farmers today are again 
on the upswing.
     iii. the national cheese exchange as a cash market for cheese
    The National Cheese Exchange in Green Bay, Wisconsin, has been in 
operation since 1918. As with all cash markets, the NCE provides a 
method of trade that allows those who have more cheese than they want 
or need, to sell it to those who want or need more. Its primary 
functions are to provide a means of inventory management and of price 
discovery. These are the primary purposes of virtually any cash market 
exchange. It is supply-demand driven. It is an open outcry market. The 
buyers, sellers, prices and quantities of trade are known immediately. 
This is the epitome of an open competitive market, where knowledgeable 
buyers and sellers openly trade.
    As previously mentioned, questions about the National Cheese 
Exchange and its role in dairy prices are not new. At various points in 
time, trading on the NCE has been the focus of examination by state and 
federal authorities, in response to allegations of price manipulation, 
or other improper trading activity. None of the authorities has ever 
found evidence of price manipulation, or any legitimate basis for 
taking action against the NCE or its trading members.
  --In 1988, after an inquiry concerning potential state antitrust 
        violations, the State of Wisconsin's Attorney General stated 
        that no evidence of price fixing agreements or violations of 
        Wisconsin antitrust laws had been found, and determined that no 
        further action was warranted.
  --In July 1996, after reviewing a controversial study of the NCE 
        conducted by two University of Wisconsin professors, the 
        Federal Trade Commission (FTC) found no factual basis for a 
        violation of Federal antitrust laws, and determined that no 
        further review by the FTC was warranted.
  --The Commodity Futures Trading Commission (CFTC) also reviewed the 
        University of Wisconsin study, and similarly found insufficient 
        facts to warrant further action under its authority, in June 
        1996.
  --On February 27, 1997, the CFTC issued a report specifically on the 
        National Cheese Exchange, in connection with an application by 
        the Coffee, Sugar and Cocoa Exchange to trade a futures 
        contract based on the Basic Formula Price. Because of the 
        linkage between the BFP and NCE prices, the CFTC closely 
        examined the operations of the NCE. It found the NCE to include 
        a wide variety of both buying and selling interests, with no 
        significant barriers to membership. Trading activity was 
        observed to be regular and transparent. Importantly, the CFTC 
        found the NCE transactions to represent a ``significant 
        portion'' of the spot market for cheese. No aspect of the NCE 
        gave the CFTC cause for concern, and it formally approved the 
        BFP futures contract application.
    In short, no state or federal authority has found evidence of price 
manipulation, or of any illegal trading activity at the National Cheese 
Exchange, despite repeated allegations and reported suspicions. Even 
the criticism of it being a ``thinly traded'' market was discounted by 
the CFTC in its most recent report, which noted that ``a number of the 
contract markets trading pursuant to CFTC designation are `thinly' 
traded.'' (CFTC report at p. 15, n. 15). (Copies of these documents 
have been provided to the committee staff.) Moreover, the volume of 
trading on the NCE has been increasing, tripling over the past four 
years.
    What can be accurately stated about the National Cheese Exchange is 
that its prices reflect the prevailing conditions of supply and demand 
in the market at the time. This fact has been corroborated by a former 
chief economist of the U.S. Department of Agriculture, as well as by 
current USDA policies and practices. In July 1996, Dr. Bruce Gardner, 
former USDA Assistant Secretary for Economics from 1989-92 and then a 
Distinguished Professor at the University of Maryland's Department of 
Agricultural and Resource Economics, found that ``general supply-demand 
factors had quite consistent and statistically strong effects on NCE 
prices.'' He stated, ``the data clearly show that the NCE reflects 
supply and demand conditions, and shows no evidence of manipulation by 
the actions of any individual trader or group of traders.''
                    iv. a new cash market for cheese
    Notwithstanding our confidence in NCE prices as a reflection of 
demand and supply conditions, the members of the National Cheese 
Institute realize that repeated controversies over the NCE are 
undermining its sustainability. Earlier this year, momentum built 
within the Wisconsin state legislature to enact legislation restricting 
trading activities on the NCE. This series of developments, in 
conjunction with NCI's interest in developing more viable dairy futures 
markets, led the NCI to pursue actively the establishment of an 
alternative cash market for cheese that would also improve the 
structures and processes which provide for cheese transactions.
    Over the past month, the National Cheese Institute along with the 
NCE has been engaged in a private sector initiative to establish a new 
cash market for cheese. Our efforts to date have been very productive, 
and the opening of a new cash market for cheese may occur as early as 
May 1997. When trading begins on the new cash market, trading on the 
NCE is expected to cease.
    Like the NCE, the new cash market will provide the industry with a 
competitive forum to buy and sell cheese on a spot basis. A new cash 
market, however, will have several characteristics that are designed to 
improve and expand its use. For example, the new cash market will 
likely allow for more frequent cheese trading sessions and use a 
broader network of established brokers which will make it more 
accessible to a wider spectrum of food industry participants.
    Furthermore, the new cash market will be part of an established 
exchange which has a long history and distinguished reputation for 
managing futures contracts pursuant to the regulatory requirements and 
oversight authority of Federal regulators. By affiliating the cash 
market with an exchange that also offers dairy futures contracts, we 
will be strengthening the links between the cash and futures markets, 
and moving the dairy industry another step closer to more viable 
futures markets for price discovery and risk management purposes. As 
discussed previously, the lack of viable futures contracts has made it 
very difficult for the dairy farmers and processors to manage price 
volatility.
    The details for establishing a new cash market are still being 
worked out and, therefore, I am not able to provide many of the 
specifics at this time. A committee of NCI members has been tasked with 
reviewing proposals by the Coffee, Sugar and Cocoa Exchange and the 
Chicago Mercantile Exchange, both of which have indicated serious 
interest in starting a cash cheese market. Next week on March 17, 
representatives of these two exchanges will be making presentations of 
their specific proposals to NCI and NCE board members. A final decision 
and announcement of the establishment of the new cash market will 
hopefully be forthcoming soon thereafter. If all goes well, we look 
forward to a seamless transition from trading on the NCE to trading at 
the new exchange.
               v. the basic formula price (bfp) for milk
    After years of bitter complaints and challenges by various parties, 
the Secretary of Agriculture eliminated the ``Minnesota-Wisconsin'' 
price series from use in setting Federal milk class prices, and began 
using a new formula. The Minnesota-Wisconsin price series used the 
prices paid to dairy farmers in the states of Minnesota and Wisconsin 
for manufacturing grade milk (Grade B) during the preceding month as 
the base. This base was updated or adjusted by prices paid to the same 
dairy farmers during the first half of the month to which it applied, 
plus an estimate of what would be paid for the rest of the month. The 
Minnesota-Wisconsin price was announced by the 5th of the month 
following the month to which it applied. With the decline in the amount 
of manufacturing grade milk and the fact that fewer companies made 
separate payments for the first half of the month, continuing to use 
this formula was difficult to justify.
    The Secretary noticed and convened a hearing to find an 
alternative. The result of that process was the announcement in January 
1995 of the current formula for calculating the BFP. This formula uses 
the prices paid to Minnesota and Wisconsin dairy farmers for Grade B 
milk in the preceding month, the same as the base price used under the 
old Minnesota-Wisconsin price series. To update the previous month's 
price, it uses changes in (1) the price of cheese as reflected by 
trading on the NCE, (2) butter prices on the Chicago Mercantile 
Exchange, and (3) powder prices obtained by survey. These commodity 
prices are weighted according to the amount of milk in Wisconsin and 
Minnesota used to make each product. This formula, or slight variants 
of it, was broadly supported by processors, manufacturers and dairy 
farmer organizations, and the Secretary said that ``after reviewing the 
various formulas, it is concluded the best updater would include'' the 
price series just enumerated. In its decision of just a little over two 
years ago, USDA concluded that NCE's cheddar cheese, 40 pound block 
price reflected supply-demand conditions and should be the primary 
price adjuster in the basic formula price. The following year, after 
conducting a rigorous analysis of NCE prices and comparing it to other 
price quotations for Wisconsin and elsewhere, Dr. Bruce Gardner 
concluded that ``the NCE price is a good indicator of national cheese 
market conditions. There certainly is no evidence of any better 
indicator to be found.''
    Nevertheless, the NCE will soon discontinue trading, which 
necessitates the Secretary finding an equivalent price to replace the 
NCE price used in this formula. Each Federal milk order contains the 
following provision:
        ``10xx.54 Equivalent price
          If for any reason a price quotation required by this part for 
        computing class prices or for other purposes is not available 
        in the manner described, the Market Administrator shall use a 
        price determined by the Secretary to be equivalent to the price 
        that is required.''
    The IDFA organizations including the National Cheese Institute 
believe that the new cash market for cheese will be an improved, 
equivalent price series which the Secretary should identify as an 
``equivalent'' price within the meaning of the law. We believe that it 
will reflect supply and demand conditions for cheese; will represent 
trade and traders from a broad number of companies and interests; and 
is better than any other alternative. This action can be taken 
administratively by the Secretary. However, if the BFP is to be 
modified in other ways, it would require a full fledged hearing subject 
to procedures prescribed in the law. This would probably take 
considerable time to complete.
    The Secretary of Agriculture already has underway a review of many 
elements of Federal milk marketing orders including the Basic Formula 
Price. We urge the determination of the equivalency of the new cash 
market for cheese as the best alternative to the NCE, pending more 
indepth review of long-range solutions and changes in Federal orders.
    Some have urged USDA to develop a survey of cheese companies to 
determine what they were paid for cheese they manufactured. We think 
such a survey could have merit as a basis of providing more market 
information. We are therefore cooperating and assisting USDA in its 
design and efforts to obtain industry participation. We believe such a 
series could be helpful in evaluating markets and provide another basis 
of price discovery. However, it is a brand new technique which needs to 
be evaluated as to how well it may reflect supply and demand conditions 
There are a number of issues to be addressed regarding such a survey. 
For example, will participation be adequate to be representative and 
reliable? Will the same companies complete the survey every week, week 
after week? How will services provided to the buyer be excluded from 
the value of the unprocessed cheese? How will quality and service 
premiums be excluded?
    IDFA and NCI have pledged their willingness to work with USDA to 
develop such a survey and the association members hope it can be 
accomplished successfully, but whether it should be used as part of the 
Basic Formula Price remains subject to serious open question.
                             vi. conclusion
    To support continued growth, the dairy industry needs to continue 
moving in the direction of being market-driven. This means that there 
will be price volatility, as there is in all other market-driven 
sectors of agriculture. It also means that the entire dairy industry, 
from the dairy farmer on, needs the same kind of capabilities to manage 
price volatility that producers and processors of other commodities 
enjoy. IDFA and NCI will continue their efforts to enhance those 
capabilities.
    Mr. Chairman, in conclusion, we would like to leave you this 
afternoon with four main points in mind--
    (1) The volatility of milk and dairy product prices has increased.
    (2) Last year's record-high farm milk prices are likely to be 
followed this year by the second-highest recorded prices.
    (3) The NCE should be replaced by a new cheese cash market in a few 
months.
    (4) When that occurs, the Secretary should use the new cheese cash 
market as one of the ``adjusters'' in setting the Basic Formula Price.
    I appreciate the opportunity to appear before you today to share 
these views with you.

[GRAPHIC] [TIFF OMITTED] T01MA13.034

[GRAPHIC] [TIFF OMITTED] T01MA13.035

STATEMENT OF ED COUGHLIN, ACTING CEO, NATIONAL MILK 
            PRODUCERS FEDERATION
    Senator Specter. I would like to turn now to our final 
witness, Mr. Ed Coughlin, acting chief executive officer of the 
National Milk Producers Federation. The floor is yours, Mr. 
Coughlin.
    Mr. Coughlin. I will be short.
    Senator Specter. Thank you.
    Mr. Coughlin. The National Milk Producers Federation is a 
commodity group of about 60,000 dairy farmers, and what we have 
today, basically that is about 60 percent of all the dairy 
farmers in the country.
    A year ago about this time the House addressed some of the 
same issues we are addressing here today. At that point in 
time, the federation members maintained that the trading level 
on the National Cheese Exchange was accurately reflecting the 
value of cheese and could be used to determine the Federal milk 
order price. Our position today is the same.
    The federation and its members are aware of the controversy 
surrounding the National Cheese Exchange, and they are very 
sensitive to the concerns expressed by producers who lack 
confidence in that market. Dairy producers, as has been stated 
earlier, have a very important financial interest in the 
National Cheese Exchange prices, since the cheese prices are 
the single most important factor used in establishing milk 
prices in the United States.
    It is important that the industry have confidence in the 
method used to determine prices, and that confidence be 
restored as promptly as possible.
    We believe that the complaints that the National Cheese 
Exchange is not functioning in the best interests of dairy 
farmers and their cooperatives is unfounded. Now, the National 
Cheese Exchange is going to close, so it appears as though that 
is a foregone conclusion. Closing the exchange creates a 
Federal order pricing problem. Specifically, in the Federal 
order the 40-pound block cheddar cheese price of the National 
Cheese Exchange is used in determining the Federal milk order 
basic formula price.
    I would suggest to you that one of the things you want to 
do if you want to look at prices is, the National Cheese 
Exchange has specific criteria for the cheese that is sold on 
that exchange. If you call up cheese plants, you say, here are 
the criteria. Let us say I want a quote from you of, if this 
cheese was sold on the exchange, what would your price be, I 
think that would probably--there is a set of criteria that is 
there. That may not encompass all of what you want to find out. 
For example----
    Senator Specter. Mr. Coughlin, will they have that same 
kind of criteria with the new cheese exchange that Mr. Tipton 
is talking about?
    Mr. Coughlin. I would defer to Mr. Tipton on the answer to 
that, but I am sure that they would have to.
    Mr. Tipton. It would be our intent that the rules of 
trading, at least the description of the product that is traded 
would be very similar.
    Senator Specter. Thank you. Mr. Coughlin.
    Mr. Coughlin. That provides the homogeneous product. In 
other words, they are not comparing apples and oranges. You are 
comparing a product, that here is what you are looking at.
    To deal with the situation where the Secretary needs a 
price quote and where one is not available, every order, every 
milk order contains a provision whereby the Secretary of 
Agriculture can determine an equivalent price quotation. Thus, 
absent the 40-pound block price the Secretary of Agriculture 
will have to make that. As you suggested, he might like that.
    But there are two sides to that. You know, we have talked 
today about the producer side. Mr. Tipton did not talk about 
it, but when the Secretary of Agriculture establishes a price, 
he is establishing a price that every plant must pay, so that 
he is establishing a minimum obligation for the plants that 
have to pay.
    Now, when you establish that, you have got to be very 
concerned that you do not establish a price that the market 
does not return, so if you establish a price for x cheese 
company and x cheese company's price that you establish exceeds 
the price you get out of the market, and you do that under a 
Federal order regulation, that is a problem, because x cheese 
company does not get the money to pay that.
    Now, it would be nice if x cheese company got that money 
and they could pass that on to their producers, but there are 
two sides of this transaction, that processors have to pay that 
price, and they have to get the money out of the marketplace, 
and the best measure of the marketplace, as you heard Mr. 
Collins say today, is the National Cheese Exchange, and that, 
in our opinion, is still the fact.
    Our members make a lot of cheese. Mr. Jones was up here. He 
represents Mid-America Dairymen. They make a lot of cheese, but 
they have to account for that price, and then whatever is left 
over from what they get out of the marketplace is what they can 
pay to their producers, so I think those are important. That 
has to be considered.
    You cannot just go out and set the price at a higher level. 
The manufacturers have to be able to get that out of the 
marketplace in order to be able to have the money in their bank 
account to pay it. I mean, there is a cash flow problem there.
    But we would certainly--I represent producers, and we feel 
strongly that producers deserve a fair price, but at the 
present time we have not seen a better basis than the National 
Cheese Exchange.
    However, we do not quite go along with Mr. Tipton. We do 
not think that the Secretary should automatically use the new 
cash market that might be established. I mean, we want to see 
what happens.
    I would love to say that yes, we can jump in and use the 
new cash market, and if the first month the prices on the new 
cash market went up and prices to producers rose, that makes 
somebody look good. But on the other hand, if the prices went 
down, I do not want to be the one that gets blamed because we 
are using that new cash market.
    So we do support improvements in the National Cheese 
Exchange and ways to find a better alternative. A key 
improvement to broaden trading activity, we think that would be 
done on the new exchange, expanded trading hours, I think that 
is in the process, electronic trading. Anonymous trading is 
another thing that I think is very important, and I think that 
would be accomplished with this new change.
    Another goal is additional oversight. You know, using the 
existing exchanges, I think that brings a track record of some 
success in managing it.
    Whatever the exchange is for the cash market, whether it is 
the National Cheese Exchange or another exchange, the important 
point is that any changes made yield an accurate price for U.S. 
dairy products.
    I would say another thing that was testified to, and this 
was not in my formal statement, the National Milk Producers 
Federation did ask Secretary Glickman to establish a $13 per 
hundredweight floor under the basic formula price in Federal 
orders for purposes of establishing the class I price. We did 
it for a temporary period, January to June, period.
    Secretary Glickman has turned that proposal down. That 
leads me to conclude that the supply-demand conditions which 
currently set established milk prices will continue to 
establish those milk prices.

                           Prepared Statement

    Senator Specter. Mr. Coughlin, may I interrupt your 
testimony for just a minute? I am going to have to step out for 
just about 3 or 4 minutes. We will recess for just a few 
minutes, and then I will be right back.
    [A brief recess was taken.]
    [The statement follows:]
                Prepared Statement of Edward T. Coughlin
    Mr. Chairman, I am Edward T. Coughlin, Acting Chief Executive 
Officer for the National Milk Producers Federation (NMPF), the national 
farm commodity organization that represents dairy producers and the 
dairy cooperatives they own and operate throughout the United States. I 
appreciate the opportunity to testify today about issues involving the 
National Cheese Exchange (NCE) and pricing milk used to produce cheese.
    Last year I testified before the U.S. House of Representatives on 
the same issue we are addressing today. Simply stated, the Federation's 
position is the same as it was last year. The Federation members 
maintain that trading levels on the NCE accurately reflect the value of 
cheese and can be used to determine federal order prices.
    The Federation and its members are aware of the controversy 
surrounding the NCE and are sensitive to the concerns expressed by 
producers who lack confidence in the NCE as a viable cash market. Dairy 
producers have an important financial interest in NCE prices. Cheese 
prices are the single most important factor in establishing the milk 
price that all U.S. dairy producers receive each month. It is important 
that industry confidence in the method used to determine milk prices be 
restored promptly. We believe that complaints that the NCE is not 
functioning in the best interests of dairy farmers and their 
cooperatives are wholly unfounded.
    The NCE may close soon. Closing the NCE will create a federal milk 
order pricing problem. The 40 pound block Cheddar cheese price at the 
NCE is used in determining the federal milk order Basic Formula Price 
and in determining the protein price in some orders that include a 
multiple component pricing program.
    To deal with a situation where a price quotation needed to 
determine a federal order price is not available, every order contains 
a provision whereby the Secretary of Agriculture determines an 
equivalent price quotation for the information that is not available. 
Absent an NCE 40 pound block Cheddar cheese price, the Secretary of 
Agriculture will have to make an equivalent price determination.
    At the present time, the National Milk Producers Federation 
believes that the Secretary should consider all relevant information in 
making an equivalent price determination. Relevant information would 
include the 40 pound block Cheddar cheese price on any new cash market, 
information USDA gathers during the Cheddar cheese price survey that 
was started recently and any other pertinent data.
    Perhaps after we gain some experience with a new cash market and 
evaluate the survey data that USDA has started to collect we can 
support a specific alternative to the NCE 40 pound block Cheddar cheese 
price. For now, we think the best alternative is to allow the Secretary 
of Agriculture discretion in determining an equivalent price.
    The National Milk Producers Federation supports improving the NCE 
or finding a better alternative. A key improvement would be to broaden 
the trading activity. This might be achieved through expanded trading 
hours, electronic trading and anonymous trading. Another goal is 
additional oversight. This might be accomplished by establishing a cash 
market with an exchange that has a successful track record for managing 
its operations.
    Whether within the NCE or through another exchange, the important 
point is that any changes made yield an accurate price for U.S. dairy 
producers.
    This concludes my testimony. Thank you, Mr. Chairman. I will be 
happy to respond to any questions.

                    Request to Establish Price Floor

    Senator Specter. We will reconvene. Mr. Coughlin, please 
pardon the delay, and proceed.
    Mr. Coughlin. Mr. Specter, I was just about through with my 
testimony. The point I was making is that the National Milk 
Producers Federation did ask Secretary Glickman in December to 
establish a $13 per hundredweight floor under the basic formula 
price in Federal orders for purposes of establishing the class 
I.
    Senator Specter. Who made that request?
    Mr. Coughlin. The organization I represent, the National 
Milk Producers Federation.
    Senator Specter. Yes.
    Mr. Coughlin. We asked that that be done on a temporary 
basis for the period of January through June 1997. Secretary 
Glickman turned that request down. That leads me to the 
conclusion--you asked in the question about what has to be done 
to raise milk prices--that we are going to continue to see a 
system of supply-demand base prices based off of the National 
Cheese Exchange or some other exchange unless the Congress 
takes some action to change milk prices.
    Senator Specter. Mr. Coughlin, when you asked the Secretary 
to do that in December, did he tell you it would take 6 months 
for it to be effectuated?
    Mr. Coughlin. He did not tell us it would take 6 months. I 
do not want to argue with the Secretary. There are 
administrative procedures whereby the Secretary could go today 
and issue a hearing notice on 3 days' notice, hold a hearing on 
an emergency basis, issue an emergency decision, and there is 
existing authority under the Rules of Practice and Procedures 
for Marketing Orders that it can be done a lot quicker than 6 
months.
    Senator Specter. What would be the minimum time?
    Mr. Coughlin. Let us see, today is the 13th. I suspect, on 
using emergency procedures, if the Secretary wanted to, he 
could try to implement something the first of next month.
    Now, I am giving you an answer to a question in a very--
what can be done. The industry, the producers, would have to go 
to the Secretary and convince the Secretary that, one, there 
were emergency conditions that warranted it.
    Senator Specter. Do you think there are emergency 
conditions which warrant it?
    Mr. Coughlin. What I would look at as evidence is the level 
of milk production. Is the level of milk production declining 
so that we do not have enough milk supply in this country? The 
data published by the Department of Agriculture does not 
indicate that to be the case. We would look at prices. 
Certainly, the prices, as has been pointed out here, the prices 
have recovered somewhat from their low point, so the standard 
that is in the Agricultural Marketing Agreement Act is a 
supply-demand standard.
    So I think the Secretary would have to conclude, to operate 
on an emergency basis that there were real emergency 
conditions, that there was not adequate milk supply or we were 
facing a prospect of an inadequate milk supply. Do those 
conditions exist today? I think it would be hard to determine 
that they do exist. I think such an action would be challenged 
in the courts, and I think the Secretary's record, because the 
record of that hearing would be what would have to be presented 
to the court to be judged on the basis of the evidence in the 
record, I think it would be difficult to present a solid case 
that the emergency conditions that would enable the Secretary 
to act are there.
    Senator Specter. Do you think it might be overturned as 
being arbitrary and capricious on his part?
    Mr. Coughlin. Yes.
    Senator Specter. Could you provide me with a short 
memorandum as stating the best case to present to the 
Secretary, which I will transmit to him, ask for his 
consideration on that?
    Mr. Coughlin. Yes.
    Senator Specter. I ask you to do that because you have the 
expertise in the field, and you also represent the milk 
producers. I would like to see that, and I will transmit it 
promptly to Secretary Glickman.
    That, and the price of cheese, to whatever extent that 
would change, are there any other avenues which could provide 
some immediate relief for the farmers?
    Mr. Coughlin. The single-most important thing that the 
Secretary of Agriculture can do was mentioned here earlier 
today with respect to the dairy export incentive program. In 
the past the dairy export incentive program has done a 
significant job.
    Senator Specter. The export program?
    Mr. Coughlin. Yes, the dairy export incentive program. The 
dairy export incentive program has done a good job of moving 
products out of the United States into export markets.
    Senator Specter. To raise the price of milk.
    Mr. Coughlin. Yes; it does have the impact of tightening 
the domestic supply.
    Senator Specter. Is there more the Secretary should be 
doing on that?
    Mr. Coughlin. Yes; I think somebody mentioned the December 
19 meeting earlier. At that time, one of the things that our 
organization urged the Secretary to do was to do what the FAIR 
Act said, which was to make full use of the dairy export 
incentive program.
    Senator Specter. Is he not making full use of it?
    Mr. Coughlin. Under the Uruguay Round GATT agreement we 
have a certain quantity of dairy products that can be exported 
with a subsidy under the dairy export incentive program. That 
year for the exports begins July 1, 1996, and runs through June 
30, 1997. Now, we are already 8 months, close to 9 months, into 
the period of time, and the quantity of product that has been 
exported is roughly--I am going to say 20 percent. I could 
furnish you exact numbers.
    In other words, we have got 3 or 4 months left of the year 
to comply with what the Congress said in the 1996 farm bill, 
make maximum use of it, export everything we can. That has not 
been done, in my opinion.
    Senator Specter. Could you give me a short memorandum on 
that?
    Mr. Coughlin. I will.
    Senator Specter. I will take that up with him, as well.
    So we now have three options we are talking about, the 
cheese price, the export increase, and the administrative 
action he would take, which you think there is not really a 
sound evidentiary base or may not be so viewed, either by the 
Secretary or by the courts. Anything else?
    Mr. Coughlin. Again, I say if the Secretary did it I 
believe the action would be challenged in court, because what 
you are doing is raising the price that processors would have 
to pay. So I think the processors would see that as an 
opportunity to go to court.
    Senator Specter. But the Secretary has pretty broad 
discretion. They would have to show it was an arbitrary and 
capricious exercise of discretion.
    Mr. Coughlin. Well, the Secretary would have to demonstrate 
that the record in the hearing demonstrated that he had an 
emergency condition that warranted taking such action.
    Senator Specter. And those who challenged it would have to 
prove that he was arbitrary and capricious.
    Mr. Coughlin. You are the lawyer. Yes.
    Senator Specter. OK. Anything else that you might have to 
suggest that we could look toward here?
    Mr. Coughlin. No; I do not have anything else.
    Senator Specter. Mr. Tipton, do you have any suggestion as 
to what we might look toward here to provide a short-term 
correction?
    Mr. Tipton. Well, as I said in my statement--before I 
answer that, if I could, I think I need to correct the record. 
I apparently misspoke, and it is 4 to 30 days old cheese that 
is traded on the exchange, and I think I said 3 to 30.
    Senator Specter. Yes; it is 4 to 30, then.
    Mr. Tipton. Yes; I am sorry.
    We believe that the market itself is correcting the 
situation, and I have a very difficult time understanding that 
there is a dire emergency that warrants a 3-day hearing when we 
are looking at a situation in which the prices in the United 
States came off of an all-time high, and second, this year will 
most likely be the second highest prices ever recorded. So, 
that is, the Secretary would have to go to an evidentiary 
hearing, and I think it would be very difficult to make that 
case.
    Senator Specter. OK. You think option two is not a very 
good one. My question is do you have an option four?
    Mr. Tipton. No; I do not, other than the market, and I 
think the market will do it. It seems like there is always 
difficulty in recognizing that the market may take care of some 
of these things. The market took care of the price last fall by 
going up enormously, and I think that it will do that again 
this year.
    Senator Specter. All right. I am delighted to yield back 
the gavel to our distinguished chairman, Senator Cochran.
    Senator Cochran. Senator Specter, thank you very much for 
suggesting this hearing. I think it has been helpful in getting 
a broad range of input on this issue and this question about 
what can be done, if anything, about the pricing of dairy, the 
calculations of it, the formulas used, and the inputs that are 
analyzed, and I think we will study the statements with profit 
in our effort to understand it better. And, I appreciate Mr. 
Tipton and Mr. Coughlin being here to help give us a balanced 
view of this situation.

                          Submitted Questions

    I have additional questions and several members of the 
subcommittee have questions which will be submitted to be 
answered for the record. We also have questions from Senator 
Rod Grams and Senator Rick Santorum.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]
                 Questions Submitted by Senator Cochran
                         dairy price mechanisms
    1. USDA has recently proposed 6 options to make changes to the 
Class I price structure. The options would still use a market-driven 
basic formula price plus an added differential. Differentials are made 
up of one or more of the following: (1) a fixed component; (2) a 
location adjustment; (3) an adjustor relating to utilization; or (4) 
the cost of balancing the market. Many of these options would hurt 
farmers in the Southeast. Milk differentials are very important to 
Mississippi.
    Question. How does lowering the price of milk in a deficit area, 
such as Mississippi, encourage increased milk production for the 
market?
    Answer. The effects of lowering the Class I differential in a 
deficit area cannot be answered without also considering adjustments in 
Class I differentials elsewhere. Ultimately, a national price surface 
must be determined that reflects local, regional and national supply 
and demand for milk. Prices established under the Federal order program 
are minimums, and these minimum prices are not intended to encourage 
production beyond what market forces dictate. Moreover, as minimums, 
Federal order prices may be exceeded in particular markets as supply 
and demand conditions warrant.
    The Department continues to accept comments from interested parties 
on Federal order consolidation and reform, and the Department has not 
made any decision regarding the pricing structure under Federal Milk 
Marketing Orders. All options remain under consideration at this time, 
which include options that would lower as well as raise Class I 
differentials.
    Question. If differentials are reduced in one area where a short 
supply of milk exists, how does this help dairy producers in a 
different area which may be called on to provide supplemental milk 
supplies?
    Answer. A lower differential in a deficit market could lead to 
lower blend prices and therefore lower milk production in the deficit 
area and increased milk shipments into the deficit market from surplus 
areas. This could raise milk prices in surplus areas. In addition, 
lower milk prices in the deficit area would reduce the amount of milk 
available for the manufacturing milk market, supporting manufacturing 
milk prices nationally. However, the effects of lowering the 
differential in a deficit market on producers in surplus areas depends 
on how Class I differentials are adjusted in fluid surplus markets. In 
addition, Federal orders only establish minimum prices for milk 
according to use, with actual pay prices to producers in many deficit 
markets exceeding the minimum Federal order blend price. Lowering Class 
I differentials in those markets where producer prices exceed the 
Federal order blend price may have only a modest effect on prices paid 
to producers.
    2. Many have alleged that the National Cheese Exchange is subject 
to manipulation of dairy prices.
    Question. Is there any evidence that this is true? Do you believe 
that it has cost producers or consumers money?
    Answer. The University of Wisconsin study concluded that there was 
evidence of manipulation on the National Cheese Exchange (NCE) by large 
traders. Both the Federal Trade Commission and the Department of 
Justice reviewed the University of Wisconsin study and concluded there 
was no evidence to suggest either a conspiracy or monopolization 
theory. A subsequent study from the University of Maryland found 
problems with the University of Wisconsin study's methodological 
approach and conclusions. The alleged problems have been disputed by 
the researchers involved in the University of Wisconsin study. Most 
recently, the Commodity Futures Trading Commission examined the issue 
of manipulation as part of the approval process for a new fluid milk 
futures contract and concluded the potential for manipulation of NCE 
prices was not sufficient to deny contract approval.
    To address concerns raised by dairy producers, the Department 
announced in late January that it was seeking comments on the use of 
NCE prices in the determination of minimum prices under Federal orders. 
This comment period ended on March 31, and we are currently reviewing 
those comments. In addition, the Department started in early March a 
weekly survey of cheddar cheese prices in response to concerns about 
the accuracy of NCE prices and are in the process of reviewing that 
information. The Department has no clear-cut evidence to indicate that 
the NCE has cost consumers or producers.
                                 ______
                                 
                Questions Submitted by Senator McConnell
    Question. What is the status of the NASS weekly/monthly price 
survey and when does USDA expect it to be operational?
    Answer. The Department has been collecting the cheese price survey 
data on a weekly basis since early March. Tentative plans call for the 
first release of the data in early May. We continue to work with the 
cheese industry to ensure maximum cooperation and that the data 
collected are accurate, timely and useful to the dairy industry.
    Question. If the National Cheese Exchange (NCE) price no longer 
exists, or if USDA delinks it from the Basic Formula Price (BFP), what 
price series will the Department use for cheese in the calculation of 
the BFP or its replacement?
    Answer. The Department has not made any decision on what price 
series it will use once the NCE price series is no longer available. We 
continue to review possible options and will continue to work with 
interested parties to develop a satisfactory replacement.
    Question. Mr. Secretary do you support the current Class I 
differentials that exist throughout the Federal Order System? If not, 
what changes are you contemplating and what impact will these changes 
have on mink prices in states such as Kentucky?
    Answer. The Department has not made any decision regarding Class I 
differentials and continues to accept comments from interested parties. 
When the Department presents its proposed rule for Federal order 
consolidation and reform this winter, the Department will provide 
estimates of the effects of the proposed changes on regional milk 
prices.
    Question. Do you think milk prices will be less volatile with the 
elimination of the National Cheese Exchange? Will milk prices to dairy 
producers be any higher?
    Answer. Several very unusual events caused milk prices to be 
especially volatile in 1996 and we should not gauge 1996 as the norm. 
However, the events of 1996 do point out how government intervention in 
the past helped to stabilize milk prices. The variability in milk 
prices probably has much less to do with the NCE than with the 
reduction in support since the early 1980's. Producers should not 
expect to see any major increase in milk prices following elimination 
of the NCE, since the BFP is not determined by the level of cheese 
prices on the NCE but by the month-to-month change in those prices and 
many cheese transactions occurring off the NCE tend to reflect the NCE 
price.
                                 ______
                                 
                 Questions Submitted by Senator Bumpers
    Question. If state legislation or other actions result in the 
closing of the National Cheese Exchange, how quickly can USDA implement 
another pricing structure to establish the Basic Formula Price?
    Answer. There exist ``equivalent pricing provisions'' under each of 
the Federal orders. These provisions would enable the Secretary to 
substitute an ``equivalent'' price for the NCE price in the BFP without 
USDA going through formal rulemaking procedures, assuming an equivalent 
price exists. Such provisions could be implemented as quickly as 
needed.
    Question. Does the Secretary have the authority to resume use of 
the Minnesota-Wisconsin pricing system?
    Answer. If the NCE closes and there was no other ``equivalent'' 
price that could be substituted for NCE prices, one option would be to 
revert back to the M-W price series. However, the Department replaced 
the M-W series with the BFP starting in May of 1995 because of concerns 
about whether the M-W price was statistically reliable as an indicator 
of the value of milk, and statistical reliability may be even more of a 
problem now. In addition, using the former M-W price series doesn't 
address the need to price protein, which is currently tied to the price 
of cheese on the NCE, in those orders with multiple component pricing.
    Question. To what extent have changes in the 1996 Farm Bill 
increased farm price volatility in both direct crop prices, like feed 
grains, and indirect prices, like dairy?
    Answer. The 1996 Farm Bill probably had very little to do with the 
recent volatility in grain prices. Going into the 1996/97 marketing 
year, government inventories of corn amounted to only about 30 million 
bushels, about one day's use. So, the 1996 Farm Bill was not 
responsible for the increase in price volatility for grains in recent 
months. Rather, the increase in price volatility reflects government 
policies beginning in the mid-1980's to reduce price support rates and 
government stockpiles combined with reduced yields and strong export 
demand.
    Question. Do you think the volatility of milk prices last fall, if 
caused at least in part by changes in the 1996 Farm bill, will soon be 
seen in other commodity areas?
    Answer. Traditionally, milk prices have been more stable than 
prices for grains and, despite the events of this last fall, that trend 
seems to be holding. For example, the all-milk price declined by 18 
percent from September 1995-February 1996, while corn prices declined 
24 percent over the same period. Of course, such large fluctuations in 
prices for both commodities over such a short period are certainly not 
the norm.
                                 ______
                                 
                  Questions Submitted by Senator Kohl
    Question. What criteria will you use in deciding whether a new cash 
market or new price survey for cheese is credible enough for use as a 
reference price in setting the BFP?
    Answer. We will use several criteria to judge the merits of any 
replacement for NCE prices in the BFP. We would like any price estimate 
to be based on a reasonably large number of transactions of a 
standardized product and be accurately reported. We especially believe 
that the new replacement should have wide acceptance within the dairy 
industry. Dairy producers must have confidence they are receiving a 
fair price for their milk, and dairy processors must have confidence 
the reported price is an accurate reflection of the value of cheese.
    Question. When the comment period ends on the issue of delinking 
the BFP from the Cheese Exchange, do you anticipate acting immediately 
to make a change, or are there other hurdles that need to be crossed 
before any action can be taken?
    Answer. After the comment period closes on March 31, we will review 
the comments received and consider the available options. ``Equivalent 
pricing provisions'' in each of the orders will allow us to act as 
quickly as necessary to replace NCE prices in the BFP, if we choose to 
do so following a review of the comments or after obtaining further 
input from the dairy industry.
                                 ______
                                 
                  Questions Submitted by Senator Grams
    I understand from remarks made by the former head of the 
President's Council of Economic Advisers that the Northeast Interstate 
Dairy Compact will increase the cost of food nutrition programs by 10 
percent in the affected region. This includes food stamps, WIC, and 
school lunch. I also understand that other States, including 15 in the 
southeast are contemplating a compact of their own.
    Question. Mr. Secretary, if low-income Americans are not intended 
to absorb this hit, how do you intend to pay for the increased costs to 
these programs that result from the Compact?
    Answer. I believe that assisting dairy farmers in the Compact 
region should not, and need not, come at the expense of low-income 
people in the region. I sought to address those concerns by laying out 
my expectation that the Commission provide assistance to offset any 
increased burden on low-income families in the Compact region. My 
finding of a compelling public interest in the Compact region assumes 
that the Commission will address these concerns, and I will consider 
revoking my authorization of the Compact or taking other actions if the 
Commission does not address those concerns.
    Question. Would you provide me a copy of the letter you received 
from the President's Council concerning the Compact?
    Answer. You should contact the Chairman of the Council of Economic 
Advisers to obtain a copy of the letter you refer to.
                                 ______
                                 
                Questions Submitted by Senator Santorum
    1. The dairy industry was protected from large price swings when 
the CCC held stocks that were available to be sold back to the industry 
at 10-15 percent above the support price. While price stability was the 
norm for many years, the support program encouraged overproduction. 
However, cheese and nonfat dry milk stocks have largely not been 
available for sell-back from government stocks since mid-1988, and 
butter has not been available since 1995. As a result of this history 
of price stability, the dairy industry has been late in developing and 
leveraging the tools commonly used in other industries to manage price 
risk, such as futures markets.
    Question. Do you believe the industry currently has adequate risk 
management tools to deal with the price volatility inherent to all 
agricultural commodities?
    Answer. This question is best left up to the dairy industry to 
answer. The Department stands ready to help the dairy industry develop 
better risk management tools, but we also believe that any effort 
should be in partnership with the dairy industry. Ultimately, the 
success or failure of those efforts will depend on whether the dairy 
industry chooses to use those tools.
    Question. What additional tools and training can USDA provide the 
industry to allow the private sector to better address the inherent 
price risks of supply and demand-driven markets, both on the input 
(feed, etc.) and output (milk) side?
    Answer. The Department stands ready to work with the dairy industry 
to identify and develop appropriate risk management tools and to help 
provide training in the use of those risk management tools. We believe 
that such efforts, if conducted in partnership with the dairy industry, 
can be accomplished within existing budgetary constraints.
    2. In 1996, the dairy industry experienced record high dairy 
commodity and milk prices levels, previously approached only briefly in 
the late eighties when a combination of drought and international 
market forces combined to increase cheese prices to $1.545 ($.15 below 
last year's peak). Most economists have suggested that the record high 
dairy prices in 1996 were largely the result of reduced milk production 
related to price strength in the feed sector, particularly corn. Corn 
prices, according to the NASS Agricultural Prices report, rose to $4.43 
per bushel, before dropping back $1.80 to $2.63 per bushel in December. 
Clearly, we are now focused on the volatility in the dairy sector, but 
the price comparisons between both agricultural sectors stimulates some 
questions. The U.S. all-milk price dropped $3 per hundredweight (or 18 
percent) from its record peak of $16.30 in September to its February 
low. This drop has resulted in an outcry from the producer community 
that has ranged from a request to floor the BFP to claims of market 
manipulation. In contrast, the corn price drop of $1.80, representing 
41 percent of the peak value, has not led to similar calls and 
allegations.
    Question. What characteristics between the two sectors are causing 
the very different responses to the supply and demand-driven price 
declines, and what can the dairy sector learn from the crop production 
sector to be better able to weather price volatility in the future?
    Answer. The amount of price volatility in a market depends on a 
variety of market factors, such as the sensitivity of supply, demand 
and commercial stocks to changes in prices, and the size of external 
shocks to supply, such as weather. In addition, there are differences 
between grain and milk which can affect the ability of producers to 
withstand large variations in market prices. Grain is a storable 
commodity, so grain producers can avoid the consequence of some 
variability by storing; dairy producers cannot. Grain producers 
generally receive production flexibility contract payments which can 
cushion the effect of variability on farm income; dairy producers do 
not receive payments. Finally, grain producers have many options to use 
futures or forward pricing; dairy producers have fewer pricing options 
available to them.
    The lesson for dairy producers is that with the gradual phase out 
of the price support program dairy producers can expect milk prices to 
be more volatile. Increased price volatility does not necessarily mean 
lower average prices for producers. In fact, last year milk prices were 
record high.
    Question. How does dairy price volatility compare with other 
agricultural commodities?
    Answer. It would appear that milk prices are less volatile than 
grain prices at present. This continues a long tradition of grain 
prices exhibiting larger annual swings than milk prices. Grain prices 
likely show more volatility because grain supplies are more prone to 
weather than milk production.
    3. Prior to implementing the current Basic Formula Price in May of 
1995, your staff undertook an extensive review of numerous options and 
selected the base month M-W updated with changes in dairy commodity 
values as the most accurate reflection of the value of milk for 
manufacturing.
    Question. Is there any reason to believe that the conclusions 
reached less than two years ago were wrong?
    Answer. This is no reason to believe that the decision to replace 
the M-W price series was wrong. In fact, that decision was supported by 
evidence provided at a national hearing on replacement of the M-W price 
series. However, producers must also have confidence they are receiving 
a fair price for their milk.
    Question. Is there any reason to believe that the current BFP does 
not accurately reflect supply and demand conditions (or that it 
reflects those conditions to any lesser extent than the old M-W price)?
    Answer. Overall, it would appear that the BFP is just as accurate 
an indicator of supply and demand conditions for milk as the M-W price 
series. The Department replaced the M-W price series with the BFP in 
May 1995. Over the 21-month period from May 1995 through January 1997, 
the BFP exceeded the base month M-W prices in 11 months by an average 
of $0.13 per cwt., and the BFP was below the base month M-W price in 9 
months by an average of $0.19 per cwt. The base month M-W price 
averaged $12.79 and the BFP averaged $12.78 per cwt., or just $0.01 per 
cwt. lower since May 1995.
    While the BFP and M-W price have averaged nearly the same since May 
1995, we are concerned that the BFP may be more volatile than the M-W 
price. The BFP has generally exceeded the base month M-W price during 
the spring and summer months but has been significantly below the base 
month M-W price during the last quarter of the year. During the last 
quarter of 1996--a period of rapidly declining milk prices--the BFP 
averaged $0.32 per cwt. below the base month M-W price.
    4. In response to the Federal Order reforms required under the FAIR 
Act, a USDA committee has been reviewing the basic formula price and 
potential replacements. As part of this review, the committee has 
collected data on actual sales prices for cheese and has performed some 
statistical analysis to examine the correlation with the National 
Cheese Exchange.
    Question. What kind of correlation have you found between the NCE 
and the actual prices received for cheese?
    Answer. The statistical analysis conducted to date shows a strong 
correlation between NCE prices and survey prices.
    Question. What conclusion does this correlation lead you to 
regarding the validity of the National Cheese Exchange?
    Answer. At the present time, the only conclusions drawn from this 
analysis are that cheese prices are closely linked to NCE prices, but 
the direction of causality is not clear. Regarding the comparability of 
prices, a much larger survey over a longer time period would be needed. 
It is envisioned that the Department's weekly survey of cheese prices 
would provide a more accurate indicator of cheese prices and provide a 
better basis for evaluating NCE prices.
    5. The existing Basic Formula Price used in the Federal Order 
System incorporates five commodity price series (NCE cheddar 40# 
blocks, CME Grade AA butter, Western States nonfat dry milk, Western 
States buttermilk powder) to quantify the change in milk value from the 
base month period to the current month.
    Question. How have you validated each of these price series as 
representative of their respective markets?
    Answer. The M-W price series was replaced with the BFP following a 
national hearing on replacement of the M-W. The price series used in 
the update of milk prices from the base to the current month reflects 
industry input and the expertise of dairy marketing specialists within 
and outside of the Department. All of the series used were recommended 
by the industry and judged by industry experts as being the most 
representative markets for cheese, butter, nonfat dry milk and 
buttermilk powder.
    Question. Are you comfortable that each of these price series 
correlates with broader based measures of the respective markets?
    Answer. The Department believes these price series correlate very 
well with actual market conditions in each product market. But, the 
Department remains open to alternatives. While the comment period on 
the use of NCE prices in the BFP closed on March 31, 1997, the 
Department continues to accept comments on Federal order consolidation 
and reform, including replacement of the BFP.
    Question. Has the replacement of the current month payment estimate 
for grade B milk in the old M-W with the commodity price updating 
calculation in the current BFP significantly impacted the correlation 
between cheese prices and milk prices?
    Answer. Replacement of the M-W price series with the BFP has not 
significantly changed the correlation between milk prices and cheese 
prices. Both the M-W price series and the BFP begin with a survey of 
prices paid for milk by plants purchasing Grade B milk in Minnesota and 
Wisconsin. The only difference between the two series is the method for 
updating the survey information to the current month. The BFP uses 
product prices to update the survey information, while the M-W price 
series used a supplemental survey of plant pay prices. Since most of 
the milk in Minnesota and Wisconsin goes into cheese production, both 
the M-W and the BFP price series are highly correlated with cheese 
prices.
    6. You have invited public comment on the role of the National 
Cheese Exchange price in the updating portion of the current Basic 
Formula Price calculation.
    Question. How does the current request for comments interface with 
the broader Federal Order Reform process and the efforts already 
underway by the BFP Committee?
    Answer. The current request for comments relates specifically to 
whether NCE prices should be used in the BFP and, if not, what 
alternatives to NCE prices exist. Under Federal order reform, much more 
fundamental questions regarding minimum pricing are being considered, 
such as whether the BFP should be eliminated, whether Class I and II 
prices should be decoupled from the BFP, whether the BFP should be 
replaced entirely with a product price formula and what are the 
appropriate components to use in constructing a BFP.
    Question. Is there greater risk in making a hasty change to the BFP 
that is not properly deliberated than in focusing your efforts on the 
longer term objective of comprehensive reform?
    Answer. The Department will not make a hasty decision. We will 
carefully consider all of the options available and work with the dairy 
industry before contemplating any change. In addition, we will not let 
short-term expediency adversely affect our long-term objectives of 
consolidation and reform of Federal milk marketing orders.
    7. Senators Feingold and Kohl have asked the Coffee, Sugar, Cocoa 
Exchange to develop an alternative cash market to the NCE. 
Additionally, I understand that the industry has solicited proposals 
for establishment of an alternative cash market under the umbrella of 
the existing Futures Markets.
    Question. Will the establishment of a new cash market under the 
umbrella of the existing Futures Markets bolster USDA's confidence in 
the validity of the price?
    Answer. It would be premature to respond to this question since we 
do not know the characteristics of such a market. Our ideal would be a 
market with a large volume and many traders. Unfortunately, these 
characteristics have not been the norm for most cash and futures 
markets for milk and dairy products. In addition, we believe other 
features, such as affiliation with an existing exchange, which could 
offer resources for oversight and surveillance, daily trading, 
anonymous trading and trading limits, would lend integrity to a new 
cash market.
    Question. Would USDA use this new cash market in a similar manner 
to the existing NCE as a price mover in the BFP?
    Answer. Whether the Department elects to use this new cash market 
in the determination of the BFP would depend on many factors, such as 
the volume of trading on the cash market and how well that market 
tracked with other indicators of the value of cheese. In addition, it 
would depend on what, if any, other options are available as possible 
replacements for NCE prices. We will carefully review comments from 
interested parties and review available options before reaching any 
decision regarding replacement of NCE prices.
    8. Minimum pricing under the Federal Milk Marketing Order system is 
sometimes cited as an impediment to developing the dairy futures 
markets. Specifically, proprietary handlers that are subject to the FMO 
minimum pricing provisions are limited from hedging on the futures 
market and offering forward pricing to dairy producers that may result 
in a price below the minimum regulated price.
    Question. Since forward pricing and the use of the futures market 
are valuable tools in managing the price volatility that has been of 
such great concern in recent months, does USDA have the flexibility, 
authority and desire to allow proprietary processors an exemption from 
minimum pricing provisions to the extent that they have a bona fide 
forward price contracts with producers and those contracts are 
appropriately hedged on a futures market?
    Answer. The Department would have to use formal rulemaking 
procedures, including a national hearing, to establish the merits of 
such a provision, with the final decision based on the hearing record. 
In addition, any modification to the orders has to be approved by 
producers in a referendum.
    9. One challenge inherent to the Federal Order reform process is 
the development of analysis that does not rely heavily on historic 
relationships, since those historic relationships were likely distorted 
by past policy. This challenge would point to the use of a model that 
is not confined by current milk movement assumptions, but instead seeks 
a solution based on nonregulatory factors. Also, in addition to the 
traditional goals of ensuring an adequate supply of fresh, wholesome 
milk, etc.; an appropriate goal for the Federal Market Order System 
should be to encourage an efficient market. It appears that the only 
option discussed in the Summary Report on Class I Pricing Options 
released last Friday that attempts to reflect the value of milk based 
on what would likely result from an efficient market is Option 1A. This 
option is based on a complex model run by Cornell University that 
considers production, demand, and transportation costs to determine 
relative prices across the country.
    Question. Do you agree that milk price regulations should encourage 
an efficient market?
    Answer. The Department agrees that the Federal order system should 
encourage an efficient market for milk. However, we also believe that 
Federal orders should help ensure that producers receive a fair price 
for their milk, producers are treated equitably and all producers have 
a market for their milk.
    Question. What approaches, other than Option 1A, are consistent 
with this goal of an efficient market?
    Answer. The Department agrees that analysis of Federal order 
pricing options should not depend on historical data, since historical 
relationships may be distorted by past policy. However, nearly all 
dairy economic models are based on historical data. For example, the 
Cornell model uses historical data on production, consumption and the 
location of processing facilities to determine the least cost way of 
distributing milk to consumption areas. In addition, the results on any 
model are contingent upon a variety of assumptions and subject to 
alternative interpretations. For example, Option 1B in the Department's 
report is also based on a run of the Cornell model. In addition, we 
believe efficiency in milk markets is not the only goal of Federal 
orders. The options presented in Department's pricing report reflect a 
range of efficiency and equity considerations.
    10. In the Summary Report on Class I Pricing Options released last 
Friday, several options (2 and 3B) include an adjustment to the Class I 
differential based on the ratio of Class I milk to other milk pooled in 
the Order. Although this approach has some initial intuitive appeal 
since it would seem to adjust automatically with supply and demand 
conditions, this approach has several problems in application. 
Specifically, milk is not pooled based on its geographic location, but 
rather can be affiliated with a pool in another location or can remain 
unpooled if sold for other than Class I use. For example, there is a 
long history of some Texas milk being affiliated with the Chicago 
Regional Order. Additionally, manufacturers purchase mostly pooled milk 
in some areas, and mostly unpooled milk in other areas of the country. 
Both of these scenarios result in the Class I percentage in the pool 
not accurately reflecting local supply and demand conditions.
    Another cause for concern under this ``self-adjusting'' scenario is 
the inherent disruption in processor sales that will be caused when the 
adjustment in neighboring orders does not move on a parallel track. I 
am advised that is quite conceivable, for example, that the Class I 
differential could be adjusted upward in one Order, while being 
simultaneously adjusted downward in a neighboring Order. The result 
would likely be very disorderly marketing as buyers shift markets in 
response to the new price relationships.
    Question. Do these two issues--first, the potential inaccuracy of 
Class I utilization in reflecting local supply and demand, and second, 
the disruption caused by lack of price alignment that would result from 
the automatic adjustment feature--argue for the elimination of 
utilization formulas from consideration for Class I pricing?
    Answer. The above points are valid. However, the problems mentioned 
could be partially overcome by restricting how milk is pooled or by 
restricting the frequency with which differentials are adjusted. In 
addition, allowing Class I differentials to adjust over time based on 
Class I utilization would eliminate the existing rigidity in Class I 
differentials, which would eliminate potential distortions in the 
current Federal order system.

                         Conclusion of Hearing

    Senator Cochran. The next hearing of this subcommittee will 
be on March 18 in this room, 138 of the Dirksen Senate Office 
Building, where we will continue to review the budget request 
of the Department of Agriculture for fiscal year 1998.
    That concludes the hearing. The subcommittee will recess 
and reconvene at the call of the Chair.
    [Whereupon, at 5:48 p.m., Thursday, March 13, the hearing 
was concluded and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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