[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
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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
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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
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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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